Which of the Following Statements Is Correct

question 41

Multiple Choice

Which of the following statements is correct?

• A)The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project, i.e., it is the after-tax cost of debt, if debt is to be used to finance the project, or the cost of equity, if the project will be financed with equity.
• B)The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all of the firm's outstanding debt.
• C)The cost of equity is generally harder to measure than the cost of debt because there is no stated, contractual cost number on which to base the cost of equity.
• D)The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital.

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Definitions:

Profit-Maximizing

The process or goal of a firm to adjust its production and sale strategies to achieve the highest possible profits.

Four-Firm Concentration Ratio

A metric that measures the total market share controlled by the four largest firms within an industry, used to assess the competitiveness of the market.

Herfindahl Index

A measure of market concentration, calculating the sum of the squares of market shares of each firm within an industry.

Short-Run Equilibrium

A state in which market supply equals demand, determining the price and quantity sold, specifically within a short timeframe.