When working with the CAPM, which of the following
factors can be determined with the most precision?
The market risk premium (RPM).
The beta coefficient, bi, of a relatively safe stock.
The most appropriate risk-free rate, rRF.
The expected rate of return
on the market, rM.
The beta coefficient of “the market,” which is the same as the beta of an average stock.
Which of the following statements is CORRECT?
When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
When calculating the cost of preferred stock
, companies must adjust for taxes, because dividends paid on preferred stock are deductible
by the paying corporation.
Because of tax effects, an increase in the risk-free rate
will have a greater effect on the after-tax cost of debt than on the cost of common stock
as measured by the CAPM.
If a company’s beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence must issue new stock.
Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company’s WACC.