1. Which of the following would tend to reduce the weighted average cost of capital for a firm?
The expected return on the market portfolio decreases but the risk-free rate stays the same
The flotation costs associated with issuing new common stock increase
The company’s beta increases
The firm’s corporate tax rate decreases but does not change the firm’s beta
The firm, with a required return on equity greater than its borrowing rate, retires some debt with money raised through issuing more equity
2. Margo Lawrence is employed full-time as a paralegal, but on evenings and weekends, she bakes wedding cakes. Margo started her baking activities in January 2007 and has made a profit every year from her baking through 2012. In 2013, the activity generated a $720 net loss. Which of the following statements is false?
a. The legal presumption is that Margo's $720 loss is a business loss.
b. The legal presumption is that Margo's $720 loss is a nondeductible hobby loss.
c. Margo must include the revenues from her baking activity in gross income and can deduct any of her related expenses.
d. Margo is not allowed to report her $720 loss as a miscellaneous itemized deduction