Which of the Following Statements Is CORRECT

question 38

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), rs.
• B) All else equal, an increase in a company's stock price will increase its marginal cost of new common equity, re.
• 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.

---

Definitions:

Profitability Index

A calculation that measures the relative profitability of an investment by dividing the present value of its future cash flows by the initial investment cost.

Payback Period

The time it takes for an investment to generate an amount of income or cash equal to the cost of the investment, used to assess the profitability or risk of an investment.

Net Present Value

A financial metric that calculates the value of a series of cash flows by discounting them to the present value using a specific rate, often used to assess the profitability of an investment.

Net Present Value

The difference between the present value of cash inflows and outflows over a period, used to analyze the profitability of an investment.