Which of the Following Statements Is Correct

question 20

Multiple Choice

Which of the following statements is correct?

• A)An increase in the flotation cost required to sell a new issue of stock will increase the cost of retained earnings.
• B)An increase in a firm's tax rate will increase the component cost of debt, provided the YTM on the firm's bonds is not affected.
• C)When the WACC is calculated, it should reflect the cost of new common stock, retained earnings, preferred stock, long-term debt, and short-term bank loans if the firm normally finances with bank debt, and accounts payable if the firm normally has accounts payable on its balance sheet.
• D)If a firm has been suffering accounting losses that are expected to continue into the foreseeable future, and therefore its tax rate is zero, then it is possible for the after-tax cost of preferred stock to be less than the after-tax cost of debt.

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Definitions:

Capital Contributions

The funds or resources contributed by owners or shareholders for the use in furthering the business or enterprise.

Shareholder's Basis

The amount of a shareholder's investment in stock of a corporation, adjusted for various tax-related items.

Corporate Debt

Financial obligations owed by a corporation, typically in the form of bonds, loans, or other types of securities.

Charitable Contributions

Donations made to qualifying organizations which may be deductible from the donor's taxable income, subject to IRS rules and limitations.