Question

1)The after-tax cost of debt generally increases when _______.

I. a credit rating agency upgrades a firm’s credit rating

II. a credit rating agency downgrades a firm’s credit rating

III. tax rates decrease

IV. bond prices rise

a)I and III only

b)II and III only

c)II, III, and IV only

d)I, II, III, and IV

e)None of the above

 

2)Of the following statements regarding the cost of preferred stock, which is/ are correct?

I. The cost of preferred stock is the rate of return on a perpetuity

II. The cost of preferred stock is the discount rate used to value a non-constant dividend growth stock

III. The cost of preferred stock is equal to the dividend yield

IV. The cost of preferred stock is independent of the stock’s price

a)I and II only

b)II and IV only

c)I, II, and III only

d)I and III only

e)IV only