The Cost of Common Stock Is Usually Greater Than the Simple

question 5

Multiple Choice

The cost of common stock is usually greater than the simple dividend yield because:

• A) investors perceive risk in common stock.
• B) investors expect both a current dividend and future growth.
• C) dividends are not tax-deductible.
• D) the company must make profits before it can pay dividends.

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Definitions:

Current-Year Dividends

Current-Year Dividends refer to the distribution of a portion of a company's earnings to its shareholders, declared and paid within the current fiscal year.

Cumulative Preferred Stockholder

A cumulative preferred stockholder is an investor who owns preferred shares that accumulate unpaid dividends, ensuring they are paid out before any dividends on common stock.

Dividends in Arrears

Dividends on preferred stock that have been declared but not yet paid to shareholders.

Nonparticipating

Typically refers to insurance policies or preferred stock where the holders do not have the right to share in certain dividends beyond the specified rate or in the surplus assets.