Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hen
ID: 2753994 • Letter: S
Question
Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?
The market risk premium increases.
The flotation costs associated with issuing new common stock decrease.
The company’s beta increases.
Expected inflation increases.
The flotation costs associated with issuing preferred stock increase.
The market risk premium increases.
The flotation costs associated with issuing new common stock decrease.
The company’s beta increases.
Expected inflation increases.
The flotation costs associated with issuing preferred stock increase.
Explanation / Answer
The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. The event which REDUCE its WACC is
b. => The flotation costs assiciated with issuing new common stock decrease.
(all other options are on increases side so they increases the WACC)
The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. The event which REDUCE its WACC is
b. => The flotation costs assiciated with issuing new common stock decrease.
(all other options are on increases side so they increases the WACC)
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