Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. 
B)  Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. 
C)  The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. 
D)  One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. 
E)  One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. 
A)  A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. 
B)  Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. 
C)  The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. 
D)  One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. 
E)  One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.

Question 2

Based on the corporate valuation model, Wang Inc.'s value of operations is $750 million. Its balance sheet shows $100 million notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity, in millions?

Accepted Answer

A)  $386 
B)  $406 
C)  $428 
D)  $450 
E)  $473 
A)  $386 
B)  $406 
C)  $428 
D)  $450 
E)  $473

Question 3

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Accepted Answer

A) True 
 B)False

Question 4

Based on the corporate valuation model, Morgan Inc.'s value of operations is $300 million. The balance sheet shows $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share?

Accepted Answer

A)  $12.00 
B)  $12.64 
C)  $13.30 
D)  $14.00 
E)  $14.70 
A)  $12.00 
B)  $12.64 
C)  $13.30 
D)  $14.00 
E)  $14.70

Question 5

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?

Accepted Answer

A)  $37.52 
B)  $39.40 
C)  $41.37 
D)  $43.44 
E)  $45.61 
A)  $37.52 
B)  $39.40 
C)  $41.37 
D)  $43.44 
E)  $45.61

Question 6

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)  4.42% 
B)  4.66% 
C)  4.89% 
D)  5.13% 
E)  5.39% 
A)  4.42% 
B)  4.66% 
C)  4.89% 
D)  5.13% 
E)  5.39%

Question 7

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Accepted Answer

A)  $2.20 
B)  $2.44 
C)  $2.69 
D)  $2.96 
E)  $3.25 
A)  $2.20 
B)  $2.44 
C)  $2.69 
D)  $2.96 
E)  $3.25

Question 8

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. 
B)  The corporate valuation model discounts free cash flows by the required return on equity. 
C)  The corporate valuation model can be used to find the value of a division. 
D)  An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. 
E)  Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. 
A)  The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. 
B)  The corporate valuation model discounts free cash flows by the required return on equity. 
C)  The corporate valuation model can be used to find the value of a division. 
D)  An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. 
E)  Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.

Question 9

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Accepted Answer

A)  $40.17 
B)  $41.20 
C)  $42.26 
D)  $43.34 
E)  $44.46 
A)  $40.17 
B)  $41.20 
C)  $42.26 
D)  $43.34 
E)  $44.46

Question 10

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Accepted Answer

A) True 
 B)False

Question 11

From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock. 
B)  Two firms with the same expected dividend and growth rate must also have the same stock price. 
C)  It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
D)  If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
E)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
A)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock. 
B)  Two firms with the same expected dividend and growth rate must also have the same stock price. 
C)  It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
D)  If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
E)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. 
B)  The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. 
C)  Corporations cannot buy the preferred stocks of other corporations. 
D)  Preferred dividends are not generally cumulative. 
E)  A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. 
A)  Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. 
B)  The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. 
C)  Corporations cannot buy the preferred stocks of other corporations. 
D)  Preferred dividends are not generally cumulative. 
E)  A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.

Question 14

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)  Stock A's expected dividend at t = 1 is only half that of Stock B. 
B)  Stock A has a higher dividend yield than Stock B. 
C)  Currently the two stocks have the same price, but over time Stock B's price will pass that of A. 
D)  Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. 
E)  The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. 
A)  Stock A's expected dividend at t = 1 is only half that of Stock B. 
B)  Stock A has a higher dividend yield than Stock B. 
C)  Currently the two stocks have the same price, but over time Stock B's price will pass that of A. 
D)  Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. 
E)  The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.

Question 15

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Accepted Answer

A)  The company's current stock price is $20. 
B)  The company's dividend yield 5 years from now is expected to be 10%. 
C)  The constant growth model cannot be used because the growth rate is negative. 
D)  The company's expected capital gains yield is 5%. 
E)  The company's expected stock price at the beginning of next year is $9.50. 
A)  The company's current stock price is $20. 
B)  The company's dividend yield 5 years from now is expected to be 10%. 
C)  The constant growth model cannot be used because the growth rate is negative. 
D)  The company's expected capital gains yield is 5%. 
E)  The company's expected stock price at the beginning of next year is $9.50.

Question 16

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

Accepted Answer

A)  All common stocks fall into one of three classes: A, B, and C. 
B)  All common stocks, regardless of class, must have the same voting rights. 
C)  All firms have several classes of common stock. 
D)  All common stock, regardless of class, must pay the same dividend. 
E)  Some class or classes of common stock are entitled to more votes per share than other classes. 
A)  All common stocks fall into one of three classes: A, B, and C. 
B)  All common stocks, regardless of class, must have the same voting rights. 
C)  All firms have several classes of common stock. 
D)  All common stock, regardless of class, must pay the same dividend. 
E)  Some class or classes of common stock are entitled to more votes per share than other classes.

Question 17

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

A) True 
 B)False

Question 18

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)  The two stocks should have the same expected dividend. 
B)  The two stocks could not be in equilibrium with the numbers given in the question. 
C)  A's expected dividend is $0.50. 
D)  B's expected dividend is $0.75. 
E)  A's expected dividend is $0.75 and B's expected dividend is $1.20. 
A)  The two stocks should have the same expected dividend. 
B)  The two stocks could not be in equilibrium with the numbers given in the question. 
C)  A's expected dividend is $0.50. 
D)  B's expected dividend is $0.75. 
E)  A's expected dividend is $0.75 and B's expected dividend is $1.20.

Question 19

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Accepted Answer

A) True 
 B)False

Question 20

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Accepted Answer

A)  If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's. 
B)  Stock B must have a higher dividend yield than Stock A. 
C)  Stock A must have a higher dividend yield than Stock B. 
D)  If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's. 
E)  Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B. 
A)  If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's. 
B)  Stock B must have a higher dividend yield than Stock A. 
C)  Stock A must have a higher dividend yield than Stock B. 
D)  If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's. 
E)  Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.

Which of the following statements is CORRECT?

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Which of the following statements is NOT CORRECT?

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

Filters

Exam 9: Stocks and Their Valuation

Which of the following statements is CORRECT?

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Which of the following statements is NOT CORRECT?

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

Filters