Which one of the following statements is correct?
Both preferred stock and corporate bonds can be callable.
Both preferred stock and corporate bonds have a stated liquidation value of $1,000 each.
Interest payments to bondholders as well as dividend payments to preferred shareholders are tax-deductible expenses for the issuing firm.
Bondholders generally receive a fixed payment while preferred shareholders receive a variable payment.
Preferred shareholders receive preferential treatment over bondholders in a liquidation.
Which one of the following statements is correct?
Both preferred stock and corporate bonds can be callable. | ||
Both preferred stock and corporate bonds have a stated liquidation value of $1,000 each. | ||
Interest payments to bondholders as well as dividend payments to preferred shareholders are tax-deductible expenses for the issuing firm. | ||
Bondholders generally receive a fixed payment while preferred shareholders receive a variable payment. | ||
Preferred shareholders receive preferential treatment over bondholders in a liquidation. |
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Related questions
9. Which of the following statements is NOT CORRECT?
a | a. Owners of preferred stock have greater voting rights than common shareholders. |
b. From an individual investor's perspective, preferred stock is riskier than bonds. | |
c. Companies are more likely to issue preferred stock if they have a low tax bracket since preferred stock dividends are not tax deductible. | |
d. If a preferred issue is cumulative this means that any unpaid dividends are held in arrears. |
10. As a general rule, the optimal capital structure
- Maximizes expected EPS also maximizes the price per share of common stock.
- Minimizes the interest rate on debt also maximizes the expected EPS.
- Minimizes the required rate on equity also maximizes the stock price.
- Maximizes the price per share of common stock and minimizes the WACC.
11. Which of the following statements about warrants and convertibles is NOT CORRECT?
a. The value of both warrants and convertibles depends on the stock price.
b. One primary difference between warrants and convertibles is that warrants bring in additional funds to the firm when exercised while convertibles reduce debt when exercised.
c. The coupon rate on convertible debt is higher than the coupon rate on similar straight debt because convertibles are riskier.
d. Warrants and Convertibles are used by corporations in order to get a lower rate on their debt.
12. In the lease versus buy decision, leasing is often preferable
a. if the firm is unable to borrow funds at a low rate.
b. if the firm needs a specific piece of equipment that only has value to that firm.
c. Because lease obligations do not affect the riskiness of the firm.
d. if the lessee has a higher tax rate than the lessor
13. Which statement is False?
- The WACC is the required return on the firm
Eco Plastics Company: The target capital structure for ECO is given by the weights in the following table:
Source of Capital | Weight |
Long-term debt | 30 % |
Preferred stock | 20 |
Common stock equity | 50 |
Total | 100 % |
At the present time, Eco can raise debt by selling 20 year bonds with a $1,000 par value and a 10.5% annual coupon interest rate. Eco's corporate tax rate is 40%, and its bonds generally require an average discount of $45 per bpnd and flotation costs of $32 per bond when being sold. Eco's outstanding preferred stock pays a 9 % dividend and has a $95-per-share par value. The cost of issuing and selling additional preferrerd stock is expected to be $7 per share. Because ECO is a young firm that requires lots of cash to grow it does not currently pay a dividend to common stockholders. To track the cost of common stock the CFO uses the capital asset price model (CAPM). The CFO and the firm's investment advisors believe that the appropriate risk-free rate is 4 % and that the market's expected return equals 13%. Using data from 2012 through 2015, Eco's CFO estimates the firm's beta to be 1.3. Although Eco's current target capital structure includes 20 % preferred stock, the company is considering using debt financing to retire the outstanding preferred stock, thus shifting their target capital struture to 50% long term debt and 50% common stock. If Eco shifts its capital mix from preferred stock to debt, its financial advisors expect its beta to increase to 1.5. A) Calculate Eco's current after-tax cost of long term debt. B) Calculate Eco's current cost of preferred stock C) Calculate Eco's current cost of common stock D) Caluclate Eco's current weighted average cost capital E (1) Assuming that the debt financing costs do not change, what effect would a shift to a more highly leveraged capital structure consisting of 50% long term debt, 0% perferred stock, and 50% common stock have on the risk premium for Eco's common stock? What would be Eco's new cost of common equity? (2) What would be Eco's new weighted average cost of capital? (3) Which capital structure-the original one or this one-seems better? Why?