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, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?A. The flotation costs associated with issuing preferred stock increase.B. The company's beta increases.C. The flotation costs associated with issuing new common stock increase.D. The market risk premium declines.E. Expected inflation increases.

Question
Asked Oct 7, 2019
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, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?

A. The flotation costs associated with issuing preferred stock increase.
B. The company's beta increases.
C. The flotation costs associated with issuing new common stock increase.
D. The market risk premium declines.
E. Expected inflation increases.
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The right answer is option (d). Under the CAPM method, the cost of capital is calculated by,  first multiplying beta factor with ...

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