Question 1

Proxy fights typically occur when _____.

Accepted Answer

A)  stockholders receive more than one proxy statement 
B)  a firm is performing poorly 
C)  a firm is in the middle of a takeover attempt 
D)  All of these are correct 
A)  stockholders receive more than one proxy statement 
B)  a firm is performing poorly 
C)  a firm is in the middle of a takeover attempt 
D)  All of these are correct

Question 2

Phillips Industries common stock currently sells for $50 and is expected to pay a dividend of $3.00 next year. Determine the implied growth rate for Phillips Industries dividends assuming that an investor's required rate of return on this stock is 14%.

Accepted Answer

A)  6% 
B)  8% 
C)  14% 
D)  20% 
A)  6% 
B)  8% 
C)  14% 
D)  20%

Question 3

The earnings and dividends of Nebula Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. Nebula currently pays a dividend of $0.50 per share. What is the value of Nebula stock to an investor who requires a 14 percent rate of return?

Accepted Answer

A)  $9.31 
B)  $15.73 
C)  $11.35 
D)  $2.04 
A)  $9.31 
B)  $15.73 
C)  $11.35 
D)  $2.04

Question 4

Zimmer's common stock sells for $37, and its dividends are expected to grow at a rate of 8 percent annually. What is the expected dividend (D1) given that an investor requires a return of 16 percent?

Accepted Answer

A)  $2.74 
B)  $3.20 
C)  $5.92 
D)  $2.96 
A)  $2.74 
B)  $3.20 
C)  $5.92 
D)  $2.96

Question 5

A firm may use a stock repurchase ____.

Accepted Answer

A)  as part of a financial restructuring 
B)  to dispose of excess cash 
C)  to reduce takeover risk 
D)  All of these are correct 
A)  as part of a financial restructuring 
B)  to dispose of excess cash 
C)  to reduce takeover risk 
D)  All of these are correct

Question 6

Each of the following is a reason why the valuation of common stock is considerably more complicated than that of bonds or preferred stocks EXCEPT _____.

Accepted Answer

A)  the returns can take two forms: annual cash payments and price appreciation 
B)  the cash flows from common stocks are generally more uncertain than the cash flows from other types of securities 
C)  the returns from common stocks are generally larger and more certain than the returns from bonds and preferred stocks 
D)  None of these are correct 
A)  the returns can take two forms: annual cash payments and price appreciation 
B)  the cash flows from common stocks are generally more uncertain than the cash flows from other types of securities 
C)  the returns from common stocks are generally larger and more certain than the returns from bonds and preferred stocks 
D)  None of these are correct

Question 7

Keeping Pace Enterprises, makers of track and field equipment, has common stock that sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?

Accepted Answer

A)  $1.33 
B)  $2.40 
C)  $1.45 
D)  $1.60 
A)  $1.33 
B)  $2.40 
C)  $1.45 
D)  $1.60

Question 8

____ result in what is known as treasury stock.

Accepted Answer

A)  Stock dividends 
B)  Stock repurchases 
C)  Stock splits 
D)  Reverse stock splits 
A)  Stock dividends 
B)  Stock repurchases 
C)  Stock splits 
D)  Reverse stock splits

Question 9

Management usually opposes cumulative voting because this type of voting _____.

Accepted Answer

A)  is over twice as likely as majority voting to result in a proxy fight 
B)  is more complicated than majority voting and takes longer to process 
C)  often leaves the stockholders who hold minority viewpoints with no representation on the board of directors 
D)  makes it easier for stockholders with minority viewpoints to elect sympathetic board members 
A)  is over twice as likely as majority voting to result in a proxy fight 
B)  is more complicated than majority voting and takes longer to process 
C)  often leaves the stockholders who hold minority viewpoints with no representation on the board of directors 
D)  makes it easier for stockholders with minority viewpoints to elect sympathetic board members

Question 10

High Brow Cow Farms, producers of the finest dairy products, has common stock that sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If investors in High Brow require a 13% rate of return, what is the current dividend?

Accepted Answer

A)  $2.70 
B)  $2.50 
C)  $4.00 
D)  $3.25 
A)  $2.70 
B)  $2.50 
C)  $4.00 
D)  $3.25

Question 11

The market value of common stock is primarily based on _____.

Accepted Answer

A)  the firm's future earnings 
B)  book value 
C)  total assets 
D)  retained earnings 
A)  the firm's future earnings 
B)  book value 
C)  total assets 
D)  retained earnings

Question 12

The rights of stockholders to share equally on a per-share basis in any distributions of corporate earnings is known as ____ rights.

Accepted Answer

A)  preemptive 
B)  voting 
C)  asset 
D)  dividend 
A)  preemptive 
B)  voting 
C)  asset 
D)  dividend

Question 13

What is the current value of Frocks & Socks Clothiers, Inc., to an investor who has a required rate of return of 12 percent? The current dividend is $1.00, and the dividends are expected to grow 8 percent per year for 3 years. At the end of 3 years the investor expects to sell the security for $76.

