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:

Downward Sloping Demand

The economic principle that, all else being equal, demand for a good or service decreases as its price increases.

Total Revenue

The overall income generated by a business from the sale of goods or services before any costs or expenses are subtracted.

Competitive Market

A market structure characterized by a large number of buyers and sellers, where each participant has negligible influence on the price, leading to efficient outcomes where price equals marginal cost.

Output

The total amount of goods and services produced by an economic system over a specific period.