The overall (weighted average) cost of capital is composed of a weighted average of :
a)The cost of common equity and the cost of debt
b)The cost of common equity and the cost of preferred stock
c)The cost of preferred stock and the cost of debt
d)The cost of common equity, the cost of preferred stock, and the cost of debt
Question No: 2
Which of the following is a characteristic of preferred stock?
a)These stocks have not stated liquidating value
b)Dividends on these stocks can be cumulative
c)These stocks hold credit ratings quite different from bonds
d)These stocks have not any kind of priority over common stocks
X y z company has authorized capital Rs.300000 at Rs.100 per share value company issued shares to the public as under.
1000 share at par value.
To determine the correct answer for each question, we need to understand the concepts involved.
Question No: 1
The overall (weighted average) cost of capital is a financial metric that represents the average cost a company incurs to fund its operations through various sources of capital. This includes equity (common and preferred stock) and debt.
To calculate the overall weighted average cost of capital, follow these steps:
1. Determine the individual cost of each source of capital (cost of debt, cost of preferred stock, cost of common equity). These costs reflect the expected return investors require for investing in each instrument.
2. Assign weights to each source of capital based on their proportions in the company's capital structure. For example, if a company has 60% equity and 40% debt, the weight for equity would be 0.6 and the weight for debt would be 0.4.
3. Multiply each cost of capital by its respective weight.
4. Sum up the weighted costs to calculate the overall weighted average cost of capital.
Looking at the answer options, the correct choice is (d) The cost of common equity, the cost of preferred stock, and the cost of debt.
Question No: 2
Preferred stock is a type of equity investment with characteristics that differ from common stock. To determine which option is the correct characteristic of preferred stock, let's review the given answer choices:
a) These stocks have no stated liquidating value: This statement is incorrect. Preferred stock generally has a stated liquidating value, which represents the price at which it can be redeemed at maturity or in the event of liquidation.
b) Dividends on these stocks can be cumulative: This statement is correct. Preferred stock dividends are often cumulative, meaning if the company temporarily suspends or reduces the dividend, it must make up for any missed payments in the future before paying dividends to common shareholders.
c) These stocks hold credit ratings quite different from bonds: This statement is subjective and may vary depending on the specific credit ratings assigned by rating agencies. It is not a general characteristic of preferred stock.
d) These stocks have no priority over common stocks: This statement is incorrect. Preferred stock generally has a higher claim on assets and earnings compared to common stock, providing it with priority in receiving dividends and liquidation proceeds.
Based on the explanations above, the correct choice is (b) Dividends on these stocks can be cumulative.