Question

hi, could you please simply answer these as true or false

8) A Zero-coupon bond pays no coupon for the 1st half of the bond life. _ 9) Flotation Costs decrease the cost of capital for a firm. 10) The rate of return for Preferred Stock is reduced by the tax rate of the firm. 11) Preferred Stock has characteristics of both bonds and common stock. 12) Cumulative feature of Preferred Stock generally allows for voting provisions if a dividend is missed. 13) The profit-retention rate equals the dividends paid to common stockholders. 14) The Capital Asset Pricing Model - Market Rate of Return + Beta (Risk-Free Rate - Market Rate of Return) 15) If the Required Rate of Return and the Coupon rate are equal a bond will sell at a discount.

Answer 1

(8) True (zero-coupon bond does not pay any coupon at-all)

(9) Flotation Cost increases the cost of capital. Hence False.

(10) Rate of Return for preferred stock is not reduced by the firm's tax rate as preferred dividend is not tax deductible. Hence, False

(11) Preferred stock is perpetual in nature (stock characteristic) and pays a fixed dividend every year (bond characteristic). Hence True.

(12) Cumulative feature allows the unpaid dividends of a preferred stock to accumulate. It has got nothing to do with voting rights. Hence False.

(13) Profit Retention Rate equals 1-Dividend Paid Rate. Hence False.

(14) Under CAPM, Required Return = Risk_Free Rate + Beta x (Market Return - Risk_Free Rate). Hence False

(15) If the required return (bond yield) and coupon rate are equal then the bond sells at par and not at a discount. Hence, False.