Question

23.) Market auction preferred stock is popular with large commercial banks. 24.) The residual distribution model minimizes flotation and equity signaling costs. 25.) The greater the use of debt, the greater the concentration of risk on stockholders 26.) A reverse split is a way to increase the number of shares outstanding.

Answer 1

23. True.

Market auctioned preferred stock are low risk, tax exempt 7 weeks security that was introduced by investment bankers and can be sold between auction date at close to par

24. True.

Flotation cost is the cost incurred while issuing securities. According to residual distribution model, this cost is minimized which eventually reduces the wacc

25. True

With high use of debt, financial risk to the stockholders increases, as obligation towards debt-holders increases. This thus effects the cost of equity of the firm leading to increase in its cost.

26. False;

Reverse split decreases the number of outstanding shares and this eventually increases the share price, though there is no impact on the market value.