For a Company Whose Target Capital Structure Calls for 50

question 3

Multiple Choice

For a company whose target capital structure calls for 50% debt and 50% common equity,which of the following statements is CORRECT?

• A) The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.
• B) The WACC is calculated on a before-tax basis.
• C) The WACC exceeds the cost of equity.
• D) The cost of equity is always equal to or greater than the cost of debt.
• E) The cost of retained earnings typically exceeds the cost of new common stock.

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Definitions:

Service Revenue

Revenue generated by a business through the delivery of services to its clientele.

Prepaid Rent

An asset account that records rent payments made in advance for the use of property or space that hasn’t yet been incurred.

Adjusting Entry

An entry made in the journals to align the accounts with the true financial status by accounting for accrued or deferred items.

Net Income

A measure of profitability that calculates the total revenue minus total expenses, taxes, and costs.