You Are Considering Purchasing One of Two Stocks

question 1

Multiple Choice

You are considering purchasing one of two stocks.Stock A is expected to pay a $2.50 dividend,and has historically grown at 6%.Stock B is expected to pay a $3.00 dividend and has historically grown at 4%.Both are the same risk,and you desire to earn a 16% return.Which of the following is true?

• A)You should buy Stock A,since its estimated price is higher than Stock B.
• B)You should buy Stock B,since its estimated price is higher than Stock A.
• C)You should buy Stock A,since its estimated price is lower than Stock B.
• D)You should buy Stock B,since its estimated price is lower than Stock A.
• E)You should buy either Stock A or B,since the estimated prices are the same.

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Definitions:

Preferred Share

Equity shares in a corporation, which provide dividends to its holders before dividends are distributed to common shareholders, and typically have no or restricted voting rights.

Specific Dividend

A dividend paid out in forms other than cash, such as stocks or other assets, to shareholders.

Par-value Share

A type of stock with a nominal face value that companies define in their corporate charter.

Debenture

An acknowledgment of debts by a corporation normally involving more than one creditor; often used interchangeably with “bond,” but whereas a bond is typically secured against a specific asset, a debenture may be unsecured or secured by a floating charge against inventory.