Which of the Following Statements About a Not-For-Profit Firm's Cost

question 6

Multiple Choice

Which of the following statements about a not-for-profit firm's cost of capital estimate is most correct?

• A) the capital structure weights for a not-for-profit firm are set at 50/50, because such firms can raise $1 of debt financing for each dollar of retained earnings.
• B) the cost of tax-exempt debt issued by not-for-profit firms is increased ("grossed up") by 1 σ t in the wacc estimate to reflect the fact that such firms do not pay taxes.
• C) equity (fund) capital has a cost that is roughly equivalent to the cost of retained earnings to similar investor-owned companies.
• D) not-for-profit firms have a zero cost of capital.
• E) since a not-for-profit firm has no shareholders, its wacc estimate does not include a cost of equity (fund capital) estimate.

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Definitions:

Real-life Phenomena

Events, situations, or experiences that occur in the natural world, as opposed to those created or simulated in controlled environments.

Epidemiology

Study of the frequency and distribution of a disorder, or a group of disorders, in a population.

Frequency

The rate at which something occurs or is repeated over a particular period of time or in a given sample.

Distribution

In statistics, a way of describing the observations of a variable, including their spread and central tendency.