Which of the Following Statements Is CORRECT

question 64

Multiple Choice

Which of the following statements is CORRECT?

• A) the after-tax cost of debt that should be used as the component cost when calculating the wacc is the average after-tax cost of all the firm's outstanding debt.
• B) suppose some of a publicly-traded firm's stockholders are not diversified; they hold only the one firm's stock. in this case, the capm approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting, projects will be accepted that will reduce the firm's intrinsic value.
• C) the cost of equity is generally harder to measure than the cost of debt because there is no stated, contractual cost number on which to base the cost of equity.
• D) the bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital.
• E) the cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project, i.e., it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity.

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Definitions:

Production

The process of creating goods or services through the combination of labor, materials, and technology.

Inventory Carrying Costs

The expenses related to storing unsold goods, including warehousing, insurance, depreciation, and opportunity costs.

Purchasing Costs

The total expenses incurred in buying goods or services, including the price of the product, taxes, shipping, and handling fees.

Stockouts

The situation that occurs when an item is not in stock and cannot be sold to a customer, often leading to lost sales and customer dissatisfaction.