Answer to Question #23918 in Differential Equations for j ronelle
a. When calculating the cost of preferred stock, a company needs to adjust for taxes, because
preferred stock dividends are deductible by the paying corporation.
b. All else equal, an increase in a company’s stock price will increase its marginal cost of
retained earnings, rs.
c. All else equal, an increase in a company’s stock price will increase its marginal cost of new
common equity, re.
d. Since the money is readily available, the after-tax cost of retained earnings is usually much
lower than the after-tax cost of debt.
e. If a company’s tax rate increases but the YTM on its noncallable bonds remains the same,
the after-tax cost of its debt will fall.
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