Exam 8: The Valuation and Characteristics of Stock

You are considering the purchase of Zee Company stock.You anticipate that the company will pay dividends of $3.50 per share next year and $4.00 per share the following year.You believe that you can sell the stock for $20.00 per share two years from now.If your required rate of return is 10 percent,what is the maximum price that you would pay for a share of Zee Company stock?

For a given constant required rate of return,the greatest portion of a preferred stockholder's return comes from increases in the price of preferred stock.

Which of the following statements concerning preferred stock is MOST correct?

Nogrowth Corporation expects their dividend to stay at $0.50 per share each year into the foreseeable future.Therefore

You purchased one share of Sophia Enterprises common stock for $30 today.If the stock pays a dividend of $6.50 in one year,and sells for $32.50 at that time,what will the dividend yield,growth rate,and total rate of return be for the year?

All of the following affect the value of a share of common stock EXCEPT

LTM,Inc.has an issue of preferred stock whose par value is $1,000.The preferred stock pays a 4.5% dividend.If investors require a 5.5% rate of return for these shares,what price should the preferred stock sell for?

A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors and asking for more cash.

Under cumulative voting,a 10% shareholder will likely be able to elect 10% of the board of directors.

Consider the following four types of payments that could be made by a normal operating firm: interest,common dividends,income taxes,and preferred dividends.Compared to the other payments mentioned,where would you rank common dividend payments in terms of the order of payment if the firm is liquidating?

Who bears the greatest risk of loss of value if a firm should fail?

A common stock with an expected dividend growth rate of zero would be valued in the same way as preferred stock,that is,the expected dividend divided by the required return.

If a common stockholder cannot personally attend the meeting of shareholders,then their votes are lost.

A small biotechnology research corporation has been experiencing losses for the first three years of its existence,and thus has a negative balance in retained earnings.The corporation's stock price,however,is $1 per share.Which of the following statements is MOST correct?

A preferred stock that pays an annual dividend of $10,has a par value of $100,and has a required return of 5% will be valued at $200.

Historically,price appreciation,or capital gains yield,has accounted for a greater portion of returns on common stocks than dividend payments.

Diana Ltd.paid a $2.50 per share dividend yesterday.The dividend is expected to grow at 10 percent per year for the foreseeable future.Diana Ltd.has a beta of 1.6,a standard deviation of returns of 30 percent,and a required return of 18%.What is the value of a share of Diana Ltd.common stock?

Glacier Inc.preferred stock has a 5% stated dividend percentage,and a $100 par value.What is the value of the stock if your required rate of return is 6% per year?

A small company struggling to reach profitability just announced a major new government contract that will validate its technology and generate revenue for the next several years.The announcement of the contract will

Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds.