Suppose a Company's Target Capital Structure Calls for 50% Debt

question 57

Multiple Choice

Suppose a company's target capital structure calls for 50% debt and 50% common equity.Which of the following statements is correct?

• A)The cost of equity is always equal to, or greater than, the cost of debt.
• B)The WACC is calculated on a before-tax basis.
• C)The WACC exceeds the cost of equity.
• D)The cost of retained earnings typically exceeds the cost of new common stock.

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Definitions:

SIDE

The Social Identity model of Deindividuation Effects; a theory explaining how group identity and anonymity can influence behaviors in group settings.

Optimal Distinctiveness

People strive to achieve a balance between conflicting motives for inclusiveness and separateness, expressed in groups as a balance between intragroup differentiation and intragroup homogenisation.

Social Mobility

The ability for individuals or families to move up or down the socioeconomic ladder within a society.

Metacontrast Principle

A phenomenon in social identity and group behavior, where contrast between in-group and out-group members is maximized in the perceivers' mind.