HLST 3250 Lecture Notes - Lecture 1: Dividend Yield, Preferred Stock, Common Stock

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19 Apr 2017

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True false: the calculation of the cost of capital depends upon historical costs of funds. True false: the cost of capital for each source of funds is dependent on current market conditions and expected rates of return. True false: the cost of debt is equal to the current bond yield on bonds of similar risk class and adjusted for the corporate tax rate. True false: the amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock. True false: a firm"s cost of preferred stock is equal to the preferred dividend divided by the net price after flotation costs. True false: a firm"s cost of preferred stock is equal to the preferred dividend divided by market price plus the dividend growth rate (kp= d/po+ g). True false: the cost of new common stock is greater than the cost of outstanding common stock.

Related Questions

F2 Q1-5

The return on equity of a typical firm may change over time because of changes in business and economic conditions, but it is unlikely to change based on the financing or capital structure of the firm.

a. False.

b. True.

Your firm has been plodding along without much attention from the stock market. Your boss insists that he can (a) increase the return on assets to shareholders by taking on more debt, and (b) attract new investors to the firm due to the higher returns.

a. False.

b. Partly true, partly false.

c. True.

Even in a world with no frictions â that is, taxes, costs of bankruptcy, asymmetric information â debt will always be preferred because cost of debt is always lower than cost of equity for a firm.

a. True.

b. False.

c. Partly true, partly false.

In a world with taxes and bankruptcy costs, and in which interest on debt is tax deductible, if a firm has some debt:

a. The return on equity is less than the weighted average cost of capital (WACC).

b. The return on equity is greater than the weighted average cost of capital (WACC).

c. The relationship between return on equity and the WACC cannot be determined because it depends on several factors.

In the real world, where there are taxes and interest on debt is tax deductible, if two firms have the same cash flows as each other in all possible scenarios in the future, the returns on equity of the two firms will:

a. Will depend on the capital structures adopted by the firms.

b. Will depend on the capital structures adopted by the firms and the valuation method used.

c. Always be equal to each other.

d. Will depend on the method of valuation used.

True of False

A stockâs value is equal to discounted present value of the future returns which it generates.

Preferred stock holders are owners of the company.

When a company issues stock, it tries to obtain debt capital and equity capital.

Both preferred stock and common stock have par values.

Stock price depends on its dividends.

Preferred stock dividend payments represent perpetual cash flows.

Common stock dividend payments represent annuity cash flows.

Preferred stock and common stock donât have maturities.

As investorsâ required rate of return on a stock increases, the stock price goes up.

Firms raise capital at the total corporate level by retaining earnings and by obtaining funds in the capital markets. They then provide funds to their different divisions for investment in capital projects. The divisions may vary in risk, and the projects within the divisions may also vary in risk. Therefore, it is conceptually correct to use different risk-adjusted costs of capital for different capital budgeting projects.

True or False?

When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for r_RF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RP_M. These problems leave us unsure of the true value of r_s.

True or False?

HLST 3250 Lecture Notes - Lecture 1: Dividend Yield, Preferred Stock, Common Stock

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