Accepted Answer

A)  $79.51 
B)  $56.90 
C)  $51.13 
D)  $76.00 
A)  $79.51 
B)  $56.90 
C)  $51.13 
D)  $76.00

Question 14

During the past 8 years, UTX Company common stock dividends have grown from $2.70 to $5.00 per share (currently). Determine the value of UTX common stock to an investor who requires a 16% rate of return, assuming that dividends continue growing for the foreseeable future at the same rate as over the past 8 years.

Accepted Answer

A)  $62.50 
B)  $31.25 
C)  $67.50 
D)  $46.96 
A)  $62.50 
B)  $31.25 
C)  $67.50 
D)  $46.96

Question 15

Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is an investor's required rate of return on Zero-Sum if the current price is $12?

Accepted Answer

A)  12.3% 
B)  12.0% 
C)  10.0% 
D)  10.3% 
A)  12.3% 
B)  12.0% 
C)  10.0% 
D)  10.3%

Question 16

The difference between the selling price to the public of a new issue and the net the issuing firm actually receives is known as the _____.

Accepted Answer

A)  negotiating spread 
B)  underwriting spread 
C)  bid spread 
D)  SEC cost 
A)  negotiating spread 
B)  underwriting spread 
C)  bid spread 
D)  SEC cost

Question 17

Which of the following statements about common stock voting is (are) correct? 
I. Majority voting typically prohibits a group of stockholders with a minority viewpoint from having any representation on the board.
II. Cumulative voting allows each share of stock to represent as many votes as there are directors to be elected.

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct.

Question 18

CPU Company currently (t = 0) pays a dividend of $2.50 per share on its common stock. Dividends are expected to increase at the rate of $0.25 per share for the next several years. Determine the current value of CPU's common stock to an investor who expects to be able to sell the stock for $35 per share after 3 years, given that the investor requires a 14 percent rate of return on this security.

Accepted Answer

A)  $24.00 
B)  $30.54 
C)  $19.64 
D)  $68.75 
A)  $24.00 
B)  $30.54 
C)  $19.64 
D)  $68.75

Question 19

What is the current value of a share of ABC common stock if its current dividend is $1.50 and dividends are expected to grow at the annual compound growth rate of 20 percent into the foreseeable future? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years.

Accepted Answer

A)  $56.87 
B)  $30.00 
C)  $25.00 
D)  The constant growth rate model cannot be used because the growth rate is greater than the required rate of return. 
A)  $56.87 
B)  $30.00 
C)  $25.00 
D)  The constant growth rate model cannot be used because the growth rate is greater than the required rate of return.

Question 20

Over the past 7 years the dividends of Sunshine Mining have grown from $0.24 to the current level of $0.53. What is the approximate annual compound growth rate of Sunshine's dividends?

Accepted Answer

A)  20.8% 
B)  12.0% 
C)  9.5% 
D)  10.0% 
A)  20.8% 
B)  12.0% 
C)  9.5% 
D)  10.0%

Exam 8: Common Stock: Characteristics, Valuation, and Issuance

Proxy fights typically occur when _____.

Phillips Industries common stock currently sells for $50 and is expected to pay a dividend of $3.00 next year. Determine the implied growth rate for Phillips Industries dividends assuming that an investor's required rate of return on this stock is 14%.

Zimmer's common stock sells for $37, and its dividends are expected to grow at a rate of 8 percent annually. What is the expected dividend (D1) given that an investor requires a return of 16 percent?

A firm may use a stock repurchase ____.

Each of the following is a reason why the valuation of common stock is considerably more complicated than that of bonds or preferred stocks EXCEPT _____.

Keeping Pace Enterprises, makers of track and field equipment, has common stock that sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?

____ result in what is known as treasury stock.

Management usually opposes cumulative voting because this type of voting _____.

High Brow Cow Farms, producers of the finest dairy products, has common stock that sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If investors in High Brow require a 13% rate of return, what is the current dividend?

The market value of common stock is primarily based on _____.

The rights of stockholders to share equally on a per-share basis in any distributions of corporate earnings is known as ____ rights.

What is the current value of Frocks & Socks Clothiers, Inc., to an investor who has a required rate of return of 12 percent? The current dividend is $1.00, and the dividends are expected to grow 8 percent per year for 3 years. At the end of 3 years the investor expects to sell the security for $76.

Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is an investor's required rate of return on Zero-Sum if the current price is $12?

The difference between the selling price to the public of a new issue and the net the issuing firm actually receives is known as the _____.

Over the past 7 years the dividends of Sunshine Mining have grown from $0.24 to the current level of $0.53. What is the approximate annual compound growth rate of Sunshine's dividends?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

Filters

Zimmer's common stock sells for $37, and its dividends are expected to grow at a rate of 8 percent annually. What is the expected dividend (D₁) given that an investor requires a return of 16 percent?