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The Higher the Firm's Flotation Cost for New Common Equity,the

Question 16
True False

The higher the firm's flotation cost for new common equity,the more likely the firm is to use preferred stock,which has no flotation cost,and retained earnings,whose cost is the average return on the assets that are acquired.

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Q 17
In general,firms should use their weighted average cost of capital (WACC)to evaluate capital budgeting projects because most projects are funded with general corporate funds,which come from a variety of sources.However,if the firm plans to use only debt or only equity to fund a particular project,it should use the after-tax cost of that specific type of capital to evaluate that project.
Q 18
If a firm's marginal tax rate is increased,this would,other things held constant,lower the cost of debt used to calculate its WACC.
Q 19
The reason why retained earnings have a cost equal to rs is because investors think they can (i.e. ,expect to)earn rs on investments with the same risk as the firm's common stock,and if the firm does not think that it can earn rs on the earnings that it retains,it should pay those earnings out to its investors.Thus,the cost of retained earnings is based on the opportunity cost principle.
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