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.

---

Definitions:

Purchasing Power Parity

An economic theory that compares different countries' currencies through a "basket of goods" approach to estimate the exchange rate at which two currencies will be at parity, or have the same purchasing power.

Nominal Exchange Rate

The nominal exchange rate is the rate at which one country's currency can be exchanged for another country's currency without adjustment for inflation.

Price Level

A measure of the average prices of goods and services in an economy over a period of time.

Purchasing Power

The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.