Exam 10: Stock Valuation

The cumulative dividend feature is necessary to protect the rights of preferred stockholders.

WSU Inc. is a young company that does not yet pay a dividend. You believe that the company will begin to pay dividends 5 years from now, and that the company will then be worth $50 per share. If your required rate of return on this risky stock is 20%, what is the stock worth today?

Is the following common stock priced correctly? If no, what is the correct price? Price = $26.25 Required rate of return = 13% Dividend year 0 = $2.00 Dividend year 1 = $2.10

You are evaluating the purchase of Cool Toys, Inc. common stock that just paid a dividend of $1.80. You expect the dividend to grow at a rate of 12%, indefinitely. You estimate that a required rate of return of 17.5% will be adequate compensation for this investment. Assuming that your analysis is correct, what is the most that you would be willing to pay for the common stock if you were to purchase it today? Round to the nearest $.01.

Profitable companies often prefer to issue debt rather than preferred stock because

The common stock of Cranberry, Inc. is selling for $26.75 on the open market. A dividend of $3.68 is expected to be distributed, 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?

Green Company's common stock is currently selling at $24.00 per share. The company recently paid dividends of $1.92 per share and projects growth at a rate of 4%. At this rate, what is the stock's expected rate of return?

The value of preferred shares is affected by changes in interest rates.

Determine the rate of return on a $25 common stock that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.

A stock currently sells for $63 per share, and the required return on the stock is 10%. Assuming a growth rate of 5%, calculate the stock's last dividend paid.

Draper Company's common stock paid a dividend last year of $3.70. You believe that the long-term growth in the dividends of the firm will be 8% per year. If your required return for Draper is 14%, how much are you willing to pay for the stock?

The required rate of return on TKF preferred has fallen from 5.75% at the time of issue to the present rate of 5%. The stock now sells for $115. What was the original price?

Which of the following provisions is unique to preferred stockholders and usually NOT available to common stockholders?

Piercing Publishers recently issued preferred stock with a fixed annual dividend of $3.00 per share. Investors require a 5% return on similar preferred stock issues. The stock is currently selling for $65. Is the stock a good buy?

Common stock represents a claim on residual income.

Petrified Forest Skin Care, Inc. pays an annual perpetual dividend of $1.70 per share. If the stock is currently selling for $21.25 per share, what is the expected rate of return on this stock.

Frost Corporation's recent earnings per share were $12.90. Their dividend payout ratio is 20%. Earnings are expected to grow at an average of 6% per year and the company's policy is to maintain the same payout ratio. If investors are requiring a 12% rate of return on this stock, what will they be willing to pay for one share?

McDonald's stock currently sells for $123. It's expected earnings per share are $5.12. The average P/E ratio for the industry is 24. If investors expected the same growth rate and risk for McDonald's as for an average firm in the same industry, it's stock price would

Common stockholders are essentially creditors of the firm.

Discuss two reasons why preferred stock would be viewed as less risky than common stock to investors.