Question

Explain the difference between a “long” and a “short” position in a stock. Explain if you would take a long or a short position in the stock of a company that owns traditional mall properties.

How are the dividends paid to preferred stockholders different from the dividends paid to common stock holders? In your response, be sure to clearly define what it means to be perpetuity.

Explain the difference between the required rate of return and the expected rate of return. When comparing the required rate of return to the expected rate of return, when would we purchase the stock (i.e., when the required rate is <,>, or = to the expected rate)?

Answer 1

Long position refers to buying a stock and short position means selling a stock.

A company that owns traditional mall properties will be sinking and thus we will take short position.

The dividends paid to preferred stockholders are different from the dividends paid to common stock holders since in the event company is unable to pay all the dividends then preferred stockholders are pais first and then common stockholders are paid.

Perpetuity means for an indefinite period. It is used in certain assumption such as for computing terminal values.

Required rate of return is the minimum expected rate of return which an investor expects from the stock where as the expected rate of return is the actual return which a investor wants from a stock.

An investor will purchase the stock if Required rate of return < Expected Rate of return

An investor will sell the stock if Required rate of return > Expected Rate of return