Question

Please add the explanation

8. Which of the following is a legitimate reason the valuation of common stock is generally harder than the valuation of bonds?

I. Future cash flows on stocks are not known in advance.

II. Common stocks don't have a maturity date.

III. Common stock valuation is sensitive to estimates of the dividend growth rate.

A) I only

B) I and II only

C) I and III only

D) II and III only

E) I, II, and III

Answer 1

Correct answer is option E. I,II,and III.

All the given points are legitimate reason the valuation of common stock is generally harder than the valuation of bonds.

1.Future cash flows on stocks are not known in advance. Because the payment of dividend is deppends on the companies decision on it.Its not prefixed.

2. Even though company purchase its own shares,the Common stocks don't have a maturity date.So terminal valuation is difficult.

3. Common stock valuation is sensitive to estimates of the dividend growth rate. Unlike other instrument's fixed rate of dividend [ preferred dividend ] or interest,common stock's dividend will be change year by year.So growth rate will be fluctuates constantly.