1. Burnham Brothers Inc. has no retained earnings since it has always paid out all of its earnings as dividends. 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 new common stock increase.
b. The company's beta increases.
c. Expected inflation increases.
d. The flotation costs associated with issuing preferred stock increase.
e. The market risk premium declines.
2. Which of the following statements is CORRECT?
a. One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.
b. One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
c. One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future.
d. One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.
e. One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.