1) Which of the following statements is true of the capital asset pricing model (CAPM)?

a. The capital asset pricing model (CAPM) approach to estimating a firm's cost of retained earnings gives a better estimate than the discounted cash flow (DCF) approach.

b. The capital asset pricing model (CAPM) approach is typically used to estimate a firm's flotation cost adjustment factor, and this factor is added to the discounted cash flow (DCF) cost estimate.

c. The beta coefficient used in the capital asset pricing model (CAPM) approach is the same as the growth rate used in the discounted cash flow (DCF) method.

d. The capital asset pricing model (CAPM) approach and the discounted cash flow (DCF) approach always result in exactly the same estimate for r.

e. The capital asset pricing model (CAPM) approach assumes investors are well diversified and the discounted cash flow (DCF) approach assumes constant growth rate.

2) Tangerine Inc.'s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rate is 40 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find the cost of retained earnings. Which of the following is Tangerine's component cost of retained earnings?

a. 8 percent

b. 10 percent

c. 12 percent

d. 14 percent

e. 16 percent

3) The before-tax cost of debt of a firm using funds from bond issue is equal to the _____ of the bond.

a. yield to maturity (YTM)

b. maturity value

c. coupon rate

d. discount rate

e. internal rate of return