INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 2, Problem 1CP
Summary Introduction
To select: The correct option for a firm’s
Introduction : The preferred stock is defined as the stock in which the holder of the stock has the fixed dividend and the payment of this stock has the higher priority in comparison of the ordinary share dividends.
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A firm’s preferred stock often sells at yields below its bonds because:a. Preferred stock generally carries a higher agency rating.b. Owners of preferred stock have a prior claim on the firm’s earnings.c. Owners of preferred stock have a prior claim on a firm’s assets in the event of liquidation.d. Corporations owning stock may exclude from income taxes most of the dividend income they receive.
Which of the following statements is CORRECT?
a. The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
b. Corporations cannot buy the preferred stocks of other corporations.
c. Preferred dividends are not generally cumulative.
d. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.
e. Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.
Which one is the most incorrect?
Non-cumulative preferred stocks are entitled only to earnings that have been declared and paid.
Preferred stock provides a more stable income to investors than common stock.
One of the advantages to the firm associated with preferred stock financing rather than common stock financing is that control of the firm is not diluted.
One of the advantages to the firm of financing with preferred stock is that 65% of the dividends paid out are tax deductible.
Chapter 2 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 2 - Prob. 1PSCh. 2 - Prob. 2PSCh. 2 - Prob. 3PSCh. 2 - Prob. 4PSCh. 2 - Prob. 5PSCh. 2 - Prob. 6PSCh. 2 - Prob. 7PSCh. 2 - Prob. 8PSCh. 2 - Prob. 9PSCh. 2 - Prob. 10PS
Ch. 2 - Prob. 11PSCh. 2 - Prob. 12PSCh. 2 - Prob. 13PSCh. 2 - Prob. 14PSCh. 2 - Prob. 15PSCh. 2 - Prob. 16PSCh. 2 - Prob. 17PSCh. 2 - Prob. 18PSCh. 2 - Prob. 19PSCh. 2 - Prob. 20PSCh. 2 - Prob. 21PSCh. 2 - Prob. 22PSCh. 2 - Prob. 1CPCh. 2 - Prob. 2CPCh. 2 - Prob. 3CPCh. 2 - Prob. 4CPCh. 2 - Prob. 5CP
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- Which of the following statements is CORRECT? Group of answer choices When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM. If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough reinvested earnings to take care of its equity financing and hence must issue new stock. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.arrow_forwardA firm’s preferred stock often sells at yields below its bonds because: Preferred stock generally carries a higher agency rating. Owners of preferred stock have a prior claim on the firm’s earnings. Owners of preferred stock have a prior claim on a firm’s assets in the event of liquidation. Corporations owning stock may exclude from income taxes most of the dividend income they receive. Which is the most risky transaction to undertake in the stock index option markets if the stock market is expected to increase substantially after the transaction is completed? Write a call option. Write a put option. Buy a call option. Buy a put optionarrow_forwardFrom the issuing firm's point of view, one advantage of preferred stock over bonds is A) preferred dividends are a deductible expense for tax purposes. B) preferred voting privileges concentrate power in the hands of managers and major shareholders. C) a dividend payment can be skipped without triggering bankruptcy. D) all of the abovearrow_forward
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