Question

which statement is true?a.preferred stock is generally the cheapest source of capital for a firm.b.preferred stock is valued using the capital asset pricing model.c.the cost of preferred stock remains constant from year to year.d.an increase in the market value of preferred stock will increase a firm's weighted average cost of capital.e.the cost of preferred stock is unaffected by the issuer's tax rate.

Answer 1

The true statement about preferred stock is that the cost of preferred stock is unaffected by the issuer's tax rate. Preferred stock dividends are paid from after-tax earnings, distinguishing them from the tax-deductible interest payments on debt.

Step-by-step explanation:

The question is focused on the topic of financing options for companies, particularly preferred stock. When answering which statement is true about preferred stock, the correct option is: 'e. the cost of preferred stock is unaffected by the issuer's tax rate.' This is because preferred stock dividends are paid from after-tax earnings and do not provide the tax advantages that interest payments on debt do. It's also important to note that preferred stock valuation does not employ the Capital Asset Pricing Model (CAPM), which is primarily used for common stock and estimates returns based on systemic risk.