Which of the following statements is CORRECT? a. A major disadvantage of financi

Question

Which of the following statements is CORRECT?

a. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.
b. One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.
c. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.
d. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm’s common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.
e. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.


Which of the following statements is CORRECT, assuming stocks are in equilibrium?
Answer
a. Other things held constant, the higher a company’s beta coefficient, the lower its required rate of return.
b. Assume that the required return on a given stock is 15%. If the stock’s dividend is growing at a constant rate of 4%, its expected dividend yield is 6%.
c. A required condition for one to use the constant growth model is that the stock’s expected growth rate is lower than its required rate of return.
d. A stock’s dividend yield can never exceed its expected growth rate.
e. All of the above statements are correct

Explanation / Answer

b. One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.
e. All of the above statements are correct Thank you.....

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