Which of the following statements is CORRECT?
a. The component cost of preferred stock is expressed as rp(1 – T).This follows because preferred stock dividends are treated as fixedcharges, and as such they can be deducted by the issuer for taxpurposes.
b. A cost should be assigned to retained earnings due to theopportunity cost principle, which refers to the fact that thefirm’s stockholders would themselves expect to earn a return onearnings that were paid out rather than retained andreinvested.
c. No cost should be assigned to retained earnings because the firmdoes not have to pay anything to raise them. They are generated ascash flows by operating assets that were raised in the past, hencethey are “free.”
d. Suppose a firm has been losing money and thus is not payingtaxes, and this situation is expected to persist into theforeseeable future. In this case, the firm’s before-tax andafter-tax costs of debt for purposes of calculating the WACC willboth be equal to the interest rate on the firm’s currentlyoutstanding debt, provided that debt was issued during the past 5years.
e. If a firm has enough retained earnings to fund its capitalbudget for the coming year, then there is no need to estimateeither a cost of equity or a WACC.
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