Question

The CAPM/SML and Discounted Cash Flow approaches to estimating the cost of retained earnings will be the same under which of the following conditions?

(A) The company's common stock price is in equilibrium.
(B) The company's preferred stock price is in equilibrium.
(C) The company's common stock is undervalued.
(D) None of the above.

Answer 1

(A) The company's common stock price is in equilibrium.

Explanation

The main difference between preferred and common stock is that preferred stock gives no voting rights to shareholders while common stock does. Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders.