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Maese Sisters Inc has been paying out all of its earnings as

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Maese Sisters Inc has been paying out all of its earnings as dividends, and hence has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity. Its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would reduce the WACC?
The flotation costs associated with issuing new common stock increase.
The market risk premium declines.
The company's beta increases.
Expected inflation increases.
The flotation costs associated with issuing preferred stock increase.



Question 23 2 points Save
Which of the following statements is CORRECT?
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.
When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company has does not have enough retained earnings to take care of its equity financing and hence needs to issue new stock.
Higher flotation costs reduce investor returns, and that leads to a reduction in a company's WACC.



Question 24 2 points Save
Which of the following statements about the cost of capital is CORRECT?
A change in a company's target capital structure cannot affect its WACC.
WACC calculations should be based on the before-tax costs of all the individual capital components.
If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decrease.
Flotation costs associated with issuing new common stock normally lead to a decrease in the WACC.
An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.
Submitted: 7 years ago.
Category: Homework
Expert:  SteveS replied 7 years ago.
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