Which of the Following Statements Is CORRECT

question 1

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 (re) could possibly be lower than the cost of reinvested earnings (rs) 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 rp(1 σ 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:

Producing Departments

Departments or divisions within an organization directly involved in producing the goods or services offered to customers.

Fixed Costs

Costs that do not change with the level of production or sales activity within a certain range and period, such as rent, salaries, and insurance.

Cafeteria

A type of food service location within an institution where customers serve themselves from a variety of dishes made available.

Transfer Prices

Prices used for the sale or transfer of goods and services between departments or divisions within the same company.