Financial Assets
QUESTIONS
9-1 It is frequently stated that the one purpose of the preemptive right is to allow individu-
als to maintain their proportionate share of the ownership and control of a corporation.
a. How important do you suppose control is for the average stockholder of a firm
whose shares are traded on the New York Stock Exchange?
b. Is the control issue likely to be of more importance to stockholders of publicly
owned or closely held (private) firms? Explain.
9-2 Is the following the correct equation for finding the value of a constant growth stock?
Explain.
9-3 If you bought a share of common stock, you would probably expect to receive dividends
plus an eventual capital gain. Would the distribution between the dividend yield and the
capital gain yield be influenced by the firm’s decision to pay more dividends rather than
to retain and reinvest more of its earnings? Explain.
9-4 Two investors are evaluating GE’s stock for possible purchase. They agree on the
expected value of D1 and also on the expected future dividend growth rate. Further, they
agree on the riskiness of the stock. However, one investor normally holds stocks for 2
years, while the other holds stocks for 10 years. On the basis of the type of analysis done
in this chapter, should they both be willing to pay the same price for GE’s stock?
Explain.
9-5 A bond that pays interest forever and has no maturity is a perpetual bond. In what
respect is a perpetual bond similar to a no-growth common stock? Are there preferred
stocks that are evaluated similarly to perpetual bonds and other preferred stocks that are
more like bonds with finite lives?
