Chapter 7

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1. Which of the following statements is CORRECT?a. The constant growth model takes into consideration the capitalgains investors expect to earn on a stock.STATEMENT A is true because the expected growth rate is also the expected capitalgains yield.b. Two firms with the same expected dividend and growth rates must alsohave the same stockprice.c. It is appropriate to use the constant growth model to estimate a stock 'svalue even if itsgrowth rate is never expected to become constant.d. If a stock has a required rate of return rs = 12%, and if its dividend isexpected to grow at aconstant rate of 5%, this implies that the stock’s dividend yield is also 5%.e. The price of a stock is the present value of all expected future dividends,discounted at thedividend growth rate.2. Stocks A and B have the following data. Assuming the stock market is efficientand the stocks are in equilibrium, which of the following statements is CORRECT?A B Price $25 $25Expected 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 'sprice will pass that of A.d. Since Stock A’s growth rate is twice that of Stock B, Stock A’s futuredividends will always betwice as high as Stock B’s.e. The two stocks should not sell at the same price. If their prices are equal,then adisequilibrium must exist3. Which of the following statements is CORRECT?a. A major disadvantage of financing with preferred stock is that preferredstockholders typicallyhave supernormal voting rights.b. Preferred stock is normally expected to provide steadier, more reliableincome to investorsthan the same firm’s common stock, and, as a result, the expected after-taxyield on thepreferred is lower than the after-tax expected return on the common stock.c. The preemptive right is a provision in all corporate charters that givespreferred stockholdersthe

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