QUESTION 31 Which of the following statements is CORRECT? 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.

We should use historical measures of the component costs from prior financings that are still outstanding when estimating a companys WACC for capital budgeting purposes.

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

Its cost of retained earnings is the rate of return stockholders require on a firms common stock.

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.