Which of the Following Statements Is CORRECT

question 33

Multiple Choice

Which of the following statements is CORRECT?

• A) We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.
• B) The cost of new equity (re)could possibly be lower than the cost of reinvested earnings (rs)if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
• C) A firm's cost of reinvesting earnings is the rate of return stockholders require on a firm's common stock.
• D) The component cost of preferred stock is expressed as rp(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.
• E) In the WACC calculation, we must adjust the cost of preferred stock (the market yield)to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.

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Definitions:

CFCs

Chlorofluorocarbons, man-made chemical compounds used in aerosols, cooling devices, and as solvents, which have been found to deplete the ozone layer.

Montreal Protocol

An international treaty designed to protect the ozone layer by phasing out the production of numerous substances believed to be responsible for ozone depletion.

CFCs

Chlorofluorocarbons, a class of chemical compounds used in refrigeration and aerosols, which have been found to deplete the ozone layer.