Question

Which of the following statements is CORRECT?

a. Since the money is readily available, the after-tax cost of retained earnings is usually much lower than the after-tax cost of debt

b. All else equal, an increase in a company’s stock price will increase its marginal cost of new common equity, re

c. All else equal, an increase in a company’s stock price will increase its marginal cost of retained earnings, rs

d. When calculating the cost of preferred stock, a company does not need to adjust for taxes, because preferred stock dividends are not deductible by the paying corporation

Answer 1

Hello

YOUR REQUIRED ANSWER IS OPTION D :  When calculating the cost of preferred stock, a company does not need to adjust for taxes, because preferred stock dividends are not deductible by the paying corporation.

• Cost of retained earnings is much higher than cost of debt as the shareholders would require the same return on retained earnings as on equity.
• Increase in company's stock price will decrease the marginal cost of common equity and retained earnings.
• Dividends are paid to preferred capital after taxation.

Thanks!

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