Which of the Following Statements Is Correct Regarding Preferred Stock

question 16

Multiple Choice

Which of the following statements is correct regarding preferred stock floatation costs and the cost of preferred share equity?

• A)The lower the floatation costs, the lower the required rate of return.
• B)The higher the floatation costs, the higher the required rate of return.
• C)Floatation costs do not affect the required rate of return on preferred equity.
• D)None of the above are correct.

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Definitions:

Interest-Rate Risk

The potential for investment losses due to fluctuations in interest rates.

Yield To Maturity

The total return anticipated on a bond if held until its maturity date, taking into account its current market price, par value, coupon interest rate, and time to maturity.

Coupon Bond

A type of bond that pays the holder interest payments at fixed intervals until maturity, when the principal is repaid.