Which of the Following Statements Is CORRECT

question 7

Multiple Choice

Which of the following statements is CORRECT?

• A) When calculating the cost of preferred stock,a company needs to adjust for taxes,because preferred stock dividends are deductible by the paying corporation.
• B) All else equal,an increase in a company's stock price will increase its marginal cost of retained earnings,r_s.
• C) All else equal,an increase in a company's stock price will increase its marginal cost of new common equity,r_e.
• D) Since the money is readily available,the after-tax cost of retained earnings is usually much lower than the after-tax cost of debt.
• E) If a company's tax rate increases but the YTM on its noncallable bonds remains the same,the after-tax cost of its debt will fall.

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Definitions:

Contribution Margin Ratio

A financial metric that shows the percentage of sales revenue that exceeds variable costs, contributing to covering fixed costs and generating profit.

Residual Income

The net income that exceeds the minimum required return on investment or capital; often used as a performance measure in managerial accounting.

Investment Opportunity

An option to allocate resources with the expectation of generating a return or profit in the future.

Turnover

In business, refers to the rate at which employees leave a company and are replaced by new hires; can also refer to the total sales in a given period.