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NEW QUESTION: 1
Which of the following statements is most correct?
A. All of these statements are false.
B. The reason that a cost of capital is assigned to retained earnings is because these funds are already earning a return in the business, the reason does not involve the opportunity cost principle.
C. The bond-yield-plus-risk-premium approach to estimating a firm's cost of common equity involves adding a subjectively determined risk-premium to the market risk-free bond rate.
D. The component cost of preferred stock is expressed as k(ps)(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of debt interest.
E. Suppose a firm is losing money and thus, is not paying taxes, and that this situation is expected to persist for a few years whether or not the firm uses debt financing. Thus the firm's after-tax cost of debt will equal its before-tax cost of debt.
Answer: E
Explanation:
Explanation/Reference:
Explanation:
Obviously if the firm is paying no taxes, its after-tax cost of debt will equal its before-tax cost of debt.



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