Preferred stock is a riskier investment than a bond. Yet companies have been known to issue preferred stock at a lower yield than they issue bonds. How can this be, assuming investors are rational?

2.(a) Estimate the cost of preferred stock (required return of preferred stock). (b) Redo question 3 including preferred stock as a financing source, and assume the target weights are as follows: notes, 5 %; bonds, 40%; preferred, 5%; equity, 50%.

3. What additional information would you like in order to make more informed estimates about the cost of equity and the cost of preferred stock?

Would you recommend that West use market or book values in is presentation? Defend your recommendation.

8. Apparently the 30% hurdle rate used by Taylor exceeds its actual cost of capital or required rate of return. Let us suppose a company errs in others direction and choses a hurdle rate considerably less than its actual cost of capital. What difficulties could this cause?

9. West believes that Taylor's high cost of capital encourages managers to develop overly optimistic cash flow forecasts. Is a more accurate cost of capital estimate likely to reduce this bias, as he apparently thinks? Explain your answer