Question 1

The P/E ratio is the market price of a share of stock divided by book equity per share.

Accepted Answer

A) True 
 B)False  False

Question 2

A decrease in the ________ will increase the value of preferred stock.

Accepted Answer

A)  expected rate of return 
B)  life of the investment 
C)  dividend paid 
D)  both A and C 
A)  expected rate of return 
B)  life of the investment 
C)  dividend paid 
D)  both A and C A

Question 3

World Wide Interlink Corp. has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with an annual dividend of $5 per share. The stock will have a par value of $30. If investors' required rate of return on this investment is currently 20%, what should the preferred stock's market value be?

Accepted Answer

A)  $10 
B)  $15 
C)  $20 
D)  $25 
A)  $10 
B)  $15 
C)  $20 
D)  $25 D

Question 4

An investor is contemplating the purchase of common stock at the beginning of this year and to hold the stock for one year. The investor expects the year-end dividend to be $2.00 and expects a year-end price for the stock of $40. If this investor's required rate of return is 10%, then the value of the stock to this investor is

Accepted Answer

A)  $36.36. 
B)  $38.18. 
C)  $33.06. 
D)  $34.88. 
A)  $36.36. 
B)  $38.18. 
C)  $33.06. 
D)  $34.88.

Question 5

A decrease in the ________ will cause an increase in common stock value.

Accepted Answer

A)  growth rate 
B)  required rate of return 
C)  last paid dividend 
D)  both B and C 
A)  growth rate 
B)  required rate of return 
C)  last paid dividend 
D)  both B and C

Question 6

If the ROE on a new investment is less than the firm's required rate of return

Accepted Answer

A)  the investment increases the firm's value. 
B)  the investment leaves the firm's value unchanged. 
C)  the effect on the firm's value is unpredictable. 
D)  the investment reduces the firm's value. 
A)  the investment increases the firm's value. 
B)  the investment leaves the firm's value unchanged. 
C)  the effect on the firm's value is unpredictable. 
D)  the investment reduces the firm's value.

Question 7

Edison Power and Light has an outstanding issue of cumulative preferred stock with an annual fixed dividend of $2.00 per share. It has not paid the preferred dividend for the last 3 years, but intends to pay a dividend on the common stock in the coming year. Before Edison can pay a dividend on the common stock

Accepted Answer

A)  preferred shareholders may cast all their votes for a single director. 
B)  preferred shareholders must receive dividends totaling $8.00 per share. 
C)  preferred shareholders must receive $2.00 per share. 
D)  will not necessarily receive any dividend. 
A)  preferred shareholders may cast all their votes for a single director. 
B)  preferred shareholders must receive dividends totaling $8.00 per share. 
C)  preferred shareholders must receive $2.00 per share. 
D)  will not necessarily receive any dividend.

Question 8

Which of the following formulas is appropriate to find the value of preferred stock with a fixed dividend?

Accepted Answer

A)  Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate)/Market's Required Yield on Preferred Stock 
B)  Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate)/Market's Required Yield on Preferred Stock - growth rate 
C)  Value of preferred stock = Annual Preferred Stock Dividend/Market's Required Yield on Preferred Stock 
D)  Value of preferred stock = Annual Preferred Stock Dividend/Investor's Required Yield on Preferred Stock 
A)  Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate)/Market's Required Yield on Preferred Stock 
B)  Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate)/Market's Required Yield on Preferred Stock - growth rate 
C)  Value of preferred stock = Annual Preferred Stock Dividend/Market's Required Yield on Preferred Stock 
D)  Value of preferred stock = Annual Preferred Stock Dividend/Investor's Required Yield on Preferred Stock

Question 9

The higher the investor's required rate of return, the higher the P/E ratio will be.

Accepted Answer

A) True 
 B)False

Question 10

Tri State Pickle Company preferred stock pays a perpetual annual dividend of 2 1/2% of its par value. Par value of TSP preferred stock is $100 per share. If investors' required rate of return on this stock is 15%, what is the value of per share?

Accepted Answer

A)  $37.50 
B)  $15.00 
C)  $16.67 
D)  $6.00 
A)  $37.50 
B)  $15.00 
C)  $16.67 
D)  $6.00

Question 11

You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock is selling for $21.00 per share. The next dividend is expected to be $2.10, and you expect the dividend to keep growing at a constant rate. If the stock is returning 15%, calculate the growth rate of dividends.

Accepted Answer

A)  3% 
B)  5% 
C)  8% 
D)  10% 
A)  3% 
B)  5% 
C)  8% 
D)  10%

Question 12

Zorba's is a small chain of restaurants whose stock is not publicly traded. The average P/E ratio for similar restaurant chains is 16.5; the P/E ratio for the S&P 500 Index is 15.2. This year's earnings were $1.21 per share and next year's earnings are forecasted at $1.46 per share. A reasonable price for a share of Zorba's stock is

Accepted Answer

A)  $24. 
B)  $20. 
C)  $18. 
D)  $16. 
A)  $24. 
B)  $20. 
C)  $18. 
D)  $16.

