Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings. 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?
1. The market risk premium declines.
2. The flotation costs associated with issuing new common stock increase.
3. The company's beta increases.
4. Expected inflation increases.
5. The flotation costs associated with issuing preferred stock increase.