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:

Centralized Planning

A system of economy where all choices related to the creation and allocation of goods and services are made by a central governmental body.

Competitive Markets

Markets where many buyers and sellers trade goods and services under conditions of few restrictions, leading to the best prices for both parties.

Opportunity Cost

The advantage lost by selecting one option instead of another.

Full-tuition Scholarships

Financial awards covering the entire cost of tuition for students, often based on academic merit, need, or other criteria, provided by educational institutions or donors.