Which of the following is a major assumption that is embedded in the capital asset pricing model (CAPM), which is often used to estimate the cost of retained earnings, is? a. Investors primarily purchase stocks with beta coefficients equal to zero. O b. All investors are well diversified. O c. The firm's cost of retained earnings must be less than its cost of preferred stock for the CAPM to provide a reasonable estimate for is. Od. The firm's cost of equity and its cost of debt are always equal. O e. The firm's dividends and earnings grow at a constant rate far into the future. Which of the following statements is true about the flotation costs that are incurred when a firm issues new securities to raise funds? O a. The higher the flotation costs associated with a preferred stock issue, the lower the firm's cost of preferred stock, i'ps. 0 Floatation costs increase the cost of using funds: e.g., the cost of issuing new common stock is greater than the cost of retained earnings because the firm must pay flotation costs to issue new equity. Flotation costs should be added to the per share price of a preferred stock issue to compute the cost of preferred stock, i'ps. O d. When it incurs flotation costs, the firm normally receives a higher amount of net proceeds from a security issue than when there are no flotation costs. O e. Floatation costs should be added to the before-tax weighted average cost of capital to determine the firm's overall net weighted average cost of capital after taxes. SW Inc.'s preferred stock, which pays a $5.25 dividend each year, currently sells for $62.50. The company's marginal tax rate is 40 percent. When it issues preferred stock, SW normally incurs flotation costs equal to 8 percent. What is the cost of preferred stock, lps, that should be included in the computation of the SW Inc.'s weighted average cost of capital (WACC)? a. 8.40% O b. 7.73% O c. 9.13% O d. 9.07% e. 7.78% The rates of return, or costs, that a firm must pay to raise funds to invest in capital budgeting projects are determined by the: O a. internal rate of return the firm earns on its investments. O b. marginal revenue generated by projects in which the firm invests. investors who purchase the firm's stocks and bonds in the financial markets. . d. cash flows generated by the investment in capital budgeting projects. O e. firm's dividend payout ratio