Which of the Following Statements Is CORRECT

question 70

Multiple Choice

Which of the following statements is CORRECT?

• A) The bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk premium to the interest rate on the company's own long-term bonds.The size of the risk premium for bonds with different ratings is published daily in The Wall Street Journal or is available online.
• B) The WACC is calculated using a before-tax cost for debt that is equal to the interest rate that must be paid on new debt,along with the after-tax costs for common stock and for preferred stock if it is used.
• C) An increase in the risk-free rate is likely to reduce the marginal costs of both debt and equity.
• D) The relevant WACC can change depending on the amount of funds a firm raises during a given year.Moreover,the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component,with the weights based on the firm's target capital structure.
• E) Beta measures market risk,which is generally the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value.However,this is not true unless all of the firm's stockholders are well diversified.

---

Definitions:

Fair Value Adjustment

A process of adjusting the book value of an asset or liability to reflect its current market value, used in accounting to ensure the fair presentation of financial statements.

Trading Portfolio

A collection of financial assets, such as stocks or bonds, held by an institution or individual for the purpose of realizing profits from short-term price movements.

Unrealized Gain or Loss-Income

The increase or decrease in the value of an investment that has not yet been sold for a profit or loss.

Other Expenses

Costs incurred by a business that do not fit into primary operational categories, such as administrative or selling expenses.