What might be wrong with each of the following statements? Answer each in 1-2 sentences. Preferred...

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What might be wrong with each of the following statements? Answer each in 1-2 sentences.  	Preferred stock is generally a better investment than the common stock of a corporation. 	The most important determinants of a corporation’s capital structure are the corporate tax rate and the expected costs of financial distress due to debt issuance. 	The main difference between bonds and loans is that bonds trade in a secondary market, whereas loans are generally issued by banks and held by banks. 	The more volatile the cash flows of a project, the lower its present value due to higher risk. 	Companies should use the CAPM to determine discount rates for their projects. 	Companies should hedge their risks whenever possible. 	The best way for a corn farmer to hedge his risks is to short corn futures before he plants the seeds. 	An oil company that hedges its production can expect its cash flow volatility to drop. 	Hedging with options is safer than hedging with futures. 	Lenders generally structure corporate loans to minimize the default probability.  
	
Document Preview: What might be wrong with each of the following statements?  Answer each in 1-2 sentences.Preferred stock is generally a better investment than the common stock of a corporation.The most important determinants of a corporation’s capital structure are the corporate tax rate and the expected costs of financial distress due to debt issuance.The main difference between bonds and loans is that bonds trade in a secondary market, whereas loans are generally issued by banks and held by banks.The more volatile the cash flows of a project, the lower its present value due to higher risk.Companies should use the CAPM to determine discount rates for their projects.Companies should hedge their risks whenever possible.The best way for a corn farmer to hedge his risks is to short corn futures before he plants the seeds.An oil company that hedges its production can expect its cash flow volatility to drop.Hedging with options is safer than hedging with futures.Lenders generally structure corporate loans to minimize the default probability.

David · Accepted Answer

What might be wrong with each of the following statements?  Answer each in 1-2 
sentences. 
1. Preferred stock is generally a better investment than the common stock of 
a corporation. 
Preferred stocks are more like a debt investment as they carry most of the 
characteristics a debt security has. It generally provides you fixed 
dividends and its market price is mainly determined by interest rate 
movements in the market. Whereas common stock’s price is more linked to 
a company’s performance. So, we can’t say that preferred stock is a better 
statement.
2. The most important determinants of a corporation’s capital structure are 
the corporate tax rate and the expected costs of financial distress due to 
debt issuance. 
This is incorrect. The most important determinants of a corporation’s 
capital structure are the weights of components (i.e. debt, equity, 
preferred stock) in the structure and cost of each component.
3. The main difference between bonds and loans is that bonds trade in a secondary 
market,

What might be wrong with each of the following statements? Answer each in 1-2 sentences. Preferred stock is generally a better investment than the common stock of a corporation. The most important...

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