Why Is Valuing Common Stock More Difficult Than Valuing Bonds

question 5

Multiple Choice

Why is valuing common stock more difficult than valuing bonds?

• A)Common stock is a long-term security and a bond is a short-term security.
• B)Because bonds have more seniority than common stocks.
• C)Because common stock is less risky to the investor than a bond.
• D)It is more difficult to forecast future common stock cash flows than bond cash flow.

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Definitions:

Dividend

A portion of a company's earnings distributed to shareholders, usually in cash or additional stock.

Equity Investments

Investments in stock or equity securities, giving the investor partial ownership in a company.

Constant Dividend

A dividend policy in which a company commits to distributing a fixed amount of money to shareholders regularly.

Rate of Return

The upward or downward adjustment in the value of an investment during a particular period, characterized as a percentage of the initial investment price.