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When calculating a company's cost of capital, you find that the company has Preferred Stock.

When calculating a company's cost of capital, you find that the company has Preferred Stock. Should Preferred Stock be treated like equity (no tax effect) or debt (multiplied by (1 - Tax Rate)) in the WACC calculation?

A.It depends on whether you are calculating Levered FCF or Unlevered FCF.

B.It should be treated like equity because Preferred Stock Dividends are not tax-deductible.

C.It should be treated like debt because Preferred Stock is above common stock in the capital structure "hierarchy."

D.It should be treated like debt, just like it is in the Enterprise Value calculation, because Preferred Stock has required dividends just like Debt has required interest payments.

Top Answer

Option B is... View the full answer

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