Which Statement Regarding Cost of Capital Is True

question 3

Multiple Choice

Which statement regarding cost of capital is true?

• A)If a company assigns the same cost of capital to all of its projects regardless of each project's risk, then the company is likely to reject some safe projects that it should accept and to accept some risky projects that it should reject.
• B)Because of the risk of bankruptcy, the cost of debt is always higher than the cost of equity capital.
• C)Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.
• D)Higher flotation costs tend to reduce the cost of equity capital.

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Definitions:

Income Tax Rate

The percentage of an individual's or corporation's income that is paid to the government as tax.

Net Profit

The financial gain remaining after subtracting all operating expenses, interest, taxes, and any other charges from total revenue.

Income Tax Rate

The rate at which an individual or business's income is taxed by the government, similar in essence to Tax Rate but specifically applied to income.

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time.