Which of the Following Statements Is CORRECT

question 47

Multiple Choice

Which of the following statements is CORRECT?

• A) 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.
• B) The cost of new equity (r_e)could possibly be lower than the cost of reinvested earnings (r_s)if the market risk premium,risk-free rate,and the company's beta all decline by a sufficiently large amount.
• C) A firm's cost of reinvesting earnings is the rate of return stockholders require on a firm's common stock.
• D) 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.
• E) 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.

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Definitions:

Granting Credit

The process of providing a loan or other form of credit to a borrower or customer, often with specific terms and conditions.

Net Present Value

A calculation used to assess the profitability of an investment or project, considering the time value of money by discounting future cash flows to their present value.

Selling Price

The amount of money charged to the buyer for a product or service, typically set above the cost to include a profit margin.

Credit Terms

The conditions under which a seller will extend credit to a buyer, including the repayment period, interest rate, and the amount of payment.