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:

Stated Corporate Value

The value of a corporation as listed in its corporate documents or financial statements, often used in legal and financial contexts.

Liability

Liability refers to the legal responsibility for one's actions or failings, which can result in the obligation to compensate for harm caused or to fulfill a contractual agreement.

Self-Dealing

Any instance in which directors or officers make decisions that violate their corporate duty of loyalty.

Penalty

A punishment imposed for breaking a law, rule, or contract which often involves paying a fine or undergoing some form of restraint.