Which Statement Regarding Cost of Capital Is True

question 8

Multiple Choice

Which statement regarding cost of capital is true?

• A) If a company assigns the same cost of capital to all of its projects regardless of each project's risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
• B) Because of the risk of bankruptcy, the cost of debt is always higher than the cost of equity capital.
• C) Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.
• D) Higher flotation costs tend to reduce the cost of equity capital.

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Definitions:

Imitation

The action of using someone or something as a model and attempting to replicate their behavior, action, or function.

Mirror Neurons

Neurons that fire both when an individual acts and when the individual observes the same action performed by another, hence, mirroring the behavior of the other.

Interneurons

Neurons that transmit impulses between other neurons, especially as part of a reflex arc or as part of the neural pathways in the brain and spinal cord.

Afferent Neurons

Nerve cells that carry sensory information from the body's periphery towards the central nervous system.