TRUE or FALSE

O O 1. Flotation costs serve to decrease the cost of preferred stock.

O O 2. For a firm with debt, V > E.

O O 3. The cost of retained earnings is not affected by flotation costs.

O O 4. It is not fair to assume that preferred stock's par value will be repaid.

O O 5. According to the subjective method, the company's current beta value should only be used for projects with average risk.

O O 6. Generally, market values are less desirable than book values for weighing a

firm's funding components.

O O 7. The market risk premium is a component of the dividend growth model.

O O 8. For a firm selling stock for the first time, the SML model is more appropriate

than the dividend growth model.

O O 9. If the dividend is $8 and the cost of preferred stock is 18%, its price < $50.

O O 10. If the risk-free rate = 2%, beta = 2 and the market risk premium is 10%,

the cost of equity > 20%.

O O 11. If the last dividend paid = $5, the dividend growth rate = 6% and the current stock price = $100, the cost of equity > 11%.

O O 12. Both bank loans and bond sales are examples of debt capital.

O O 13. Yield-to-maturity and Rd are not synonymous.

O O 14. It is fair to think of preferred stock as a perpetuity.

O O 15. The after-tax cost of debt > Rd.

O O 16. Retained earnings is included in the weight of equity.

O O 17. When solving for the weights for privately held firms, book values are more

commonly used.

O O 18. Other things equal, the greater the WACC, the greater the NPV will be.

O O 19. If 1000 shares of stock sell for $20 per share and 50 bonds sell for $800 each, their combined market value < $50,000.

O O 20. If a firm's capital structure is 40% equity and 60% debt while equity costs 15% and debt costs 6%, the weighted average cost of capital > 10%.