Question 1

Cumulative preferred stock

Accepted Answer

A) requires dividends in arrears to be carried over into the next period. 
B) has a right to vote cumulatively. 
C) has a claim to dividends before bonds. 
D) has a higher required return than common stock.

Question 2

The YLD% shown in Wall Street Journal stock quotes stands for the stock's dividend yield and is calculated by dividing the amount of the dividend by the stock's opening price on the first day of the year.

Accepted Answer

A) True 
 B)False

Question 3

Common stockholders demand a return on the price paid for their common stock,but since retained earnings on the balance sheet are merely "on paper" they do not require a return on earnings that have been retained.

Accepted Answer

A) True 
 B)False

Question 4

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.

Question 5

How is preferred stock affected by a decrease in the required rate of return?

Accepted Answer

A) The value of a share of preferred stock increases. 
B) The dividend increases. 
C) The dividend decreases. 
D) The dividend yield increases.

Question 6

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.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid.What is the name of this feature?

Accepted Answer

A) participating 
B) cumulative 
C) provisional 
D) convertible

Question 9

Bensen Co.paid a dividend of $5.25 on its common stock yesterday.The company's dividends are expected to grow at a constant rate of 8.5% indefinitely.If the required rate of return on this stock is 15.5%,compute the current value per share of Bensen Co.stock.

Accepted Answer

A) $81.38 
B) $76.43 
C) $56.23 
D) $43.90

Question 10

Bondholders and preferred stockholders can be viewed as creditors,whereas the common stockholders are the true owners of the firm.

Accepted Answer

A) True 
 B)False

Question 11

Whistle Corp.has a preferred stock that pays a dividend of $2.40.If you are willing to purchase the stock at $11,what is your required rate of return (round your answer to the nearest .1% and assume that there are no transaction costs)?

Accepted Answer

A) 21.8% 
B) 11.0% 
C) 9.1% 
D) 20.1%

Question 12

Waterfront Solutions,Inc.paid a dividend of $5.00 per share on its common stock yesterday.Dividends are expected to grow at a constant rate of 4% for the next two years,at which point the stock is expected to sell for $56.00.If investors require a rate of return on Waterfront's common stock of 18%,what should the stock sell for today?

Accepted Answer

A) $50.22 
B) $48.51 
C) $44.76 
D) $40.22

Question 13

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 14

Cumulative voting is advantageous to minority shareholders because it may allow them to elect a member of the board of directors.

Accepted Answer

A) True 
 B)False

Question 15

Two approaches that allow for the retirement of preferred stock are call provisions and sinking fund provisions.

Accepted Answer

A) True 
 B)False

Question 16

Using the dividend valuation method,an analyst determines the value of Company A's stock to be $10 and the value of Company B's stock to be $14.Based on this information,which of the following statements is most accurate?

Accepted Answer

A) Company B must be riskier than Company A,and risk requires a reward. 
B) Other things being equal,if Company A and Company B have the same firm value,Company B must have more debt,thus leveraging its returns for the benefit of shareholders. 
C) Other things being equal,if Company A and Company B have the same firm value,Company A may have more shares of stock outstanding than Company B. 
D) Company B's required rate of return is higher than Company A's required return.

Question 17

If a firm does not have enough money to pay any common stock dividends,it is technically in default to the common shareholders.

Accepted Answer

A) True 
 B)False

Question 18

Preferred stock is similar to a bond in the following way

Accepted Answer

A) preferred stock always contains a maturity date. 
B) both investments provide a stated income stream. 
C) both contain a growth factor similar to common stock. 
D) both provide interest payments.

Question 19

The stock valuation model D1/(rcs - g)requires the stock to grow at a rate greater than the required return; otherwise,the stock is worthless.

Accepted Answer

A) True 
 B)False

Question 20

In terms of risk,preferred stock is safer than common stock because it has a prior claim on assets and income.

Accepted Answer

A) True 
 B)False

Exam 8: The Valuation and Characteristics of Stock

Cumulative preferred stock

The YLD% shown in Wall Street Journal stock quotes stands for the stock's dividend yield and is calculated by dividing the amount of the dividend by the stock's opening price on the first day of the year.

Common stockholders demand a return on the price paid for their common stock,but since retained earnings on the balance sheet are merely "on paper" they do not require a return on earnings that have been retained.

Preferred stock differs from common stock in that

How is preferred stock affected by a decrease in the required rate of return?

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

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

Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid.What is the name of this feature?

Bensen Co.paid a dividend of $5.25 on its common stock yesterday.The company's dividends are expected to grow at a constant rate of 8.5% indefinitely.If the required rate of return on this stock is 15.5%,compute the current value per share of Bensen Co.stock.

Bondholders and preferred stockholders can be viewed as creditors,whereas the common stockholders are the true owners of the firm.

Whistle Corp.has a preferred stock that pays a dividend of $2.40.If you are willing to purchase the stock at $11,what is your required rate of return (round your answer to the nearest .1% and assume that there are no transaction costs) ?

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

Cumulative voting is advantageous to minority shareholders because it may allow them to elect a member of the board of directors.

Two approaches that allow for the retirement of preferred stock are call provisions and sinking fund provisions.

Using the dividend valuation method,an analyst determines the value of Company A's stock to be $10 and the value of Company B's stock to be $14.Based on this information,which of the following statements is most accurate?

If a firm does not have enough money to pay any common stock dividends,it is technically in default to the common shareholders.

Preferred stock is similar to a bond in the following way

The stock valuation model D₁/(r_cs- g)requires the stock to grow at a rate greater than the required return; otherwise,the stock is worthless.

In terms of risk,preferred stock is safer than common stock because it has a prior claim on assets and income.