Which of the Following Statements Is CORRECT

question 26

Multiple Choice

Which of the following statements is CORRECT?

• A) In the WACC calculation,we must adjust the cost of preferred stock (the market yield)to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.
• B) We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.
• C) The cost of new equity (r_e)could possibly be lower than the cost of retained earnings (r_s)if the market risk premium,risk-free rate,and the company's beta all decline by a sufficiently large amount.
• D) Its cost of retained earnings is the rate of return stockholders require on a firm's common stock.
• E) The component cost of preferred stock is expressed as r_p(1 - T),because preferred stock dividends are treated as fixed charges,similar to the treatment of interest on debt.

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Definitions:

Isocost Line

A graph line that shows all combinations of inputs which cost the same total amount.

Capital

Financial assets or the financial value of assets, such as cash and goods, used to generate income or wealth.

Labor

The utilization of human physical and mental capabilities in the crafting of goods and delivery of services.

Price Of Labor

The compensation workers receive for their labor, typically in the form of wages or salaries.