Question 13

From the issuing firm's point of view, one advantage of preferred stock over bonds is

Accepted Answer

A)  preferred dividends are a deductible expense for tax purposes. 
B)  preferred voting privileges concentrate power in the hands of managers and major shareholders. 
C)  a dividend payment can be skipped without triggering bankruptcy. 
D)  all of the above 
A)  preferred dividends are a deductible expense for tax purposes. 
B)  preferred voting privileges concentrate power in the hands of managers and major shareholders. 
C)  a dividend payment can be skipped without triggering bankruptcy. 
D)  all of the above

Question 14

If a stock has a much higher than normal P/E ratio, investors probably expect

Accepted Answer

A)  slow growth in earnings. 
B)  rapid growth in earnings. 
C)  large increases in the price of the stock. 
D)  a declining stock price 
A)  slow growth in earnings. 
B)  rapid growth in earnings. 
C)  large increases in the price of the stock. 
D)  a declining stock price

Question 15

When bankruptcy occurs, the claims of the common shareholders may go unsatisfied.

Accepted Answer

A) True 
 B)False

Question 16

Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on this stock. What is the value of the preferred stock today? Round to the nearest $1.

Accepted Answer

A)  $100 
B)  $85 
C)  $75 
D)  $16 
A)  $100 
B)  $85 
C)  $75 
D)  $16

Question 17

The growth rate of future earnings is determined by return on equity and the profit-retention rate.

Accepted Answer

A) True 
 B)False

Question 18

Home Depot stock is currently selling for $136 per share. Next year's dividend is expected to be $3.31; next year's earnings per share are expected to be $6.55. Home Depot's P/E ratio is

Accepted Answer

A)  .048. 
B)  22.03. 
C)  20.75 
D)  41.08 
A)  .048. 
B)  22.03. 
C)  20.75 
D)  41.08

Question 19

Expected cash flow for a preferred stock primarily consists of

Accepted Answer

A)  dividend payments . 
B)  changes in the price of the stock. 
C)  interest payments. 
D)  both A and B. 
A)  dividend payments . 
B)  changes in the price of the stock. 
C)  interest payments. 
D)  both A and B.

Question 20

Green Corp.'s preferred stock is selling for $20.83. If the company pays $2.50 annual dividends, what is the expected rate of return on its stock?

Accepted Answer

A)  8.33% 
B)  12.00% 
C)  2.50% 
D)  20.00% 
A)  8.33% 
B)  12.00% 
C)  2.50% 
D)  20.00%

The P/E ratio is the market price of a share of stock divided by book equity per share.

A decrease in the ________ will increase the value of preferred stock.

A decrease in the ________ will cause an increase in common stock value.

If the ROE on a new investment is less than the firm's required rate of return

Which of the following formulas is appropriate to find the value of preferred stock with a fixed dividend?

The higher the investor's required rate of return, the higher the P/E ratio will be.

Tri State Pickle Company preferred stock pays a perpetual annual dividend of 2 1/2% of its par value. Par value of TSP preferred stock is $100 per share. If investors' required rate of return on this stock is 15%, what is the value of per share?

You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock is selling for $21.00 per share. The next dividend is expected to be $2.10, and you expect the dividend to keep growing at a constant rate. If the stock is returning 15%, calculate the growth rate of dividends.

From the issuing firm's point of view, one advantage of preferred stock over bonds is

If a stock has a much higher than normal P/E ratio, investors probably expect

When bankruptcy occurs, the claims of the common shareholders may go unsatisfied.

Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on this stock. What is the value of the preferred stock today? Round to the nearest $1.

The growth rate of future earnings is determined by return on equity and the profit-retention rate.

Home Depot stock is currently selling for $136 per share. Next year's dividend is expected to be $3.31; next year's earnings per share are expected to be $6.55. Home Depot's P/E ratio is

Expected cash flow for a preferred stock primarily consists of

Green Corp.'s preferred stock is selling for $20.83. If the company pays $2.50 annual dividends, what is the expected rate of return on its stock?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, Taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters

Exam 10: Stock Valuation

The P/E ratio is the market price of a share of stock divided by book equity per share.

A decrease in the ________ will increase the value of preferred stock.

A decrease in the ________ will cause an increase in common stock value.

If the ROE on a new investment is less than the firm's required rate of return

Which of the following formulas is appropriate to find the value of preferred stock with a fixed dividend?

The higher the investor's required rate of return, the higher the P/E ratio will be.

Tri State Pickle Company preferred stock pays a perpetual annual dividend of 2 1/2% of its par value. Par value of TSP preferred stock is $100 per share. If investors' required rate of return on this stock is 15%, what is the value of per share?

You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock is selling for $21.00 per share. The next dividend is expected to be $2.10, and you expect the dividend to keep growing at a constant rate. If the stock is returning 15%, calculate the growth rate of dividends.

From the issuing firm's point of view, one advantage of preferred stock over bonds is

If a stock has a much higher than normal P/E ratio, investors probably expect

When bankruptcy occurs, the claims of the common shareholders may go unsatisfied.

Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on this stock. What is the value of the preferred stock today? Round to the nearest $1.

The growth rate of future earnings is determined by return on equity and the profit-retention rate.

Home Depot stock is currently selling for $136 per share. Next year's dividend is expected to be $3.31; next year's earnings per share are expected to be $6.55. Home Depot's P/E ratio is

Expected cash flow for a preferred stock primarily consists of

Green Corp.'s preferred stock is selling for $20.83. If the company pays $2.50 annual dividends, what is the expected rate of return on its stock?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, Taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters