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Multiple Choice

Which of the following statements is most correct?

a. The before-tax cost of preferred stock may be lower than the before-tax cost of debt, even though preferred stock is riskier than debt.
b. If a company's stock price increases, this increases its cost of common stock.
c. If the cost of equity capital increases, it must be due to an increase in the firm's beta.
d. Statements a and b are correct.
e. Answers a, b, and c are correct.

Solution Preview

a. The before-tax cost of preferred stock may be lower than the before-tax cost of debt, even though preferred stock is riskier than debt.

This is true. The investors are concerned with the adter tax returns. Because of the 70 percent dividend exclusion provision for corporations holding other ...

Solution Summary

The solution explains the correct choice among the various answers.

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