Which of the Following Statements Is CORRECT

question 91

Multiple Choice

Which of the following statements is CORRECT?

• A) when calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
• B) because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the capm.
• C) if a company's beta increases, this will increase the cost of equity used to calculate the wacc, but only if the company does not have enough reinvested earnings to take care of its equity financing and hence must issue new stock.
• D) higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's wacc.
• E) when calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.

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Definitions:

Dominant Strategy

In game theory, a strategy that is best for a player, regardless of the strategies chosen by other players.

Nash Equilibria

A concept in game theory where no participant can gain by unilaterally changing their strategy if the strategies of others remain unchanged.

Maximin Strategy

In decision-making and game theory, a strategy which maximizes the minimum gain that can be achieved, focusing on the most favorable outcome of the worst possible scenarios.

Entry-Deterrence

Strategies employed by existing firms in a market to prevent or discourage new competitors from entering the market.