Which of the following statements is CORRECT? A) We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes. B) The cost of new equity (r_e) could possibly be lower than the cost of reinvested earnings (r_s) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount. C) A company must try to adjust its current actual market value weights toward its target weights. D) The component cost of preferred stock is expressed as r_p(1 − T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt. E) In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 50% of the dividends received by corporate investors are excluded from their taxable income.

Question

Quizplus · Accepted Answer

A company should aim to have its actual market value weights match its target weights in order to have an optimal capital structure and minimize the cost of capital. However, it may not always be feasible to achieve exact alignment between the two weights.

Which of the Following Statements Is CORRECT