1. What is the basic principle behind dividend discount model? Why do growth stocks tend to have higher P/E ratios than value stocks?
2. If a firm has no dividend and has negative earnings, which valuation models are appropriate?
3. a).Red sea industries will pay a regular dividend of $1.9 per share for the next four years. At the end of the four year, the company will also pay out a $40 per share liquidating dividend, the company will cease operations. If the discount rate is 9 percent, what is the current value of the company stock?

b). in the previous problem, suppose the current per share is $80. If all other information remains the same, what must the liquidating dividend be?

4. Could I industries just paid a dividend of $2.10 per share. The dividend are expected to grow at a 22 percent rate for next five years and then level off at 8 percent growth rate indefinitely. If the required return if 12 percent, what is the value stock today?
5. Preferred stock is sometimes considered to be a cross between debt and equity. Describe the characteristics of preferred stock that make it similar to debt as well as the characteristics that make it similar to equity.
6. A) You purchased nine call option contracts with a strike price of $40 and an option premium of $1.25.You closed your contract on the expiration date when the stock was selling for $42.50 a share. What is your total profit or loss on your option position?

2. What if the selling price was 32.52 instead of 42.50. What is your total profit or loss on your option position?

7. A) You purchased seven put option contracts with a strike price of $59 and a premium of $2.5. What is the total net amount you will receive for your shares if you exercise this contract when the underlying stock is selling for $45.5 a share?

b) What if the selling price was 62.52 instead of 45.50 What is your total profit or loss on your option position?

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