Is a tax adjustment made to the cost of preferred stock?

No, the tax adjustment is made to the cost of preferred stock since dividend payments on preferred stock are not tax deductible. The share capital is excluded from WACC since it technically doesn’t have an explicit value.

Which of the following should be used as the firm’s cost of debt?

In this case the market risk premium (5%) is given to you. Which of the following should be used as the firm’s cost of debt? The yield to maturity of the existing debt outstanding should be used as the firm’s cost of debt.

Why is the cost of retained earnings cheaper than the cost of issuing new common stock?

Why is the cost of retained earnings cheaper than the cost of issuing new common stock? Issuing new common stock may send a negative signal to the capital markets, which may depress stock price. Comments about flotation costs: Flotation costs depend on the risk of the firm and the type of capital being raised.

Why the cost of financing an investment project with new issues of common stock equity is expensive than the cost of retained earnings?

The cost of common stock equity capital represents the return required by existing shareholders on their investment. The cost of retained earnings is always lower than the cost of a new issue of common stock due to the absence of flotation costs when financing projects with retained earnings.

What goes in the retained earnings statement?

A statement of retained earnings can be a standalone document or appended to the balance sheet at the end of each accounting period. It leads with the retained earnings reported at the beginning of the period. Then, it lists balance adjustments based on changes in net income, cash dividends, and stock dividends.

What happens to the retained profit in the income statement?

Are Retained Earnings Listed on the Income Statement? Retained earnings are the cumulative net earnings or profit of a company after paying dividends. Retained earnings are the net earnings after dividends that are available for reinvestment back into the company or to pay down debt.

Where does ending retained earnings appear?

Ending retained earnings appear in the second part of the balance sheet, under the equity heading. While the statement of retained earnings covers an entire period of time, the balance sheet only addresses the end of the specific period of time covered on a particular balance sheet.

Can retained earnings be used to pay debt?

Retained earnings (RE) is the surplus net income held in reserve—that a company can use to reinvest or to pay down debt—after it has paid out dividends to shareholders.

How do you interpret retained earnings?

Example of Retained Earnings The retained earnings are calculated by adding net income to (or subtracting net losses from) the previous term’s retained earnings and then subtracting any net dividend(s) paid to the shareholders. The figure is calculated at the end of each accounting period (quarterly/annually.)

What is a good price to FFO ratio?

FFO is a better metric for how much a REIT is making. Second, while most investors look for payout ratios of 40–50% for typical dividend stocks, REIT payout ratios are often much higher.

How do I choose a good REIT?

When choosing what REIT to invest in, make sure you know the management team and their track record. Check to see how they are compensated. If it’s based upon performance, chances are that they are looking out for your best interests as well. REITs are trusts focused upon the ownership of property.

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Tommy E. Junkins

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