The reason for the valuation models are virtually identical in a preferred stock , common stock, constant dividend payments that are with a zero growth, and a perpetual bond.

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Chapter 7, Problem 11QTD

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To discuss: The reason for the valuation models are virtually identical in a preferred stock, common stock, constant dividend payments that are with a zero growth, and a perpetual bond.

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A dividend valuation model such as the following is frequent. where: Pi = the current price of Common Stock i D1 = the expected dividend in Period 1 ki = the required rate of return on Stock i gi = the expected constant-growth rate of dividends for Stock i Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds . Explain the principal problem involved in using a dividend valuation model to value: (1) companies whose operations are closely correlated with economic cycles. (2) companies that are of very large and mature. (3) companies that are quite small and are growing rapidly.

1. Explain the three varying characteristics of common shares. 2. What are flotation costs? 3. How is cost of common equity computed for no growth stock? for constant growth stock? 4.What is a dividend yield? 5. Define the following terms used in Capital Asset Pricing Model (CAPM) to compute for cost of equity: a. Risk-free rate b. Stock's Beta Coefficient C. Market risk premium 6. How is cost of equity under Bond Yield Plus Risk Premium Approach computed? 7. How is weighted average cost of capital (WACC) computed?

Which of the following is a true statement regarding publicly traded stocks and bonds? O A share of common stock is generally easier to value in practice than a bond. O Market interest rates and bond prices move in the same direction. O The constant dividend growth model can be used to value stocks only if the dividend growth rate remains constant. O The price of a stock is greater than the present value of all future dividends.