1. Which of the following statements about the Constant Growth Dividend Discount Model, P0 = D1 / (K-G), is incorrect?
A. The model determines the current value (price) of a common stock by finding the present value of constantly growing dividends over a certain (finite) period.
B. Its application is restricted because in reality no stocks would pay constantly increasing dividends indefinitely.
C. The model is invalid (i.e., no good) if the stock pays no dividends or the required return is less than the growth rate.
D. It recognizes three important determinants of stock value – the company’s earning ability, riskiness (as reflected in K), and growth potential.
2. Which of the following statements regarding preferred stock is incorrect?
A. Preferred stock holders have priority in receiving dividends but they do not usually have voting rights.
B. Preferred stock typically pays a constantly growing dividend indefinitely.
C. If a preferred stock pays a constant dividend of $4 annually and its required rate of return is 5%, then this preferred stock should be selling at $80.
D. Although preferred stock is considered more risky than bond, its actual yield is lower than the bond yield due to some special U.S. tax provisions.