Question

Which of the following is FALSE?
Select one:
a. The cost of preferred stock is the ratio of the preferred stock dividend to a firm's net proceeds from the sale of the preferred stock.
b. The cost of new common stock is normally greater than any other long-term financing cost.
c. The cost of preferred stock is the ratio of the preferred stock dividend to a firm's total earnings.
d. The cost of preferred stock is typically higher than the cost of long-term debt (bonds) because the cost of long-term debt (interest) is tax deductible.

Which of the following is FALSE?
Select one:
a. A sunk cost is a cash flow that could be realized from the best alternative use of an owned asset.
b. Incremental cash flows represent the additional cash flows expected as a direct result of the proposed project.
c. Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision.
d. The three major cash flow components include the initial investment, operating cash flows, and terminal ca

Please Solve As soon as
Thank's
Abdul-Rahim Taysir

Answer 1

1. Let us analyse the options:

1. Cost of preferred stock is the dividend divided by net proceeds from issue of preferred stock. Thus True.
2. Evidences say the issue expenses in case of equity is higher than that of preferred stocks and ong term debts. Thus true
3. As explained in (1.) above, cost of preferred stock is the dividend divided by net proceeds from issue of preferred stock and not preferred stock dividend to a firm's total earnings. Thus False.
4. SInce no tax benefit available to preference stock holders, the costs incurred on the dividend are higher than that of debt.

Thus Option 3 is correct.

2. Let us analyse the options:

1. Sunk Costs are costs already incurred and have no relevance for financial decision making. Thus False.
2. Increemental cashflows are direct additional cash flows expected from the proposed project. So True.
3. As explained in (1.)this is correct definition of Sunk Cost.Thus True.
4. From Project point of view cashflows are intial outlay (ie investment), annual operating cash flows, termination cash flows. Thus True.

Hence Option 1 is the answer.