BFW1001 Week 8 Tutorial 1

Preferred stock is similar to a bond in the following way:

• Preferred stock always contains a maturity date.

• Both investments provide a stated income stream.

• Both contain a growth factor similar to common stock.

• Both provide interest payments.

Samsonite Inc. preferred stock pays a $0.50 annual dividend. What is the value of the stock if the cost of preferred stock is 10%?

• $0.05

• $0.50

• $5.00

• $50.00

Which of the following is NOT true regarding common stock?

• Unlike interest payments, dividends are not tax deductible.

• Unlike bond principal, common stock does not mature.

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

• Dividend payments, like interest payments, are fixed.

Perrine Industrial Inc. will pay a dividend of $5 per share next year (i.e., in year 1). Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the cost of common equity is 16%?

• $33.44

• $55.56

• $59.44

• $65.87

Which of the following methods is commonly used by investors to gain exposure to a stock market index?

• Investing in a specific sector of the index

• Buying shares of a single company in the index

• Investing in a mutual fund or exchange-traded fund that tracks the stock market index

• Engaging in high-frequency trading