Question 1

Because most preferred stocks are perpetuities,their value can be determined by dividing the annual dividend by an investor's required return.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

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?

Accepted Answer

D1 = $2.50 * (1.10)=

Question 6

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 7

H.J.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 H.J.'s current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?

Accepted Answer

A)  No, the percentage return on the stock is too high, thus it is too risky. 
B)  Yes, the stock is expected to return more than you require. 
C)  No, the stock is overpriced. 
D)  Not enough information is given. 
A)  No, the percentage return on the stock is too high, thus it is too risky. 
B)  Yes, the stock is expected to return more than you require. 
C)  No, the stock is overpriced. 
D)  Not enough information is given.

Question 8

Preferred stock differs from common stock in that

Accepted Answer

A)  preferred stock usually has a maturity date. 
B)  preferred stock investors have a higher required return than common stock investors. 
C)  preferred stock dividends are fixed. 
D)  common stock investors have a required return and preferred stock investors do not. 
A)  preferred stock usually has a maturity date. 
B)  preferred stock investors have a higher required return than common stock investors. 
C)  preferred stock dividends are fixed. 
D)  common stock investors have a required return and preferred stock investors do not.

Question 9

Chambers Corporation's ROE is 20%.Their dividend payout ratio is 70%.The last dividend,just paid,was $2.00.If dividends are expected to grow by the company's internal growth rate indefinitely,what is the current value of Chambers common stock if its required return is 18%?

Accepted Answer

A)  $17.67 
B)  $16.89 
C)  $14.92 
D)  $11.52 
A)  $17.67 
B)  $16.89 
C)  $14.92 
D)  $11.52

Question 10

Preferred stock is less risky than common stock,but more risky than debt.

Accepted Answer

A) True 
 B)False

Question 11

Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period.What is the name of this provision?

Accepted Answer

A)  Cumulative 
B)  Putable 
C)  Callable 
D)  Convertible 
A)  Cumulative 
B)  Putable 
C)  Callable 
D)  Convertible

Question 12

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 13

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

Accepted Answer

A)  Preferred stock is valued the same as zero coupon bonds because the cash flow patterns are similar. 
B)  If a corporation issues 4% preferred stock with a par value of $100, the dividend will increase by 4% per year. 
C)  Preferred stock dividends are typically the same each year, allowing a preferred stock to be valued as a perpetuity. 
D)  Preferred stock dividends are calculated as a percentage of common stock dividends, although the preferred stock dividends must be paid first. 
A)  Preferred stock is valued the same as zero coupon bonds because the cash flow patterns are similar. 
B)  If a corporation issues 4% preferred stock with a par value of $100, the dividend will increase by 4% per year. 
C)  Preferred stock dividends are typically the same each year, allowing a preferred stock to be valued as a perpetuity. 
D)  Preferred stock dividends are calculated as a percentage of common stock dividends, although the preferred stock dividends must be paid first.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A)  the preemptive right. 
B)  a proxy. 
C)  majority voting rules. 
D)  the cumulative voting right. 
A)  the preemptive right. 
B)  a proxy. 
C)  majority voting rules. 
D)  the cumulative voting right.

Question 16

A financial analyst expects KacieCo.to pay a dividend of $2 per share one year from today,a dividend of $3 per share in years two,and estimates the value of the stock at the end of year two to be $22.If your required return on KacieCo stock is 14 %,what is the most you would be willing to pay for the stock today if you plan to sell the stock in two years?

Accepted Answer

A)  $20.99 
B)  $26.75 
C)  $26.90 
D)  $27.00 
A)  $20.99 
B)  $26.75 
C)  $26.90 
D)  $27.00

Question 17

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 18

In theory,shareholders select the board of directors,but in reality,management effectively selects the directors.

Accepted Answer

A) True 
 B)False

Question 19

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?

Accepted Answer

A)  First 
B)  Second 
C)  Third 
D)  Fourth 
A)  First 
B)  Second 
C)  Third 
D)  Fourth

Question 20

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

Accepted Answer

A) True 
 B)False

Because most preferred stocks are perpetuities,their value can be determined by dividing the annual dividend by an investor's required return.

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.

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

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?

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?

All of the following affect the value of a share of common stock except:

H.J.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 H.J.'s current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?

Preferred stock differs from common stock in that

Chambers Corporation's ROE is 20%.Their dividend payout ratio is 70%.The last dividend,just paid,was $2.00.If dividends are expected to grow by the company's internal growth rate indefinitely,what is the current value of Chambers common stock if its required return is 18%?

Preferred stock is less risky than common stock,but more risky than debt.

Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period.What is the name of this provision?

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

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

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

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

In theory,shareholders select the board of directors,but in reality,management effectively selects the directors.

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

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

Current Asset Management

International Business Finance

Filters

Exam 8: The Valuation and Characteristics of Stock

Because most preferred stocks are perpetuities,their value can be determined by dividing the annual dividend by an investor's required return.

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.

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

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?

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?

All of the following affect the value of a share of common stock except:

H.J.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 H.J.'s current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?

Preferred stock differs from common stock in that

Chambers Corporation's ROE is 20%.Their dividend payout ratio is 70%.The last dividend,just paid,was $2.00.If dividends are expected to grow by the company's internal growth rate indefinitely,what is the current value of Chambers common stock if its required return is 18%?

Preferred stock is less risky than common stock,but more risky than debt.

Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period.What is the name of this provision?

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

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

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

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

In theory,shareholders select the board of directors,but in reality,management effectively selects the directors.

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

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

Current Asset Management

International Business Finance

Filters

H.J.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 H.J.'s current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?