Which of the Following Statements Is Correct

question 8

Multiple Choice

Which of the following statements is correct?

• A)When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
• B)When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
• C)Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock.
• D)If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence needs to issue new stock.

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Definitions:

Market

Any structure that allows buyers and sellers to exchange any type of goods, services, and information.

Price Elasticity

A measure of how much the quantity demanded of a good responds to a change in the price of that good, with elasticity greater than one indicating a strong response.

Raise Profits

The process of increasing a company's profits through different methods such as reducing costs, increasing sales, or improving productivity.

Inverse Demand Curve

A graphical representation showing the relationship between the price of a good and the quantity of the good that consumers are willing to purchase, plotted with price on the vertical axis and quantity on the horizontal axis.