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Question(s) / Instruction(s):

Which of the following statements is CORRECT?

A             In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.

B             We should use historical measures of the component costs from prior financings when estimating a company’s WACC for capital budgeting purposes.

C             The cost of new equity (re) could possibly be lower than the cost of retained earnings (rs) if the markets risk premium, risk-free rate, and the company’s beta all decline by a sufficiently large amount.

D             Its cost of retained earnings is the rate of return stockholders require on a firm’s common stock.

E              The component cost of preferred stock is expressed as rp (1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.

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