Question 1

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

Accepted Answer

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

Question 2

Kellner Motor Co.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Kellner's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D0?

Accepted Answer

A)  $0.95 
B)  $1.05 
C)  $1.16 
D)  $1.27 
E)  $1.40 
A)  $0.95 
B)  $1.05 
C)  $1.16 
D)  $1.27 
E)  $1.40

Question 3

Merrell Enterprises' stock has an expected return of 14%.The stock's dividend is expected to grow at a constant rate of 8%,and it currently sells for $50 a share.Which of the following statements is CORRECT?

Accepted Answer

A)  The stock's dividend yield is 8%. 
B)  The current dividend per share is $4.00. 
C)  The stock price is expected to be $54 a share one year from now. 
D)  The stock price is expected to be $57 a share one year from now. 
E)  The stock's dividend yield is 7%. 
A)  The stock's dividend yield is 8%. 
B)  The current dividend per share is $4.00. 
C)  The stock price is expected to be $54 a share one year from now. 
D)  The stock price is expected to be $57 a share one year from now. 
E)  The stock's dividend yield is 7%.

Question 4

When a new issue of stock is brought to market,it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

A) True 
 B)False

Question 5

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?                                               $\text {\underline{ A} }$      $\text {\underline{ B} }$

$\begin{array}{lll}
\text { Required return } & 10 \% & 12 \% \
\text { Market price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \%
\end{array}$

Accepted Answer

A)  These two stocks must have the same dividend yield. 
B)  These two stocks should have the same expected return. 
C)  These two stocks must have the same expected capital gains yield. 
D)  These two stocks must have the same expected year-end dividend. 
E)  These two stocks should have the same price. 
A)  These two stocks must have the same dividend yield. 
B)  These two stocks should have the same expected return. 
C)  These two stocks must have the same expected capital gains yield. 
D)  These two stocks must have the same expected year-end dividend. 
E)  These two stocks should have the same price.

Question 6

The preemptive right gives current stockholders the right to purchase,on a pro rata basis,any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.

Accepted Answer

A) True 
 B)False

Question 7

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

$\begin{array}{lcc}
&\underline { X } & \underline { Y } \
\text { Price } & \$ 25 & \$ 25 \
\text { Expected dividend yield } & 5 \% & 3 \% \
\text { Required return } & 12 \% & 10 \%
\end{array}$

Accepted Answer

A)  Stock X pays a higher dividend per share than Stock Y. 
B)  One year from now, Stock X should have the higher price. 
C)  Stock Y has a lower expected growth rate than Stock X. 
D)  Stock Y has the higher expected capital gains yield. 
E)  Stock Y pays a higher dividend per share than Stock X. 
A)  Stock X pays a higher dividend per share than Stock Y. 
B)  One year from now, Stock X should have the higher price. 
C)  Stock Y has a lower expected growth rate than Stock X. 
D)  Stock Y has the higher expected capital gains yield. 
E)  Stock Y pays a higher dividend per share than Stock X.

Question 8

The preemptive right is important to shareholders because it

Accepted Answer

A)  will result in higher dividends per share. 
B)  is included in every corporate charter. 
C)  protects the current shareholders against a dilution of their ownership interests. 
D)  protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate. 
E)  allows managers to buy additional shares below the current market price. 
A)  will result in higher dividends per share. 
B)  is included in every corporate charter. 
C)  protects the current shareholders against a dilution of their ownership interests. 
D)  protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate. 
E)  allows managers to buy additional shares below the current market price.

Question 9

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 10

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25).The stock sells for $32.50 per share,and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate,g,forever.What is the equilibrium expected growth rate?

Accepted Answer

A)  6.01% 
B)  6.17% 
C)  6.33% 
D)  6.49% 
E)  6.65% 
A)  6.01% 
B)  6.17% 
C)  6.33% 
D)  6.49% 
E)  6.65%

Question 11

Based on the corporate valuation model,Bizzaro Co.'s value of operations is $300 million.The balance sheet shows $20 million of short-term investments that are unrelated to operations,$50 million of accounts payable,$90 million of notes payable,$30 million of long-term debt,$40 million of preferred stock,and $100 million of common equity.Bizzaro has 10 million shares of stock outstanding.What is the best estimate of the stock's price per share?

Accepted Answer

A)  $13.72 
B)  $14.44 
C)  $15.20 
D)  $16.00 
E)  $16.80 
A)  $13.72 
B)  $14.44 
C)  $15.20 
D)  $16.00 
E)  $16.80

Question 12

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Accepted Answer

A) True 
 B)False

Question 13

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? Eagnected diviend $D _ { 1 }$  &emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;$3.00
Curtent Price, $P _ { 0 }$ &emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;$50
Eogpected constant prowth rate &emsp;&emsp;&emsp;&emsp; 6.0%

Accepted Answer

A)  The stock's expected dividend yield and growth rate are equal. 
B)  The stock's expected dividend yield is 5%. 
C)  The stock's expected capital gains yield is 5%. 
D)  The stock's expected price 10 years from now is $100.00. 
E)  The stock's required return is 10%. 
A)  The stock's expected dividend yield and growth rate are equal. 
B)  The stock's expected dividend yield is 5%. 
C)  The stock's expected capital gains yield is 5%. 
D)  The stock's expected price 10 years from now is $100.00. 
E)  The stock's required return is 10%.

