Which of the Following Statements Is Correct

question 1

Multiple Choice

Which of the following statements is correct?

• A) Capital components are the types of capital used by firms to raise money. All capital comes from one of three components: long-term debt, preferred stock, and equity.
• B) Preferred stock does not involve any adjustment for flotation cost since the dividend and price are fixed.
• C) The cost of debt used in calculating the WACC is an average of the after-tax cost of new debt and of outstanding debt.
• D) The opportunity cost principle implies that if the firm cannot invest retained earnings and earn at least r_s, it should pay these funds to its stockholders and let them invest directly in other assets that do provide this return.
• E) The cost of new common equity includes an adjustment for flotation costs which is expressed as a fixed percentage of the current stock price. The flotation percentage is determined jointly by the current price of the firm's stock and its growth rate.

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Definitions:

Given Up

The cost of forgoing the next best alternative when making a decision, also known as opportunity cost.

Looking For Work

The activity engaged in by individuals who are seeking employment, often considered a measure of labor market activity.

Business Cycle

The fluctuations in economic activity that an economy experiences over a period of time, consisting of expansions, or periods of growth, and contractions, or periods of decline.

Business Cycle Peaks

The points in time at which an economy transitions from an expansion to a recession, marking the highest point of economic activity before downturn.