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:

Straight-Line Depreciation

A technique for segmenting the cost of a material asset over its life in even annual segments.

After-Tax Discount Rate

The discount rate used in financial calculations that reflects the net cost of capital after accounting for the effects of taxes.

Discount Factor

A factor by which a future cash flow is multiplied to obtain its present value.

After-Tax Discount Rate

The interest rate used in discounted cash flow analysis to calculate the present value of future cash flows after accounting for taxes.