Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

How is preferred stock similar to bonds?

Accepted Answer

A) Dividend payments to preferred shareholders (much like bond interest payments to bondholders)are tax deductible. 
B) Investors can sue the firm if preferred dividend payments are not paid (much like bondholders can sue for non-payment of interest payments). 
C) Preferred stockholders receive a dividend payment (much like interest payments to bondholders)that is usually fixed. 
D) Preferred stock is not like bonds in any way. 
A) Dividend payments to preferred shareholders (much like bond interest payments to bondholders)are tax deductible. 
B) Investors can sue the firm if preferred dividend payments are not paid (much like bondholders can sue for non-payment of interest payments). 
C) Preferred stockholders receive a dividend payment (much like interest payments to bondholders)that is usually fixed. 
D) Preferred stock is not like bonds in any way.

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

Given the constant growth dividend valuation model,the expected percentage growth in value of a stock is equal to the capital gains yield for that stock.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

The common stock of Cranberry Inc.is selling for $26.75 on the open market.Next year's dividend is expected to be $3.68,and the growth rate of this company is estimated to be 5.5%.If Richard Dean,an average investor,is considering purchasing this stock at the market price,what is his expected rate of return?

Accepted Answer

R = (D/V)+

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

V_p = Div/R

Question 13

Castle,Inc.paid a dividend yesterday of $2 per share.Castle management expects the dividend to increase next year to $3 annually.If the dividend is expected to stay at $3 per year for the foreseeable future,what is the value of the stock to an investor with a required rate of return of 10%?

Accepted Answer

A) $7.50 
B) $30.00 
C) $32.00 
D) $50.00 
A) $7.50 
B) $30.00 
C) $32.00 
D) $50.00

Question 14

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 15

If two firms have the same current dividend and the same expected growth rate,their stocks must sell at the same current price or else the market will not be in equilibrium.

Accepted Answer

A) false,because the required return could be different 
B) true,because we are using a dividend valuation model 
C) true if markets are semi-strong form efficient 
D) true if investors are risk-averse 
A) false,because the required return could be different 
B) true,because we are using a dividend valuation model 
C) true if markets are semi-strong form efficient 
D) true if investors are risk-averse

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

An example of the growth factor in common stock is

Accepted Answer

A) acquiring a loan to fund an investment in Asia. 
B) retaining profits in order to reinvest into the firm. 
C) issuing new stock to provide capital for future growth. 
D) two strong companies merging together to increase their economy of scale. 
A) acquiring a loan to fund an investment in Asia. 
B) retaining profits in order to reinvest into the firm. 
C) issuing new stock to provide capital for future growth. 
D) two strong companies merging together to increase their economy of scale.

Question 18

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

Accepted Answer

A) the dollar amount of the dividends. 
B) investors' required rate of return. 
C) the future growth rate for dividends. 
D) the stock and paid-in-capital amounts on the balance sheet. 
A) the dollar amount of the dividends. 
B) investors' required rate of return. 
C) the future growth rate for dividends. 
D) the stock and paid-in-capital amounts on the balance sheet.

Question 19

Asymmetric Frames Corp had a return on equity of 15%.The corporation's earnings per share was $6.00,its dividend payout ratio was 40% and its profit-retention rate was 60%.If these relationships continue,what will be United Financial Corp's internal growth rate?

Accepted Answer

A) 6.0% 
B) 8.6% 
C) 9.0% 
D) 15.6% 
A) 6.0% 
B) 8.6% 
C) 9.0% 
D) 15.6%

Question 20

What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm?

Accepted Answer

A) the cumulative feature 
B) the convertible feature 
C) the proportionality clause 
D) the preemptive right 
A) the cumulative feature 
B) the convertible feature 
C) the proportionality clause 
D) the preemptive right

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

How is preferred stock similar to bonds?

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.

Given the constant growth dividend valuation model,the expected percentage growth in value of a stock is equal to the capital gains yield for that stock.

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

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

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

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?

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

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

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?

Castle,Inc.paid a dividend yesterday of $2 per share.Castle management expects the dividend to increase next year to $3 annually.If the dividend is expected to stay at $3 per year for the foreseeable future,what is the value of the stock to an investor with a required rate of return of 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?

If two firms have the same current dividend and the same expected growth rate,their stocks must sell at the same current price or else the market will not be in equilibrium.

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.

An example of the growth factor in common stock is

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

Asymmetric Frames Corp had a return on equity of 15%.The corporation's earnings per share was $6.00,its dividend payout ratio was 40% and its profit-retention rate was 60%.If these relationships continue,what will be United Financial Corp's internal growth rate?

What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm?

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

Exam 8: The Valuation and Characteristics of Stock

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

How is preferred stock similar to bonds?

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.

Given the constant growth dividend valuation model,the expected percentage growth in value of a stock is equal to the capital gains yield for that stock.

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

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

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

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?

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

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

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?

Castle,Inc.paid a dividend yesterday of $2 per share.Castle management expects the dividend to increase next year to $3 annually.If the dividend is expected to stay at $3 per year for the foreseeable future,what is the value of the stock to an investor with a required rate of return of 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?

If two firms have the same current dividend and the same expected growth rate,their stocks must sell at the same current price or else the market will not be in equilibrium.

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.

An example of the growth factor in common stock is

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

Asymmetric Frames Corp had a return on equity of 15%.The corporation's earnings per share was $6.00,its dividend payout ratio was 40% and its profit-retention rate was 60%.If these relationships continue,what will be United Financial Corp's internal growth rate?

What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm?

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