QUESTION 25

Burnham Brothers Inc. has no retained earnings since it has always paid out all of its earnings as dividends. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events wouldINCREASEits WACC?

1. The company starts investing in riskier projects.
2. The company's market risk decreases.
3. The company's short-term borrowing increases while its long-term borrowing decreases.
4. The company stops issuing new preferred stock and increases borrowing.
5. The market risk premium declines.