Which of the Following Statements Is CORRECT

question 71

Multiple Choice

Which of the following statements is CORRECT?

• A) a cost should be assigned to reinvested earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders would themselves expect to earn a return on earnings that were distributed rather than retained and reinvested.
• B) no cost should be assigned to reinvested earnings because the firm does not have to pay anything to raise them. they are generated as cash flows by operating assets that were raised in the past; hence, they are "free."
• C) suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future. in this case, the firm's before-tax and after-tax costs of debt for purposes of calculating the wacc will both be equal to the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years.
• D) if a firm has enough reinvested earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a wacc.
• E) the component cost of preferred stock is expressed as rp(1 σ t). this follows because preferred stock dividends are treated as fixed charges, and as such they can be deducted by the issuer for tax purposes.

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Definitions:

Enterprise Resource Planning

A type of software that organizations use to manage day-to-day business activities such as accounting, procurement, project management, and manufacturing.

Human Resource Management

A function in organizations designed to maximize employee performance in service of an employer's strategic objectives.

Accounting Sales

The recorded revenue from goods or services sold or provided to customers, reflecting income generated by a business.

Subsidiary Ledger

A detailed ledger that contains all the transaction information of a specific account, which then summarizes to a general ledger.