Question

5. The amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock.
True
False

6. The cost of new common stock is greater than the cost of outstanding common stock.
True
False

7. In determining the cost of preferred stock, the earnings on outstanding preferred stock may be used as a proxy.
True
False

8. The out-of-pocket cost of common stock is a good approximation of the cost of common stock equity.
True
False

9.The cost of retained earnings is considered to be equal to the required rate of return on a firm's outstanding common stock.
True
False

10. Retained earnings represent an internal source of funds that is raised without the payment of interest or cost to the firm's stockholders.
True
False

11. The only difference in the cost of retained earnings (Ke) and the cost of new common stock (Kn) is the flotation cost on new common stock.
True
False

12. The measurement of common stock equity in weighted average cost of capital uses the cost of retained earnings (Ke), but not the cost of new common stock (Kn).
True
False

13. A firm should always be at a single optimum debt-to-equity ratio to minimize its cost of capital.
True
False

14. The weighted average cost of capital calculates the average cost of issued or new issuance of debt and equity for a firm.
True
False

15. Market values rather than book values should be used for determining the optimal capital structure; however, in practice, book value is commonly used.
True
False

16. The pretax cost of debt is generally less than the pretax cost of equity.
True
False

17. In the capital asset pricing model (CAPM), beta measures the volatility of the market.
True
False

18. Per the capital asset pricing model, the slope of the security market line (SML) must be 1.0.
True
False

19. Although debt financing is generally cheaper than equity financing, financial managers should not use debt financing significantly above the industry standard because it can increase the firm's overall cost of capital.
True
False

20. As the risk-free rate increases, the required rate of return for common stock decreases.
True
False

Answer 1

As per rules I am answering the first 4 subparts of the question

5: False

Generally the company uses retained earnings and new stock first.Thereafter it uses borrowed funds and so the amount of debt depends upon the availability of retained earnings and new stock.

6: True

New stock entails flotation costs and so its cost is higher.

7:False

Cost of preferred stock is computed as further dividends divided by the price.

8: True

Since the common stock involves flotation costs also we determine the cost of common stock using out of pocket costs.