Question 1

A small company struggling to reach profitability just announced a major new government contract that will validate its technology and generate revenue for the next several years.The announcement of the contract will

Accepted Answer

A)   cause the stock price to increase because rcs (the required return)  is likely to increase.
B)   cause the stock price to decrease because the government usually pays below market price for the goods and services it purchases.
C)   cause the stock price to increase because rcs (the required return)  is likely to decrease and g (the growth rate in future dividends)  is likely to increase.
D)   have no effect on the stock price because the company has not yet paid any dividends. C

Question 2

NewAge,Inc.paid a dividend yesterday of $2 per share.NewAge management expects the dividend to increase next year to $3 annually.If the dividend is expected to stay at $3 per year for the foreseeable future,what is the value of the stock to an investor with a required rate of return of 10%?

Accepted Answer

A)   $7.50
B)   $30.00
C)   $32.00
D)   $50.00 B

Question 3

The common stock of Cranberry Inc.is selling for $26.75 on the open market.Next year's dividend is expected to be $3.68,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?

Accepted Answer

R = (D/V)+ g
R = ($3.68/$26.75)+ .055
R = 19.26%

Question 4

Bin Restaurant Corp preferred stock has a market price of $14.50.If it has a yearly dividend of $3.50,what is your expected rate of return if you purchase the stock at its market price?

Accepted Answer

A)   41.43%
B)   19.45%
C)   22.36%
D)   24.14%

Question 5

A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors and asking for more cash.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following changes will make the value of a stock go up,other things being held constant?

Accepted Answer

A)   The required return decreases.
B)   The required return increases.
C)   In general, investors become more risk averse.
D)   The growth rate of dividends decreases.

Question 7

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 8

You are considering the purchase of a share of Edie's common stock.You expect to sell it at the end of 1 year for $32.00.You will also receive a dividend of $2.50 at the end of the year.Edie just paid a dividend of $2.25.If your required return on this stock is 12%,what is the most you would be willing to pay for it now?

Accepted Answer

A)   $28.57
B)   $33.05
C)   $20.83
D)   $30.80

Question 9

Under majority voting a majority (>50%)shareholder will be able to elect the entire board of directors.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following features,or benefits,belong to a firm's common stockholders?

Accepted Answer

A)   limited liability
B)   ownership of the firm
C)   voting rights
D)   all of the above

Question 11

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 12

The PDQ Company's common stock is expected to pay a $2.00 dividend in the coming year.If investors require a 17% return and the growth rate in dividends is expected to be 8%,what will the market price of the stock be?

Accepted Answer

A)   $11.76
B)   $24.00
C)   $23.11
D)   $22.22

Question 13

Lily 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.The required rate of return on this stock is 15.5%.You observe a market price of $78.50 for the stock.Should you purchase this stock?

Accepted Answer

A)   No, the market price is above the intrinsic value of the stock.
B)   Yes, the market price is below the intrinsic value of the stock.
C)   No, the growth rate in dividends is too far below the required return.
D)   Yes, but only if you can keep the stock for at least 5 years.

Question 14

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 15

A call provision entitles a company to repurchase its preferred stock from holders at stated prices over a given time period.

Accepted Answer

A) True 
 B)False

Question 16

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 17

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g)is which of the following,where D1 is the next dividend and Vc is the current value of the stock?

Accepted Answer

A)   (D1 + g) /Vc
B)   D1/Vc + g
C)   D1/g
D)   D1/g + Vc

Question 18

Which of the following is not true regarding common stock?

Accepted Answer

A)   Dividends, unlike interest payments, are not tax deductible.
B)   Common stock, unlike bond principal, does not mature.
C)   Common stockholders are owners of the firm, whereas bondholders are creditors.
D)   Dividend payments, like interest payments, are fixed.

Question 19

Greenland Airlines has net income of $2 million this year.The book value of Greenland Airlines common equity is $8 million dollars.The company's dividend payout ratio is 60% and is expected to remain this way.What is Greenland Airlines' internal growth rate?

Accepted Answer

A)   6%
B)   9%
C)   10%
D)   15%

Question 20

Preferred stock is riskier than long-term debt because its claim on assets and income come after those of bonds.

Accepted Answer

A) True 
 B)False

Exam 8: The Valuation and Characteristics of Stock

A small company struggling to reach profitability just announced a major new government contract that will validate its technology and generate revenue for the next several years.The announcement of the contract will

NewAge,Inc.paid a dividend yesterday of $2 per share.NewAge management expects the dividend to increase next year to $3 annually.If the dividend is expected to stay at $3 per year for the foreseeable future,what is the value of the stock to an investor with a required rate of return of 10%?

Bin Restaurant Corp preferred stock has a market price of $14.50.If it has a yearly dividend of $3.50,what is your expected rate of return if you purchase the stock at its market price?

A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors and asking for more cash.

Which of the following changes will make the value of a stock go up,other things being held constant?

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

Under majority voting a majority (>50%)shareholder will be able to elect the entire board of directors.

Which of the following features,or benefits,belong to a firm's common stockholders?

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.

The PDQ Company's common stock is expected to pay a $2.00 dividend in the coming year.If investors require a 17% return and the growth rate in dividends is expected to be 8%,what will the market price of the stock be?

Lily 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.The required rate of return on this stock is 15.5%.You observe a market price of $78.50 for the stock.Should you purchase this 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.

A call provision entitles a company to repurchase its preferred stock from holders at stated prices over a given time period.

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

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following,where D₁ is the next dividend and Vc is the current value of the stock?

Which of the following is not true regarding common stock?

Greenland Airlines has net income of $2 million this year.The book value of Greenland Airlines common equity is $8 million dollars.The company's dividend payout ratio is 60% and is expected to remain this way.What is Greenland Airlines' internal growth rate?

Preferred stock is riskier than long-term debt because its claim on assets and income come after those of bonds.

Exam 8: The Valuation and Characteristics of Stock

A small company struggling to reach profitability just announced a major new government contract that will validate its technology and generate revenue for the next several years.The announcement of the contract will

NewAge,Inc.paid a dividend yesterday of $2 per share.NewAge management expects the dividend to increase next year to $3 annually.If the dividend is expected to stay at $3 per year for the foreseeable future,what is the value of the stock to an investor with a required rate of return of 10%?

Bin Restaurant Corp preferred stock has a market price of $14.50.If it has a yearly dividend of $3.50,what is your expected rate of return if you purchase the stock at its market price?

A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors and asking for more cash.

Which of the following changes will make the value of a stock go up,other things being held constant?

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

Under majority voting a majority (>50%)shareholder will be able to elect the entire board of directors.

Which of the following features,or benefits,belong to a firm's common stockholders?

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.

The PDQ Company's common stock is expected to pay a $2.00 dividend in the coming year.If investors require a 17% return and the growth rate in dividends is expected to be 8%,what will the market price of the stock be?

Lily 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.The required rate of return on this stock is 15.5%.You observe a market price of $78.50 for the stock.Should you purchase this 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.

A call provision entitles a company to repurchase its preferred stock from holders at stated prices over a given time period.

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

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following,where D1 is the next dividend and Vc is the current value of the stock?

Which of the following is not true regarding common stock?

Greenland Airlines has net income of $2 million this year.The book value of Greenland Airlines common equity is $8 million dollars.The company's dividend payout ratio is 60% and is expected to remain this way.What is Greenland Airlines' internal growth rate?

Preferred stock is riskier than long-term debt because its claim on assets and income come after those of bonds.

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following,where D₁ is the next dividend and Vc is the current value of the stock?