Valuing Stock 1.2
Essay Questions
1 Explain how the difference in the bid and ask prices might be considered a hidden cost to the investor.
2. What ten sectors of the economy are represented in the S&P 500 Index?
111. When might the constant growth model not be used?
3. Explain the characteristics of preferred stock.
113. Explain how stock is valued if the constant growth model cannot be used.
4. Under what conditions would the constant-growth-rate model not be appropriate?
5. What are the differences between common stock and preferred stock?
6. Explain how it is possible for the Dow Jones Industrial Average and the Nasdaq Composite to move in different directions in one day.
7. Consider two firms with the same P/E ratio. Explain how one could be described as expensive compared to the other.
8. Explain how important a firm’s growth is by creating an example of a growth and no-growth stock.
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