true and false 6. The cost of preferred stock is typically lower than the cost o
ID: 2647737 • Letter: T
Question
true and false
6. The cost of preferred stock is typically lower than the cost of long-term debt (i.e., bonds) because
the preferred stock dividend payments are tax deductible.
______ 7. A firm can retain more of its earnings if it can convince its stockholders that it will earn at least
their required return on the reinvested funds.
______ 8. The cost of preferred stock is generally higher than both the cost of debt and the cost of
retained earnings.
______ 9. The cost of new common stock is normally greater than any other long-term financing cost.
______ 10. The
Explanation / Answer
ANSWERS:
6. True.
The WACC should include the types of capital used to pay for long-term assets, and this is typically long-term debt, preferred stock (if used), and common stock.
7. True.
Because they require more asset investment only for their operation.
8. True.
Preferred stocks offer a dividend that never increases and the price of the preferred stock usually stays in a narrow range unlike common stock that can shoot up or fall precipitously. So owners of a preferred stock will miss out on large upside moves associated with the common stocks of the same company
9. True.
Because common stock dividends are paid from after-tax cash flows, no tax adjustment is required.
10. True.
It is found by weighting the cost of each specific type of capital by its proportion in the firm