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    Required rate of return on the market, preferred stock

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    1. The returns on the market, the returns on United Fund (UF), the risk-free rate, and the required return on the United Fund are shown below. Assuming the market is in equilibrium and that beta can be estimated with historical data, what is the required return on the market, rM?

    Year Market UF
    2003 -9% -14
    2004 11% 16
    2005 15% 22
    2006 5% 7
    2007 -1% -2

    A. 10.57%
    B. 11.13%
    C. 11.72%
    D. 12.33%
    E. 12.95%

    17. Which of the following statements is CORRECT?
    A. A major disadvantage of financing with preferred stock is that preferred stockholders typically have super-normal voting rights.
    B. 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.
    C. 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.
    D. 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 would be tax free.
    E. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.

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    Solution Preview

    Answer:

    1) A. 10.57%

    17) B. Preferred stock is normally ...

    Solution Summary

    The required rate of return on the market and the preferred stock is examined.

    $2.19

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