Exam 7: Stock Valuation

Preemptive rights allow existing shareholders to maintain voting control and protect themselves against the dilution of their ownership.

The required return can be affected by changes in the risk free rate, even if the risk premium remains constant.

Which of the following is a marketable security?

Which of the following is typically a feature of common stock?

Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm's creditors.

Uncle Tim's Inventions has an expected dividend next year of $3.60 and a required return of 12 percent. Assuming the dividends will be paid indefinitely, calculate the value of a share of common stock assuming a zero growth rate of dividends.

Holders of equity capital ________.

A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend. If the current market price of the preferred stock is $50, the yield on the preferred stock is ________.

Smith Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return?

________ is the value of a firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.

Treasury stock is generally reclassified as class B common stock and has voting rights.

An underwritten issue of common stock is one in which a firm purchases insurance to cover unexpected losses suffered by shareholders.

Preferred stock is valued as if it were a ________.

In an efficient market, stock prices adjust quickly to new public information.

From a corporation's point of view, a disadvantage of issuing preferred stock is ________.

Rational buyers and sellers use their assessment of an asset's risk and return to determine its value. Relative to this concept, which of the following is true?

A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.

The common stock book value model ignores a firm's expected earnings potential and generally lacks any true relationship to the firm's value in the marketplace.

If the risk-free rate decreases due to a shift in government policy, the required return goes up.

The Oxford Heating Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.20 in the second year, $4.41 in the third year, and its most recent dividend was $4.63. The company wishes to continue this dividend growth indefinitely. What is the value of the company's stock if the required rate of return is 12 percent?