True or False: The following statement accurately describes howfirms make decisions related to issuing new common stock.

If a firm needs additional capital from equity sources once itsretained earnings breakpoint is reached, it will have to raise thecapital by issuing new common stock.

True: Firms will raise all the equity they can from retainedearnings before issuing new common stock, because capital fromretained earnings is cheaper than capital raised from issuing newcommon stock.

False: Firms raise capital from retained earnings only when theycannot issue new common stock due to market conditions outside oftheir control.

White Lion Homebuilders is considering investing in a one-yearproject that requires an initial investment of $450,000. To do so,it will have to issue new common stock and will incur a flotationcost of 2.00%. At the end of the year, the project is expected toproduce a cash inflow of $595,000. The rate of return that WhiteLion expects to earn on its project (net of its flotation costs) is   (rounded to two decimal places).

Alpha Moose Transporters has a current stock price of $22.35 pershare, and is expected to pay a per-share dividend of $1.36 at theend of the year. The company’s earnings’ and dividends’ growth rateare expected to grow at the constant rate of 9.40% into theforeseeable future. If Alpha Moose expects to incur flotation costsof 5.00% of the value of its newly-raised equity funds, then theflotation-adjusted (net) cost of its new common stock (rounded totwo decimal places) should be   .

White Lion Homebuilders Co.’s addition to earnings for this yearis expected to be $857,000. Its target capital structure consistsof 35% debt, 5% preferred, and 60% equity. Determine White LionHomebuilders’s retained earnings breakpoint:

$1,428,333

$1,642,583

$1,499,750

$1,785,416