Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which of the following statements regarding the cost of preferred stock is accurate?

The cost of preferred stock is calculated by dividing the annual preferred dividend by the net proceeds from the issuance of preferred shares.

The cost of preferred stock is always lower than the cost of debt because preferred dividends are tax-deductible.

The cost of preferred stock is based on the market value of common stock.

The cost of preferred stock includes the effect of stock splits and stock dividends.

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Verified step by step guidance

Step 1: Understand the concept of the cost of preferred stock. The cost of preferred stock represents the return required by investors who purchase preferred shares. It is calculated based on the annual preferred dividend and the net proceeds from issuing preferred shares.

Step 2: Recall the formula for calculating the cost of preferred stock. The formula is:

\frac{D}{P}

, where

D

represents the annual preferred dividend and

P

represents the net proceeds from the issuance of preferred shares.

Step 3: Evaluate the accuracy of each statement provided in the problem. For example, preferred dividends are not tax-deductible, so the statement claiming that the cost of preferred stock is always lower than the cost of debt due to tax deductibility is incorrect.

Step 4: Consider the relationship between preferred stock and common stock. The cost of preferred stock is not based on the market value of common stock; it is specifically tied to the preferred dividend and issuance proceeds.

Step 5: Analyze the effect of stock splits and stock dividends. These typically impact common stock rather than preferred stock, so the cost of preferred stock does not include these effects. The accurate statement is the one describing the formula for calculating the cost of preferred stock.