Part A

Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital (WACC)?

A. Common equity

B. Accruals

C. bonds

D. Preferred stock.

Part B

2. The cost of a particular source of capital (debt, preferred stock, common stock) is equal to the investor's required rate of return.

True

False

Part C

Which one of the following is a logical assumption concerning capital structure weights?

A. The weights are constant over time.

B. A new bond issue will increase the weight of the firm’s preferred stock.

C. The redemption of a bond issue will decrease the weight of the firm’s debt.

D. The issuance of additional shares of common stock will not change the weight of the preferred stock.

Part D

A stock sells for $20 per share, its last dividend (D1) was $1.00, and its growth rate is a constant 6%. What is its cost of common stock?

A. 5.3%

B. 11.0%

C. 11.3%

D. 11.6%

Part E.

A preferred stock is valued as a:

A. constant growth stock.

B. fixed coupon rate bond.

C. zero coupon stock.

D. perpetuity.