Question

True False O 0 1. Flotation costs serve to decrease the cost of preferred stock. O 0 2. For a firm with debt, V > E. O 0 3. The cost of retained earnings is not affected by flotation costs. 0 0 4. It is not fair to assume that preferred stock’s par value will be repaid. 0 O 0 o 5. According to the subjective method, the company's current beta value should only be used for projects with average risk. 6. Generally, market values are less desirable than book values for weighing a firm's funding components. 7. The market risk premium is a component of the dividend growth model. 0 0 0 0 8. For a firm selling stock for the first time, the SML model is more appropriate than the dividend growth model. 9. If the dividend is $8 and the cost of preferred stock is 18%, its price < $50. 0 0 o O 0 O 10. If the risk-free rate = 2%, beta = 2 and the market risk premium is 10%, the cost of equity > 20%. 11. If the last dividend paid = $5, the dividend growth rate = 6% and the current stock price = $100, the cost of equity > 11%. 12. Both bank loans and bond sales are examples of debt capital. o 0 O 13. Yield-to-maturity and Rd are not synonymous. O O 14. It is fair to think of preferred stock as a perpetuity. 0 O 15. The after-tax cost of debt > Rd. o O 16. Retained earnings is included in the weight of equity. o 0 17. When solving for the weights for privately held firms, book values are more commonly used. 18. Other things equal, the greater the WACC, the greater the NPV will be. O O 0 O O O 19. If 1000 shares of stock sell for $20 per share and 50 bonds sell for $800 each, their combined market value < $50,000. 20. If a firm's capital structure is 40% equity and 60% debt while equity costs 15% and debt costs 6%, the weighted average cost of capital > 10%.

Answer 1

1)

Floatation costs are costs incurred for rising new finance. Flotation costs are both incurred for Equity and Debt. These costs increase the cost of finance as well as initial investment to finance the project.

Hence, Given statement is False.

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