Which of the Following Statements Is Correct

question 13

Multiple Choice

Which of the following statements is correct?

• A) The WACC should include only after-tax component costs.Therefore,the required rates of return (or "market rates")on debt,preferred,and common equity (r_d,r_ps,and r_{s or e})must be adjusted to an after-tax basis before they are used in the WACC equation.
• B) The cost of retained earnings is generally higher than the cost of new common stock.
• C) Preferred stock is riskier to investors than is debt.Therefore,if someone told you that the market rates showed r_d > r_ps for a given company,that person must have made a mistake.
• D) When the MCC schedule is developed,the first break point always occurs as a result of using up retained earnings.
• E) If a company with a debt-to-assets ratio of 50 percent were suddenly exempted from all future income taxes,then,all other things held constant,this would cause its WACC to increase.

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Definitions:

Interest Rate

The cost of borrowing money or the return on savings, expressed as a percentage of the principal.

Annual Interest Rate

The percentage of the principal that is paid as a fee over a period of one year for borrowing or saving money.

Capital Income

This term refers to the total amount of money generated from investments, dividends, interest, and any other sources other than labor earnings.

Rent

A regular payment made for the use of land, property, or equipment.