CFA® Level 1: CFA® Level 1

Which of the following statements is most correct?

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A. An increase in the flotation cost incurred in selling new stock will reduce the retained earnings break point, as long as the dollar level of retained earnings and the fraction of capital which is equity financed remains constant.

B. None of these answers are correct.

C. All of these answers are correct.

D. An increase in a firm's corporate tax rate, will increase the firm s cost of debt capital, as long as the yield to maturity on the company's bonds remains constant or falls.

E. An increase in the flotation cost incurred in selling new stock will increase the cost of retained earnings.

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Explanations

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A. B. C. D. E.

An increase in the flotation cost has no effect on the cost of retained earnings or the retained earnings break point. An increase in the firm's corporate tax rate reduces the after-tax component cost of debt.

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