Which of the Following Statements Is Correct

question 61

Multiple Choice

Which of the following statements is correct?

• A)A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders could themselves earn a return on earnings if they were paid out rather than retained and reinvested.
• B)No cost should be assigned to retained earnings because the firm does not have to pay anything to raise them-they are generated as cash flows by operating assets that were raised in the past; hence, they are "free."
• C)Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future. In this case, the firm's before-tax and after-tax costs of debt will both be equal to the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years.
• D)If a firm has enough retained earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC.

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Definitions:

Ratios

Quantitative measurements that show the relationship between two numerical values or financial figures, often used to analyze companies' financial health.

Treasury Stock

Shares that were issued and later reacquired by the issuing company, reducing the amount of outstanding stock on the open market.

Return On Equity

A measure of a corporation's profitability, indicating how much profit is generated with the money shareholders have invested.

Return On Assets Ratio

A financial metric used to evaluate a company's efficiency in generating profits from its assets, calculated by dividing net income by total assets.