question. Mark 1. Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher costruined carnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock? a. Increase the dividend payout ratio for the upcoming year b. Increase the percentage of debt in the target capital structure c. Increase the proposed capital budget. d. Reduce the amount of short-term bank debt in order to increase the current ratio, e. Reduce the percentage of debt in the target capital structure. 2. LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept? a. Project B, which is of below-average risk and has a return of 8.5%. b. Project C, which is of above-average risk and has a return of 11%. c. Project A, which is of average risk and has a return of 9%. d. None of the projects should be accepted. e. All of the projects should be accepted. 3. Which of the following statements is CORRECT? a. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. b. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. c. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM. d. If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only ift company does not have enough retained earnings to take care of its equity financing and hence must issue stock e. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WA 4. Bosio Inc.'s perpetual preferred stock sells for $102.50 per share, and it pays an $8.50 annual dividend. If the were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What company's cost of preferred stock for use in calculating the WACC? a. 9.33% b. 8.72% c. 7.26% d. 7.17% e. 8.64% 5. O'Brien Inc. has the following data: TRF = 5.00%; RPM (Market Risk Premium)=6.00%and b = 1.50 firm's cost of equity from retained earnings based on the CAPM? a. 10.92%