Common Stock

Which one of the following types of securities has the lowest priority in a bankruptcy proceeding? Convertible bond Senior debt Common stock Preferred stock Straight bond

Common stock

The dividend yield is defined as:

next year's expected dividend divided by the current market price per share.

Which one of the following will increase the current value of a stock? Decrease in the dividend growth rate Increase in the required return Increase in the market rate of return Decrease in the expected dividend for next year Increase in the capital gains yield

Increase in the capital gains yield

What is the future value of a perpetuity?

Infinity

Newly issued securities are sold to investors in which one of the following markets?

Primary

What happens to the stock price if the risk increases?

Required return will increase, causing the price to fall.

What happens to the stock price if Growth increases?

The price goes up.

What happens to the stock price if the dividend goes up?

The price goes up.

Hot Wings, Inc., has an odd dividend policy. The company has just paid a dividend of $8.50 per share and has announced that it will increase the dividend by $6.50 per share for each of the next four years, and then never pay another dividend. If you require a return of 16 percent on the company's stock, how much will you pay for a share today?

The price of a stock is the PV of the future dividends. This stock is paying four dividends, so the price of the stock is the PV of these dividends discounted at the required return. So, the price of the stock is: P 0 = ($15 / 1.16) + ($21.5 / 1.16^2) + ($28 / 1.16^3) + ($34.5 / 1.16^4) P 0 = $65.90

Dividends are best defined as:

cash or stock payments to shareholders.

A capital gain is a...

change in the price.

The dividend yield on a stock will increase if the:

stock price decreases.