Which of the Following Statements Is Correct

question 8

Multiple Choice

Which of the following statements is correct?

• A)When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
• B)When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
• C)Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock.
• D)If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence needs to issue new stock.

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Definitions:

Operations

The day-to-day activities necessary for a business to function, including production, sales, and administration.

Adjusted Cost

A financial figure that has been modified to take into account specific factors or changes, such as depreciation or returns.

Operations

The daily operations required to manage a business, such as production, sales, and administrative tasks.

T-Accounts

A tool used in accounting to represent general ledger accounts, showing debits on the left side and credits on the right side.