FIN 534 RANK Imagine Your Future / FIN 534 RANK Imagine Your Future / - Page 66

Price $25 $25 Expected growth (constant) 10% 5% Required return 15% 15% a. Stock A's expected dividend at t = 1 is only half that of Stock B. b. Stock A has a higher dividend yield than Stock B. c. Currently the two stocks have the same price, but over time Stock B's price will pass that of A. d. Since Stock A’s growth rate is twice that of Stock B, Stock A’s future dividends will always be twice as high as Stock B’s. e. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. 3. Which of the following statements is CORRECT? a. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm’s common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.