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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's
price will pass that of A.
d. Since Stock A’s growth rate is twice that of Stock B, Stock A’s future
dividends will always be twice as high as Stock B’s.
e. The two stocks should not sell at the same price. If their prices are
equal, then a disequilibrium must exist.
3. Which of the following statements is CORRECT?
a. A major disadvantage of financing with preferred stock is that
preferred stockholders typically have supernormal voting rights.
b. Preferred stock is normally expected to provide steadier, more reliable
income to investors than the same firm’s common stock, and, as a result,
the expected after-tax yield on the preferred is lower than the after-tax
expected return on the common stock.
c. The preemptive right is a provision in all corporate charters that gives
preferred stockholders the right to purchase (on a pro rata basis) new
issues of preferred stock.
d. One of the disadvantages to a corporation of owning preferred stock is
that 70% of the dividends received represent taxable income to the
corporate recipient, whereas interest income earned on bonds would be
tax free.
e. One of the advantages to financing with preferred stock is that 70% of
the dividends paid out are tax deductible to the issuer.