Q1. Which of the following statements is most accurate regarding a firm’s cost of preferred shares? A firm’s cost of preferred stock is:

A)   the market price of the preferred shares as a percentage of its issuance price.

B)   approximately equal to the market price of the firm’s debt as a percentage of the market price of its common shares.

C)   the dividend yield on the firm’s newly-issued preferred stock.

Q2. The after-tax cost of preferred stock is always:

A)   less than the before-tax cost of preferred stock.

B)   equal to the before-tax cost of preferred stock.

C)   higher than the cost of common shares.

答案和详解如下：

Q1. Which of the following statements is most accurate regarding a firm’s cost of preferred shares? A firm’s cost of preferred stock is:

A)   the market price of the preferred shares as a percentage of its issuance price.

B)   approximately equal to the market price of the firm’s debt as a percentage of the market price of its common shares.

C)   the dividend yield on the firm’s newly-issued preferred stock.

Correct answer is C)

The newly-issued preferred shares of most companies generally sell at par. As such, the dividend yield on a firm’s newly-issued preferred shares is the market’s required rate of return. The yield on a BBB corporate bond reflects a pre-tax cost of debt. Both remaining choices make no sense.

Q2. The after-tax cost of preferred stock is always:

A)   less than the before-tax cost of preferred stock.

B)   equal to the before-tax cost of preferred stock.

C)   higher than the cost of common shares.

Correct answer is B)

The after-tax cost of preferred stock is equal to the before-tax cost of preferred stock, because preferred stock dividends are not tax deductible. The cost of preferred shares is usually higher than the cost of debt, but less than the cost of common shares.

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