Which of the Following Statements Is CORRECT

question 64

Multiple Choice

Which of the following statements is CORRECT?

• A) All else equal, an increase in a company's stock price will increase its marginal cost of reinvested earnings (not newly issued stock), r_s.
• B) All else equal, an increase in a company's stock price will increase its marginal cost of new common equity, r_e.
• C) Since the money is readily available, the after-tax cost of reinvested earnings (not newly issued stock) is usually much lower than the after-tax cost of debt.
• D) If a company's tax rate increases but the YTM on its noncallable bonds remains the same, the after-tax cost of its debt will fall.
• E) When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are deductible by the paying corporation.

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Definitions:

Marginal Cost

The expense incurred in creating an extra single unit of a product or service.

Price Elasticity

A metric that determines how the demand for a certain good fluctuates with its price adjustments.

Marginal Revenue

The additional income that an organization receives from selling one more unit of a good or service.

Profit Maximizing

The process or strategy by which a firm adjusts its production to achieve the highest possible profit.