Part A: True or False Questions e cost of preferred stock is computed the same as the rate of return on an annuity 2. A firm's overall cost of equity is unaffected by changes in the market risk premium. 3. The capital asset pricing model approach to equity valuation assumes the reward-to- risk ratio is constant. 4. The deferred tax on capital gains favors a low dividend policy. 5. The fact that flotation costs can be significant is an argument for maintaining a low dividend policy and rarely issuing extra dividends