6. When can one not use the constant growth dividend discount model? . When the
ID: 2800011 • Letter: 6
Question
6. When can one not use the constant growth dividend discount model? . When the growth rate in dividends is zero. h. When the growth rate in dividends is negative. When the growth rate in dividends is greater than the required return on the stock. d. When the growth rate in dividends is less than the required return on the stock. 7. How is preferred stock similar to common stock? a. Both are fixed income securities and offer a constant payment to investors. b. Payments on both securities can be suspended without putting the firm in a precarious position. c. Payments made to investors on both securities are not taxable. d. Both securities show up on the liabilities section of the balance sheet. 8. In the corporate governance process, a. The management team chooses the board of directors. b. The shareholders elect the board of directors. c. The shareholders vote directly on the management team. d. Shareholders who do not come to the annual meeting have no right to vote. 9. Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing a a. Perpetuity. b. Treasury bond Zero coupon bond. Positive growth common stock. c. d. 10. A company just paid a dividend of $1 per share, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 12, the market risk premiumn is 5%, and the risk-free rte is 3%. What is the company's expected stock price? a. $17.50 b. $21.00 c. $22.75 d. $24.50 e. $26.25 11. Which of the following capital components usually offers the cheapest form of financing on an after tax basis? a. Preferred Stock b. New Common Stock c. Retained Earnings d. DebtExplanation / Answer
6) In constant dividend growth model, where g is growth rate of dividend, r is required return and D is dividend,
P = Price of stock = D / (1+r) + D* (1+g) / (1 + r)^2 + ... to infinity
This assumes that (1+ g) / (1+r) < 1 i.e. r > g.This means required return is greater than dividend growth rate
Option d
Please post separate question for other answers, answering first question as per chegg guidelines
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