Question 1

Which of the following statements concerning the required rate of return on stocks is true?

Accepted Answer

A)  The higher an investor's required rate of return, the higher the value of the stock. 
B)  If risk is reduced, the required return will decrease because more investors are risk-averse. 
C)  The required return on preferred stock is generally higher than the required return on common stock. 
D)  The higher the risk, the higher the required return, other things being equal. 
A)  The higher an investor's required rate of return, the higher the value of the stock. 
B)  If risk is reduced, the required return will decrease because more investors are risk-averse. 
C)  The required return on preferred stock is generally higher than the required return on common stock. 
D)  The higher the risk, the higher the required return, other things being equal.

Question 2

If Neal O'Danny preferred stock pays an annual dividend of $2.80,and investors require a 9% return,what is the value of O'Danny's preferred stock today?

Accepted Answer

A) True 
 B)False

Question 3

An investor's required rate of return for a common stock can be estimated by summing the stock's dividend yield and annual growth rate,assuming the growth rate is constant over time.

Accepted Answer

A) True 
 B)False

Question 4

Under majority voting,a majority (>50%)shareholder will just be able to elect a simple majority of the board of directors.

Accepted Answer

A) True 
 B)False

Question 5

The use of a call provision in addition to a sinking fund can effectively create a maturity date for preferred stock.

Accepted Answer

A) True 
 B)False

Question 6

If the expected growth rate for dividends is zero,then the value of common stock will be equal to the current dividend.

Accepted Answer

A) True 
 B)False

Question 7

ABC Corp.5% preferred stock with a par value of $100 and a market price of $125 will pay an annual dividend this year of $12 per share.

Accepted Answer

A) True 
 B)False

Question 8

The market price of a firm's common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings)divided by the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 9

The price of DDS Corporation stock is expected to be $45 in 5 years.Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of $1.00.If your required rate of return is 15 percent,how much are you willing to pay for DDS stock?

Accepted Answer

The expected cash flows are th

Question 10

You observe Thundering Herd Common Stock selling for $40.00 per share.The next dividend is expected to be $4.00,and is expected to grow at a 5% annual rate forever.If your required rate of return is 12%,should you purchase the stock?

Accepted Answer

A)  yes, because the present value of the expected future cash flows is greater than $40 
B)  no, because the present value of the expected future cash flows is less than $40 
C)  yes, because the present value of the expected future cash flows is less than $40 
D)  no, because the present value of the expected future cash flows is greater than $40 
A)  yes, because the present value of the expected future cash flows is greater than $40 
B)  no, because the present value of the expected future cash flows is less than $40 
C)  yes, because the present value of the expected future cash flows is less than $40 
D)  no, because the present value of the expected future cash flows is greater than $40

Question 11

Crandle's common stock is currently selling for $79.00.It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely.What is the required rate of return on Crandle's stock?

Accepted Answer

A)  11.11% 
B)  11.76% 
C)  12.2% 
D)  14.21% 
A)  11.11% 
B)  11.76% 
C)  12.2% 
D)  14.21%

Question 12

Bevel Building Products,Inc.,whose common stock is currently selling for $12 per share,is expected to pay a $1.80 dividend,and sell for $14.40 one year from now.What are the dividend yield,growth rate,and total rate of return,respectively?

Accepted Answer

A)  15%; 20%; 35% 
B)  10%; 5%; 15% 
C)  15%; 12%; 27% 
D)  20%; 15%; 35% 
A)  15%; 20%; 35% 
B)  10%; 5%; 15% 
C)  15%; 12%; 27% 
D)  20%; 15%; 35%

Question 13

Using the constant growth dividend valuation model and assuming dividends will growth a constant rate forever,the increase in the value of the stock each year should be equal to the

Accepted Answer

A)  growth rate in dividends, g. 
B)  required return on the stock, rcs. 
C)  dividend yield plus the capital gains yield. 
D)  dividend yield. 
A)  growth rate in dividends, g. 
B)  required return on the stock, rcs. 
C)  dividend yield plus the capital gains yield. 
D)  dividend yield.

Question 14

Studio 55,Inc.has an issue of preferred stock that pays a dividend of $4.00.The preferred stockholders require a rate of return on this stock of 9%.At what price should the preferred stock sell for? Round off to the nearest $0.10.

Accepted Answer

A)  $36.00 
B)  $44.40 
C)  $62.50 
D)  $88.80 
A)  $36.00 
B)  $44.40 
C)  $62.50 
D)  $88.80

Question 15

If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way,and if your required rate of return is 16% per year,how much is the stock worth today?

Accepted Answer

A)  $42.68 
B)  $48.05 
C)  $51.10 
D)  $74.64 
A)  $42.68 
B)  $48.05 
C)  $51.10 
D)  $74.64

Question 16

A firm can increase the growth rate of common stockholders' investment in the firm by retaining more earnings or increasing return on equity.

Accepted Answer

A) True 
 B)False

Question 17

The change in the value of a corporation's common stock as the result of growth is the same regardless of whether the growth is the result of internal growth or the infusion of new capital.

Accepted Answer

A) True 
 B)False

Question 18

Perrine Industrial Inc.just paid a dividend of $5 per share.Future dividends are expected to grow at a constant rate of 7% per year.What is the value of the stock if the required return is 16%?

Accepted Answer

A)  $33.44 
B)  $55.56 
C)  $59.44 
D)  $65.87 
A)  $33.44 
B)  $55.56 
C)  $59.44 
D)  $65.87

Question 19

Backford Company just paid a dividend yesterday of $2.25 per share.The company's stock is currently selling for $60 per share,and the required rate of return on Backford Company stock is 16%.What is the growth rate expected for Backford Company dividends assuming constant growth?

Accepted Answer

A)  9.47% 
B)  9.89% 
C)  10.87% 
D)  11.81% 
A)  9.47% 
B)  9.89% 
C)  10.87% 
D)  11.81%

Question 20

Which of the following changes will make the value of a stock go up,other things being held constant?

Accepted Answer

A)  The required return decreases. 
B)  The required return increases. 
C)  In general, investors become more risk averse. 
D)  The growth rate of dividends decreases. 
A)  The required return decreases. 
B)  The required return increases. 
C)  In general, investors become more risk averse. 
D)  The growth rate of dividends decreases.

Which of the following statements concerning the required rate of return on stocks is true?

If Neal O'Danny preferred stock pays an annual dividend of $2.80,and investors require a 9% return,what is the value of O'Danny's preferred stock today?

An investor's required rate of return for a common stock can be estimated by summing the stock's dividend yield and annual growth rate,assuming the growth rate is constant over time.

Under majority voting,a majority (>50%)shareholder will just be able to elect a simple majority of the board of directors.

The use of a call provision in addition to a sinking fund can effectively create a maturity date for preferred stock.

If the expected growth rate for dividends is zero,then the value of common stock will be equal to the current dividend.

ABC Corp.5% preferred stock with a par value of $100 and a market price of $125 will pay an annual dividend this year of $12 per share.

The market price of a firm's common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings)divided by the number of shares outstanding.

The price of DDS Corporation stock is expected to be $45 in 5 years.Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of $1.00.If your required rate of return is 15 percent,how much are you willing to pay for DDS stock?

You observe Thundering Herd Common Stock selling for $40.00 per share.The next dividend is expected to be $4.00,and is expected to grow at a 5% annual rate forever.If your required rate of return is 12%,should you purchase the stock?

Crandle's common stock is currently selling for $79.00.It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely.What is the required rate of return on Crandle's stock?

Bevel Building Products,Inc.,whose common stock is currently selling for $12 per share,is expected to pay a $1.80 dividend,and sell for $14.40 one year from now.What are the dividend yield,growth rate,and total rate of return,respectively?

Using the constant growth dividend valuation model and assuming dividends will growth a constant rate forever,the increase in the value of the stock each year should be equal to the

Studio 55,Inc.has an issue of preferred stock that pays a dividend of $4.00.The preferred stockholders require a rate of return on this stock of 9%.At what price should the preferred stock sell for? Round off to the nearest $0.10.

If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way,and if your required rate of return is 16% per year,how much is the stock worth today?

A firm can increase the growth rate of common stockholders' investment in the firm by retaining more earnings or increasing return on equity.

The change in the value of a corporation's common stock as the result of growth is the same regardless of whether the growth is the result of internal growth or the infusion of new capital.

Perrine Industrial Inc.just paid a dividend of $5 per share.Future dividends are expected to grow at a constant rate of 7% per year.What is the value of the stock if the required return is 16%?

Backford Company just paid a dividend yesterday of $2.25 per share.The company's stock is currently selling for $60 per share,and the required rate of return on Backford Company stock is 16%.What is the growth rate expected for Backford Company dividends assuming constant growth?

Which of the following changes will make the value of a stock go up,other things being held constant?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

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Exam 8: The Valuation and Characteristics of Stock

Which of the following statements concerning the required rate of return on stocks is true?

If Neal O'Danny preferred stock pays an annual dividend of $2.80,and investors require a 9% return,what is the value of O'Danny's preferred stock today?

An investor's required rate of return for a common stock can be estimated by summing the stock's dividend yield and annual growth rate,assuming the growth rate is constant over time.

Under majority voting,a majority (>50%)shareholder will just be able to elect a simple majority of the board of directors.

The use of a call provision in addition to a sinking fund can effectively create a maturity date for preferred stock.

If the expected growth rate for dividends is zero,then the value of common stock will be equal to the current dividend.

ABC Corp.5% preferred stock with a par value of $100 and a market price of $125 will pay an annual dividend this year of $12 per share.

The market price of a firm's common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings)divided by the number of shares outstanding.

The price of DDS Corporation stock is expected to be $45 in 5 years.Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of $1.00.If your required rate of return is 15 percent,how much are you willing to pay for DDS stock?

You observe Thundering Herd Common Stock selling for $40.00 per share.The next dividend is expected to be $4.00,and is expected to grow at a 5% annual rate forever.If your required rate of return is 12%,should you purchase the stock?

Crandle's common stock is currently selling for $79.00.It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely.What is the required rate of return on Crandle's stock?

Bevel Building Products,Inc.,whose common stock is currently selling for $12 per share,is expected to pay a $1.80 dividend,and sell for $14.40 one year from now.What are the dividend yield,growth rate,and total rate of return,respectively?

Using the constant growth dividend valuation model and assuming dividends will growth a constant rate forever,the increase in the value of the stock each year should be equal to the

Studio 55,Inc.has an issue of preferred stock that pays a dividend of $4.00.The preferred stockholders require a rate of return on this stock of 9%.At what price should the preferred stock sell for? Round off to the nearest $0.10.

If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way,and if your required rate of return is 16% per year,how much is the stock worth today?

A firm can increase the growth rate of common stockholders' investment in the firm by retaining more earnings or increasing return on equity.

The change in the value of a corporation's common stock as the result of growth is the same regardless of whether the growth is the result of internal growth or the infusion of new capital.

Perrine Industrial Inc.just paid a dividend of $5 per share.Future dividends are expected to grow at a constant rate of 7% per year.What is the value of the stock if the required return is 16%?

Backford Company just paid a dividend yesterday of $2.25 per share.The company's stock is currently selling for $60 per share,and the required rate of return on Backford Company stock is 16%.What is the growth rate expected for Backford Company dividends assuming constant growth?

Which of the following changes will make the value of a stock go up,other things being held constant?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters