Question

Q1.A preferred stock is valued as a:

		constant growth stock.
		fixed coupon rate bond.
		zero coupon stock.
		perpetuity.

Q2.

If D represents debt, E represents equity, and the firm has preferred stock (P), then the capital structure weight of equity is computed as:

		E/D
		E/(D+E)
		E/(D+E+P)
		E/ (E+P)

Q3.

Which of the following is considered a capital component for the purpose of calculating the weighted average cost of capital (WACC)?

		Accounts payables
		Accruals
		Short-term debt
		Preferred stock.

Q4.

The cost of a particular source of capital (debt, preferred stock, common stock) is equal to the investor's required rate of return.

True

False

Q5.

Which one of the following is a logical assumption concerning capital structure weights?

		The weights are constant over time.
		A new bond issue will increase the weight of the firm’s preferred stock.
		The redemption of a bond issue will decrease the weight of the firm’s debt.
		The issuance of additional shares of common stock will not change the weight of the preferred stock.

Answer 1

Q1.

perpetuity

Explanation:

Cost of Preferred Stock = Annual Dividend/Interest Rate

Q2.

E/(D+E+P)

Explanation:

Weight of Equity = Equity/(Equity + Debt + Preferred Stock)

Q3.

Preferred stock

Explanation:

WACC = Wd(1 - t)Cd + WeCe + WpCp

Q4.

True

The given statement is true.

Q5.

The issuance of additional shares of common stock will not change the weight of the preferred stock

Explanation:

If firm issues additional common stock then weight of equity will increase and it will not effect weight of preferred stock.