What is the value of a preferred stock that pays a $5.55 dividend to an investor

Question

What is the value of a preferred stock that pays a $5.55 dividend to an investor with a required rate of return of 10%?

Select one:

a. $55.50

b. $22.22

c. $45

d. $27.83

Which of the following is NOT true regarding common stock?

Select one:

a. Common stock, unlike bond principal, does not mature.

b. Dividend payments, like interest payments, are fixed.

c. Dividends, unlike interest payments, are not tax deductible.

d. Common stockholders are owners of the firm, whereas bondholders are creditors.

Which of the following statements is MOST correct concerning diversification and risk?

Select one:

a. Proper diversification generally results in the elimination of risk.

b. Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.

c. Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.

d. Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.

Which of the following statements is true?

Select one:

a. Long-term bonds have greater interest rate risk than do short-term bonds.

b. Short-term bonds have greater interest rate risk than do long-term bonds.

c. All bonds have equal interest rate risk.

d. Interest rate risk is highest during periods of high interest rates.

Explanation / Answer

Required return:

= Preference dividend÷Market price of share

10% = $5.55÷Market price of share

Market price of share = $55.5

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