In the valuation of common stock, the simple annuity and perpetuity formulas used in the valuation of bonds and preferred stock are not generally applicable because:
A)Investors buy common stock for much different reasons than they buy bonds or preferred stock.
B)Returns accruing to common stock should never be capitalized (discounted) in order to determine a price.
C)Unlike bonds and preferred stock, common-stock is a short term investment.
D)Common stock dividends are normally expected to grow over time, rather than being constant as are payments on most bonds and most preferred stock.

Question

Quizplus · Accepted Answer

Common stock dividends are typically expected to grow over time, while the payments on bonds and preferred stock are generally constant. Therefore, the simple annuity and perpetuity formulas used in bond and preferred stock valuation are not applicable to common stock valuation.

In the Valuation of Common Stock, the Simple Annuity and Perpetuity