When calculating the cost of preferred stock we find that it

When calculating the cost of preferred stock, we find that it is computed similarly as:

Select one:

a. pre-tax cost of debt

b. return on an annuity

c. after-tax cost of debt

d. return on a perpetuity

e. cost of an irregular growth common stock

When calculating the expected risk premium for a stock, we find it is equal to the expected market return on the stock minus the:

Select one:

a. expected market rate of return.

b. risk-free rate.

c. inflation rate.

d. standard deviation.

e. variance.

Solution

d. return on a perpetuity

Perpertuity rate = Annual Payment ÷ Perpetuity Price

Cost of preferred stock = annual dividend / share price

Both formulas look same.

b. risk-free rate.

Market risk premium is equal to the expected return on an investment minus the risk-free rate. The risk-free rate is the minimum rate investors could expect to receive on an investment if it had no risk.