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Ch.8 Question Solutions

Ch.8 Question Solutions - 1 in the numerator and a minus...

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8-1 True. The value of a share of stock is the PV of its expected future dividends. If the two investors expect the same future dividend stream, and they agree on the stock’s riskiness, then they should reach similar conclusions as to the stock’s value. 8-2 A perpetual bond is similar to a no-growth stock and to a share of preferred stock in the following ways: 1. All three derive their values from a series of cash inflows – coupon payments from the perpetual bond, and dividends from both types of stock. 2. All three are assumed to have indefinite lives with no maturity value (M) for the perpetual bond and no capital gains yield for the stocks. 8-3 Yes. If a company decides to increase its payout ratio, then the dividend yield component will rise, but the expected long-term capital gains yield will decline. 8-4 No. The correct equation has D
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Unformatted text preview: 1 in the numerator and a minus sign in the denominator. 8-5 a. The average investor in a listed firm is not really interested in maintaining his proportionate share of ownership and control. If he wanted to increase his ownership, he could simply buy more stock on the open market. Consequently, most investors are not concerned with whether new shares are sold directly (at about market prices) or through rights offerings. However, if a rights offering is being used to effect a stock split, or is it is being used to reduce the underwriting cost of an issue (by substantial underpricing), the preemptive right may well be beneficial to the firm and to its stockholders. b. The preemptive right is clearly important to the stockholders of closely held firms whose owners are interested in maintaining their relative control positions....
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