Which of the Following Statements Is CORRECT

question 67

Multiple Choice

Which of the following statements is CORRECT?

• A) A cost should be assigned to reinvested earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders would themselves expect to earn a return on earnings that were distributed rather than retained and reinvested.
• B) No cost should be assigned to reinvested earnings because the firm does not have to pay anything to raise them.They are generated as cash flows by operating assets that were raised in the past; hence, they are "free."
• C) Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future.In this case, the firm's before-tax and after-tax costs of debt for purposes of calculating the WACC will both be equal to the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years.
• D) If a firm has enough reinvested earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC.
• E) The component cost of preferred stock is expressed as rp(1 - T).This follows because preferred stock dividends are treated as fixed charges, and as such they can be deducted by the issuer for tax purposes.

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Definitions:

Highway

A main road, especially one connecting major towns or cities, designed for fast travel and transportation of goods and people.

Congestion

A condition occurring in network systems or urban environments where the demand for resources or space exceeds the available capacity, leading to slowdowns and inefficiency.

Temporal Aggregation

A method that involves combining time series data over longer periods to analyze trends or patterns.

Transportation Resources

The vehicles, infrastructure, and systems involved in the movement of goods and people from one location to another.