Exam 8: The Valuation and Characteristics of Stock

The stock valuation model D1/(rcs - g)requires the stock to grow at a rate greater than the required return; otherwise,the stock is worthless.

In terms of risk,preferred stock is safer than common stock because it has a prior claim on assets and income.

In general,common stock and preferred stock are both valued by calculating the present value of all expected future cash flows,using the required return as the discount rate.

The retention ratio is equal to 1 minus the dividend payout ratio.

Which of the following features,or benefits,belong to a firm's common stockholders?

Public perception and reputation do not affect stock prices,which are strictly a function of dividends and required returns.

If a shareholder cannot attend the corporation's annual meeting,the shares may still be voted using

Whistle Corp.has a preferred stock that pays a dividend of $2.40.If you are willing to purchase the stock at $11,what is your required rate of return? (Round your answer to the nearest .1% and assume that there are no transaction costs.)

Lithium Lakes Industries preferred stock has a par value of $100 and pays a dividend of $6.00 per share.It presently sells for $87 per share.What do investors require as a rate of return on this stock? Round off to the nearest .10%.

The amount of the preferred stock dividend is generally fixed either as a dollar amount or as a percentage of the par value.

Common stock valuation can be based on the present value of future dividends or alternatively on the present value of the firm's future quarterly net income.

Bensen Co.paid a dividend of $5.25 on its common stock yesterday.The company's dividends are expected to grow at a constant rate of 8.5% indefinitely.The required rate of return on this stock is 15.5%.You observe a market price of $78.50 for the stock.Should you purchase this stock?

Cumulative preferred stock

How is preferred stock affected by a decrease in the required rate of return?

The expected rate of return implied by a given market price equals the required rate of return for investors at the margin.

Assume that a firm had such serious financial problems that it was about to be liquidated after a bankruptcy.All of the firm's assets are about to be sold in order to pay the following claims against the firm: bondholders,preferred stockholders,common stockholders,and federal income taxes.Of the claims mentioned,what priority would common stockholders have?

Limited liability for a corporation's common shareholders is a protective provision that aids the corporation in raising funds.

LED Corp.'s common stock paid $2.50 in dividends last year (D0).Dividends are expected to grow at a 12-percent annual rate forever.If LED's current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?

ACME,Inc.expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future.Therefore,the value of the stock to an investor with a required return of 12% is

TellTrue Corporation has preferred stock which paid an annual dividend in 2009 of $5 per share.TellTrue also has common stock which paid a dividend in 2009 of $5.Which of the following statements is MOST correct concerning TellTrue stock?