Which of the Following Statements Is CORRECT

question 39

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:

Benefit

An advantage or profit gained from something.

Sensory Organs

Sensory organs are specialized parts of the body that receive and process sensory information, enabling perception of sight, sound, smell, taste, and touch.

High Frequency

Pertaining to or involving very short intervals of time or occurring at a rapid rate.

Automatic System

Cognitive processes that occur without conscious control or deliberation, typically fast and efficient, handling tasks such as perception, encoding, and simple decision-making.