Question 1

Common stock valuation can be based on the present value of future dividends or alternatively on the present value of the firm's future quarterly net income.

Accepted Answer

A) True 
 B)False

Question 2

Keyes Corporation preferred stock pays an annual dividend of $7 per share.Which of the following statements is true for an investor with a required return of 9%?

Accepted Answer

A)  The value of the preferred stock is $7 because the dividend is fixed at $7 each year . 
B)  The value of the preferred stock is $63.00 per share. 
C)  The value of the preferred stock is $77.78 per share. 
D)  The value of the preferred stock is $6.30 per share because of the 9% required return.

Question 3

CMT,Inc.has an issue of preferred stock whose par value is $500.The preferred stock pays a 4.5% dividend.If investors require a 5.5% rate of return for these shares,what price should the preferred stock sell for?

Accepted Answer

A)  $611.11 
B)  $508.33 
C)  $409.09 
D)  $81.82

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Johnstown Supply Corporation stock is currently selling for $58.00.It is expected to pay a dividend of $5.00 at the end of the year.Dividends are expected to grow at a constant rate of 7.5% indefinitely.Compute the required rate of return on Johnstown Supply Corporation stock.

Accepted Answer

A)  12.48% 
B)  15.65% 
C)  13.64% 
D)  16.12%

Question 6

Assume that a firm had such serious financial problems that it was about to be liquidated after a bankruptcy.All of the firm's assets are about to be sold in order to pay the following claims against the firm: bondholders,preferred stockholders,common stockholders,and federal income taxes.Of the claims mentioned,what priority would common stockholders have?

Accepted Answer

A)  First 
B)  Second 
C)  Third 
D)  Fourth

Question 7

Common stock cannot be worth less than its book value.

Accepted Answer

A) True 
 B)False

Question 8

Under cumulative voting a 10% shareholder will likely be able to elect 10% of the board of directors.

Accepted Answer

A) True 
 B)False

Question 9

U.S Technologies preferred stock sells for $80 and pays $9 each year in dividends.What is the expected rate of return?

Accepted Answer

The answer of U.S Technologies preferred stock sells for $80...

Question 10

Emery Company just paid a dividend yesterday of $2.25 per share.The company's stock is currently selling for $60 per share,and the required rate of return on Emery Company stock is 16%.What is the growth rate expected for Emery Company dividends assuming constant growth?

Accepted Answer

A)  9.47% 
B)  9.89% 
C)  10.87% 
D)  11.81%

Question 11

You observe Golden Flashes Common Stock selling for $40.00 per share.The next dividend is expected to be $4.00,and is expected to grow at a 5% annual rate forever.If your required rate of return is 12%,should you purchase the stock?

Accepted Answer

A)  Yes, because the present value of the expected future cash flows is greater than $40. 
B)  No, because the present value of the expected future cash flows is less than $40. 
C)  Yes, because the present value of the expected future cash flows is less than $40. 
D)  No, because the present value of the expected future cash flows is greater than $40.

Question 12

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 13

Although under normal operating conditions preferred shareholders do not have voting rights,protective provision generally allow for voting rights in the event of nonpayment of preferred dividends.

Accepted Answer

A) True 
 B)False

Question 14

Miller's preferred stock is selling at $54 on the market and pays an annual dividend of $4.20 per share.
a.What is the expected rate of return on the stock?
b.If an investor's required rate of return is 9%,what is the value of the stock to that investor?
c.Considering the investor's required rate of return,does this stock seem to be a desirable investment?

Accepted Answer

The answer of Miller's preferred stock is selling at $54...

Question 15

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 16

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 17

How is preferred stock similar to common stock?

Accepted Answer

A)  Preferred dividend payments usually have unlimited growth potential. 
B)  Investors cannot sue a corporation for the non-payment of dividends. 
C)  Both preferred and common stockholders have voting control of a firm. 
D)  Preferred stock dividends and common stock dividends are fixed.

Question 18

Berberich Corporation net income this year is $800,000.The company generally retains 35% of net income for reinvestment.The company's common equity currently has a book value of $5,000,000.They just paid a dividend of $1.37,and the required rate of return on this stock is 12%.Compute the value of this stock if dividends are expected to continue growing indefinitely at the company's internal growth rate.

Accepted Answer

A)  $22.61 
B)  $11.42 
C)  $15.63 
D)  $4.35

Question 19

J&S Corporation has preferred stock which paid an annual dividend in 2009 of $5 per share.J&S also has common stock which paid a dividend in 2009 of $5.Which of the following statements is most correct concerning J&S stock?

Accepted Answer

A)  The price of the preferred stock should equal the price of the common stock since the dividends are the same. 
B)  The price of the common stock could be higher than the price of the preferred stock if the common stock dividends are expected to grow in the future. 
C)  The price of the preferred stock is expected to be higher than the price of the common stock because the required return on preferred stock is higher than the required return on common stock. 
D)  If the required return on the preferred stock is the same as the required return on the common stock, then the price of preferred stock should equal the price of the common stock if markets are efficient.

Question 20

An example of the growth factor in common stock is:

Accepted Answer

A)  acquiring a loan to fund an investment in Asia. 
B)  retaining profits in order to reinvest into the firm. 
C)  issuing new stock to provide capital for future growth. 
D)  two strong companies merging together to increase their economy of scale.

Exam 8: The Valuation and Characteristics of Stock

Common stock valuation can be based on the present value of future dividends or alternatively on the present value of the firm's future quarterly net income.

Keyes Corporation preferred stock pays an annual dividend of $7 per share.Which of the following statements is true for an investor with a required return of 9%?

CMT,Inc.has an issue of preferred stock whose par value is $500.The preferred stock pays a 4.5% dividend.If investors require a 5.5% rate of return for these shares,what price should the preferred stock sell for?

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

Johnstown Supply Corporation stock is currently selling for $58.00.It is expected to pay a dividend of $5.00 at the end of the year.Dividends are expected to grow at a constant rate of 7.5% indefinitely.Compute the required rate of return on Johnstown Supply Corporation stock.

Common stock cannot be worth less than its book value.

Under cumulative voting a 10% shareholder will likely be able to elect 10% of the board of directors.

U.S Technologies preferred stock sells for $80 and pays $9 each year in dividends.What is the expected rate of return?

Emery Company just paid a dividend yesterday of $2.25 per share.The company's stock is currently selling for $60 per share,and the required rate of return on Emery Company stock is 16%.What is the growth rate expected for Emery Company dividends assuming constant growth?

You observe Golden Flashes Common Stock selling for $40.00 per share.The next dividend is expected to be $4.00,and is expected to grow at a 5% annual rate forever.If your required rate of return is 12%,should you purchase the stock?

Cumulative preferred stock

Although under normal operating conditions preferred shareholders do not have voting rights,protective provision generally allow for voting rights in the event of nonpayment of preferred dividends.

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?

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

How is preferred stock similar to common stock?

J&S Corporation has preferred stock which paid an annual dividend in 2009 of $5 per share.J&S also has common stock which paid a dividend in 2009 of $5.Which of the following statements is most correct concerning J&S stock?

An example of the growth factor in common stock is: