Which of the Following Statements Is CORRECT? Assume a Company's

question 17

Multiple Choice

Which of the following statements is CORRECT? Assume a company's target capital structure is 50% debt and 50% common equity.

• A) The WACC is calculated on a before-tax basis.
• B) The WACC exceeds the cost of equity.
• C) The cost of equity is always equal to or greater than the cost of debt.
• D) The cost of reinvested earnings typically exceeds the cost of new common stock.
• E) The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.

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Definitions:

Ordinary Simple Interest

Interest calculated on the principal amount of a loan or investment based on a simple interest rate, without the compounding factor.

360-Day Year

An accounting approximation that treats all months as having 30 days, used in calculating interest with a simplified approach.

Ordinary Simple Interest

Interest calculated on the principal amount of a loan or deposit, based on a simple interest rate over a specified period.

360-Day Year

A simplified calculation method used in finance, assuming a year consists of 360 days for the purpose of interest calculation.