2. Which of the following statements is CORRECT? 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 wil 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 caleulate 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. a. b. c. d. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. 3. A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a notation costof 5 00% of the issue price what is the firm's cost of preferred stock? a. b. c. 7.81% 8.22% 8.65% 9.10% 9.56% e. 4. Trahern Baking Co. common stock sells for $32.50 per share. It expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, and its expected constant dividend growth rate is 6.0%. New stock can be sold to the public at the price, but a flotation cost of 5% would be incurred, what would be the cost of equity from new common stock? 12.70% 13.37% 14.04% 14.74% 15.48% a. c. d. e