Question

1. Which of the following statements is correct?

a. For a company that has no growth, dividends stay constant over time.

b. Common stock is considered to have fixed maturity.

c. If preferred stock dividends are not paid, the lack of payment is legally viewed as a default.

d. The constant-growth stock has constant amount of dividends and does not grow over time.

e. All the answers are correct.

2. Dun & Bradstreet Corp has a preferred stock paying a dividend of $4 and has a return of 0.38. Calculate the preferred stock price. (Round to the nearest dollar.)

a. $67

b. $37

c. $7

d. $11

e. $29

3. Marriott Intl A has a common stock that will pay a dividend of $8 per share next year. If the required return is 0.25 and the growth rate of firm is 0.09, find the common stock price today. (Round to the nearest dollar.)

a. $96.0

b. $50.0

c. $62.6

d. $14.9

e. $81.8

Answer 1

Q-1)

Asn- Option C. If preferred stock dividends are not paid, the lack of payment is legally viewed as a default.

A company can cummulate preferred stock dividends for a mximum of 3 periods in arrear after which the lack of payment is legally viewed as a default

Q-2) Price of Preferred Stock = Dividend/Required return

= $4/0.38

Price of Preferred Stock = $11

Option D. $11

Q-3) Price of Stock = D1/(Ke-g)

where, D1 = Dividend next year = $8

Ke = Required return = 0.25

g = grwoth rate = 0.09

Price of Stock = $8/(0.25- 0.09)

Price of Stock = $50

Option B

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