Which of the following statements is most correct?
A) The before-tax cost of preferred stock may be lower than the before-tax cost of debt, even though preferred stock is riskier than debt.
B) If a company's stock price increases, this increases its cost of common stock.
C) If the cost of equity capital increases, it must be due to an increase in the firm's beta.
D) Statements a and b are correct.
E) Answers a, b, and c are correct.

Question

Quizplus · Accepted Answer

The before-tax cost of preferred stock can be lower than the before-tax cost of debt because preferred dividends are not tax-deductible, whereas interest on debt is. However, preferred stock is generally riskier than debt because it has a lower claim on assets in the event of liquidation.

Which of the Following Statements Is Most Correct