1. A firm has $ 3 million market value and it sells preferred stock with a par v
ID: 2641478 • Letter: 1
Question
1. A firm has $ 3 million market value and it sells preferred stock with a par value of $100. If the coupon rate on the preferred stock is 9% and the preferred stock trades at $85, what is the cost of preferred stock financing?
A.11.65%
B. 10.59%
C. 10.06%
D. 11.12%
2. A firm reports that in a certain year it has a net income of $4.3 million, depreciation expenses of $2.9 million, capital expenditures of $2.4 million, and Net Working Capital decreased by $1.3 million. What is the firm's free cash flow of that year?
A. $3.5 million
B. $5.1 million
C. $10.9 million
D. $ 6.1 million
Explanation / Answer
1. The correct answer is:
B. 10.59%
The cost of preferred stock financing = $100 / $85 x 0.09 = 10.59%
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2. The correct answer is:
A. $3.5 million
firm's free cash flow of that year = $4.3 million - $1.3 million + 2.9 million - 2.4 million = 3.5 million
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