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? $$\begin{array} { l c c } 
\text {  } & \underline{ \mathrm { A } }  &  \underline{ \mathrm { B } }  \
\text { Price } &  \$ 25 & \$ 25\
\text { Ejgidected growth (canstant) } & 10 \% & 5 \% \
\text { Required return } & 15 \% & 15 \%
\end{array}$$

Accepted Answer

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

Question 15

Kinkead Inc.forecasts that its free cash flow in the coming year,i.e.,at t = 1,will be -$10 million,but its FCF at t = 2 will be $20 million.After Year 2,FCF is expected to grow at a constant rate of 4% forever.If the weighted average cost of capital is 14%,what is the firm's value of operations,in millions?

Accepted Answer

A)  $158 
B)  $167 
C)  $175 
D)  $184 
E)  $193 
A)  $158 
B)  $167 
C)  $175 
D)  $184 
E)  $193

Question 16

If D1 = $1.25,g (which is constant)= 5.5%,and P0 = $44,what is the stock's expected total return for the coming year?

Accepted Answer

A)  7.54% 
B)  7.73% 
C)  7.93% 
D)  8.13% 
E)  8.34% 
A)  7.54% 
B)  7.73% 
C)  7.93% 
D)  8.13% 
E)  8.34%

Question 17

The free cash flows (in millions)shown below are forecast by Simmons Inc.If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the Year 0 value of operations,in millions? $\begin{array}{lccc}
\text { Year: } & 1 & 2 & 3 \

\text { Free cash flow: } & -\$ 20 & \$ 42 & \$ 45
\end{array}$

Accepted Answer

A)  $586 
B)  $617 
C)  $648 
D)  $680 
E)  $714 
A)  $586 
B)  $617 
C)  $648 
D)  $680 
E)  $714

Question 18

If D0 = $1.75,g (which is constant)= 3.6%,and P0 = $32.00,what is the stock's expected total return for the coming year?

Accepted Answer

A)  8.37% 
B)  8.59% 
C)  8.81% 
D)  9.03% 
E)  9.27% 
A)  8.37% 
B)  8.59% 
C)  8.81% 
D)  9.03% 
E)  9.27%

Question 19

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Accepted Answer

A) True 
 B)False

Question 20

Burke Tires just paid a dividend of D0 = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

Accepted Answer

A)  $41.59 
B)  $42.65 
C)  $43.75 
D)  $44.87 
E)  $45.99 
A)  $41.59 
B)  $42.65 
C)  $43.75 
D)  $44.87 
E)  $45.99

Exam 7: Valuation of Stocks and Corporations

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

Kellner Motor Co.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Kellner's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D0?

Merrell Enterprises' stock has an expected return of 14%.The stock's dividend is expected to grow at a constant rate of 8%,and it currently sells for $50 a share.Which of the following statements is CORRECT?

When a new issue of stock is brought to market,it is the marginal investor who determines the price at which the stock will trade.

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‾ \text {\underline{ A} } A​ B‾ \text {\underline{ B} } B​ Required return 10\% 12\% Market price \ 25 \ 40 Expected growth 7\% 9\%

The preemptive right gives current stockholders the right to purchase,on a pro rata basis,any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? Price \ 25 \ 25 Expected dividend yield 5\% 3\% Required return 12\% 10\%

The preemptive right is important to shareholders because it

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25).The stock sells for $32.50 per share,and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate,g,forever.What is the equilibrium expected growth rate?

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? Eagnected diviend D1D _ { 1 }D1​ $3.00 Curtent Price, P0P _ { 0 }P0​ $50 Eogpected constant prowth rate 6.0%

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? Price \ 25 \ 25 Ejgidected growth (canstant) 10\% 5\% Required return 15\% 15\%

If D1 = $1.25,g (which is constant)= 5.5%,and P0 = $44,what is the stock's expected total return for the coming year?

If D0 = $1.75,g (which is constant)= 3.6%,and P0 = $32.00,what is the stock's expected total return for the coming year?

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Burke Tires just paid a dividend of D0 = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Risk and Return

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

Filters

Kellner Motor Co.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Kellner's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D₀?

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? $\text {\underline{ A} }$ $\text {\underline{ B} }$ Required return 10\% 12\% Market price \ 25 \ 40 Expected growth 7\% 9\%

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D₁ = $1.25).The stock sells for $32.50 per share,and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate,g,forever.What is the equilibrium expected growth rate?

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? Eagnected diviend $D _ { 1 }$ $3.00 Curtent Price, $P _ { 0 }$ $50 Eogpected constant prowth rate 6.0%

If D₁ = $1.25,g (which is constant)= 5.5%,and P₀ = $44,what is the stock's expected total return for the coming year?

If D₀ = $1.75,g (which is constant)= 3.6%,and P₀ = $32.00,what is the stock's expected total return for the coming year?

Burke Tires just paid a dividend of D₀ = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?