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    Stocks, Bonds: Yield

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    Which of the following statements is most correct?

    A) The cost of retained earnings is the rate of return stockholders require on a firm's common stock.
    B) The component cost of preferred stock is expressed as Kp (1-T), because preferred stock dividends are treated as fixed charges, similar to the treatment of debt interest.
    C) The bond-yield -plus-risk premium approach to estimating a firm's cost of common equity involves adding a subjectivity determined risk premium to the market risk-free bond rate.
    D) The higher the firm's flotation cost for new common stock, the more likely the firm is to use preferred stock, which has no flotation cost.
    E) None of the statements above or correct.

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    Solution Preview

    Statement A is true; the other statements are false.

    Preferred stock ...

    Solution Summary

    The solution states the correct answer to the multi-choice question, and also reviews why the other answers are not correct.