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Answer to Question #6215 in Economics of Enterprise for LaMarcus Streeter

Question #6215
3. Which of the following statements is CORRECT?

a. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are deductible by the paying corporation.
b. All else equal, an increase in a company’s stock price will increase its marginal cost of retained earnings, rs.
c. All else equal, an increase in a company’s stock price will increase its marginal cost of new common equity, re.
d. Since the money is readily available, the after-tax cost of retained earnings is usually much lower than the after-tax cost of debt.
e. If a company’s tax rate increases but the YTM on its noncallable bonds remains the same, the after-tax cost of its debt will fall.
Expert's answer
d. Since the money is readily available, the after-tax cost of retained earnings
is usually much lower than the after-tax cost of debt.
Because the amount of
retained earnings losses more than debts after taxes are deducted.

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