Question

Which of the following statements comparing preferred stock to other financial instruments is NOT true?

Like common shares, preferred dividends are typically paid quarterly.

Like common shares, preferred dividends are after-tax payments for the firm.

Like bonds, preferred shares are issued with a face value.

Like bonds, most preferred shares have maturities of up to 30 years.

To estimate the after-tax cost of common stock you must:

multiply the before-tax cost of equity by (tax rate)

multiply the before-tax cost of equity by (1 - tax rate)

multiply the before-tax cost of equity by (1 + tax rate)

None of these because common stock dividend payments are not tax deductible for the firm.

By definition, the market portfolio has a ________ and the risk free rate has a ________.

standard deviation equal to 1.0; beta equal to 0.0.

standard deviation equal to 0.0; beta equal to 1.0.

beta equal 0.0; beta equal to 1.0.

beta equal to 1.0; beta equal to 0.0.

Which of the following is typically considered to be the most appropriate proxy for the risk-free rate when applying the CAPM?

10-year AAA bonds

the firm's current yield to maturity on outstanding debt

10-year Treasury bonds

the prime rate

A firm with a beta of 2.0 should:

require twice the market risk premium.

require twice the risk-free rate of return.

require twice the return on the market portfolio.

be forced to stop trading until the market perceives less risk.

Janis Corp. just issued an annual dividend of $2.50 per share. The firm anticipates the growth rate in dividends will be 3% annually for the foreseeable future. If the current price is $61 per share, what is the required rate of return for the firm's equity?

6.95%

8.36%

7.22%

7.10%

The market risk premium represents the expected difference between:

the prime rate and the 3-month Treasury bill rate.

the return on the stock market investment and the risk-free return.

the return on AAA bonds and Treasury bonds.

the return on the stock market and the return on preferred shares.

A firm with a beta of 1.0 and when held in a well-diversified portfolio should be considered to have ________ risk than the market portfolio.

less

more

There is not enough information to answer this question.

neither more nor less

All else equal, an individual investor would prefer ________ even if rates on both are equal, since ________ can be deferred.

dividends to capital gains; capital gains

dividends to capital gains; dividends

Investors are indifferent to capital gains vs dividends.

capital gains to dividends; capital gains

Answer 1

1.

Which of the following statements comparing preferred stock to other financial instruments is NOT true?

Like common shares, preferred dividends are typically paid quarterly.

2.

To estimate the after-tax cost of common stock you must:

None of these because common stock dividend payments are not tax deductible for the firm.

3.

By definition, the market portfolio has a beta equal to 1.0 and the risk free rate has a beta equal to 0.0.

4.

Which of the following is typically considered to be the most appropriate proxy for the risk-free rate when applying the CAPM?

10-year Treasury bonds

5.

Janis Corp. just issued an annual dividend of $2.50 per share. The firm anticipates the growth rate in dividends will be 3% annually for the foreseeable future. If the current price is $61 per share, what is the required rate of return for the firm's equity?

r = 2.50(1.03)/61 + 0.03

r = 7.22%