Question

Generally, the return on an equity investment is higher than the return on debt or preferred stock because:

a. equity risk is higher

b. people are more willing to invest in debt

c. the cost of preferred stock is usually between the cost of debt and that of equity

d. all the above

Although the money paid to investors is both the firm's cost and the investors return,

a. certain adjustments prevent the effective cost and return from being the same.

b. adjustments must be made to keep the effective cost and return equal.

c. adjustments keep the costs of common and preferred equity equal but debt's cost is usually higher

d. a & c

The component cost of a firm 's preferred stock consists of:

a. the current dividend yield.

b. the expected growth rate of dividends.

c. dividends expressed as a percent of par value.

d. both a & b

Flotation costs are administrative fees and expenses incurred in:

		a. the process of issuing and selling securities.
		b. listing the company's stock on a stock exchange.
		c. lawsuits alleging fraud in the issue of securities.
		d. none of the above

Answer 1

1) Correct answer:

d. all the above

equity risk is higer due to bankrupcy
people are more willing to invest in debt as it provides more sure cash flow
preferred stock are hybrid of debt and equity and therefore it has lower cost than equity and greater cost than debt

Although the money paid to investors is both the firm's cost and the investors return,

Correct option d) a and c

The component cost of a firm 's preferred stock consists of:

Correct answer: d) both a and b

Floatation costs:
Correct option : a