A four business days prior to the payment of a

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a. Four business days prior to the payment of a dividend. b. The 52-week high for a stock published in the Wall Street Journal. c. The date that is chosen to determine the ownership of shares. d. The date on which a prospectus is declared effective by the Securities and Exchange Commission. 93. CSO: 2B2b LOS: 2B2b Preferred stock may be retired through the use of any one of the following except a a. conversion. b. call provision. c. refunding. d. sinking fund. 94. CSO: 2B2b LOS: 2B2b All of the following are characteristics of preferred stock except that a. it may be callable at the option of the corporation. b. it may be converted into common stock. c. its dividends are tax deductible to the issuer. d. it usually has no voting rights. 95. CSO: 2B2b LOS: 2B2b Which one of the following describes a disadvantage to a firm that issues preferred stock? a. Preferred stock dividends are legal obligations of the corporation. b. Preferred stock typically has no maturity date. c. Preferred stock is usually sold on a higher yield basis than bonds. d. Most preferred stock is owned by corporate investors.
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182 96. COS: 2B2c LOS: 2B2q Which of the following, when considered individually, would generally have the effect of increasing a firm’s cost of capital? I. The firm reduces its operating leverage. II. The corporate tax rate is increased. III. The firm pays off its only outstanding debt. IV. The Treasury Bond yield increases. a. I and III. b. II and IV. c. III and IV. d. I, III and IV. 97. CSO: 2B2c LOS: 2B2r An accountant for Stability Inc. must calculate the weighted average cost of capital of the corporation using the following information. Interest Rate Accounts payable $35,000,000 -0- Long-term debt 10,000,000 8% Common stock 10,000,000 15% Retained earnings 5,000,000 18% What is the weighted average cost of capital of Stability? a. 6.88%. b. 8.00%. c. 10.25%. d. 12.80%.
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183 98. CSO: 2B2c LOS:2B2r Kielly Machines Inc. is planning an expansion program estimated to cost $100 million. Kielly is going to raise funds according to its target capital structure shown below. Debt .30 Preferred stock .24 Equity .46 Kielly had net income available to common shareholders of $184 million last year of which 75% was paid out in dividends. The company has a marginal tax rate of 40%. Additional data: The before-tax cost of debt is estimated to be 11%. The market yield of preferred stock is estimated to be 12%. The after-tax cost of common stock is estimated to be 16%. What is Kielly’s weighted average cost of capital? a. 12.22%. b. 13.00%. c. 13.54%. d. 14.00%. 99. CSO: 2B2c LOS: 2B2r Following is an excerpt from Albion Corporation’s balance sheet. Long-term debt (9% interest rate) $30,000,000 Preferred stock (100,000 shares, 12% dividend) 10,000,000 Common stock (5,000,000 shares outstanding) 60,000,000 Albion’s bonds are currently trading at $1,083.34, reflecting a yield to maturity of 8%. The preferred stock is trading at $125 per share. Common stock is selling at $16 per share, and Albion’s treasurer estimates that the firm’s cost of equity is 17%. If Albion’s effective income tax rate is 40%, what is the firm’s cost of capital?
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