Question 1

Which of the following is true of equity?

Accepted Answer

A)   equityholders do not have voting rights.
B)   It does not mature, so repayment is not required.
C)   It is a temporary form of financing for a firm.
D)   Equity financing is obtained from creditors. B

Question 2

Julian is considering purchasing the stock of Pepsi Cola because he really loves the taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to pay a $2 dividend in one year and he expects dividends to grow at 5 percent indefinitely? Julian requires a 12 percent return to make this investment.

Accepted Answer

A)   $28.57
B)   $29.33
C)   $31.43
D)   $43.14 A

Question 3

Preferred stockholders are often referred to as residual claimants.

Accepted Answer

A) True 
 B)False  False

Question 4

A proxy statement is a statement transferring ________.

Accepted Answer

A)   the ownership of a bondholder to another party
B)   the votes of a bondholder to the another party
C)   the votes of a stockholder to another party
D)   the ownership of a stockholder to another party

Question 5

Which of the following valuation methods is superior to others in the list since it considers expected earnings?

Accepted Answer

A)   liquidation value
B)   book value
C)   P/E multiple
D)   present value of the interest

Question 6

If expected return is less than required return on an asset, rational investors will ________.

Accepted Answer

A)   buy the asset, which will drive the price up and cause expected return to reach the level of the required return
B)   sell the asset, which will drive the price down and cause the expected return to reach the level of the required return
C)   sell the asset, which will drive the price up and cause the expected return to reach the level of the required return
D)   buy the asset, since price is expected to increase

Question 7

Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.

Accepted Answer

A) True 
 B)False

Question 8

The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?

Accepted Answer

A)   $13.50
B)   $15.00
C)   $26.50
D)   $30.00

Question 9

If a market is truly efficient, investors should not waste their time trying to find and capitalize on mispriced securities.

Accepted Answer

A) True 
 B)False

Question 10

Smith, Inc. stock currently sells for $75 per share. The firm has total assets of $1,000,000 and total liabilities, including preferred stock, of $350,000. If the firm has 10,000 shares of common stock outstanding,
(a) what is the book value of each share of common stock?
(b) is the stock overvalued or undervalued in the marketplace?
(c) what is the reason(s) for your answer in (b)?

Accepted Answer

The answer of Smith, Inc. stock currently sells for $75...

Question 11

Shares of stock currently owned by a firm's shareholders are called ________.

Accepted Answer

A)   authorized shares
B)   issued shares
C)   outstanding shares
D)   treasury shares

Question 12

A firm issued 10,000 shares of no par-value common stock, receiving proceeds of $40 per share. The amount recorded is ________.

Accepted Answer

A)   $0 in the Common Stock account
B)   $0 in the Paid-in Capital in Excess of Par account
C)   $400,000 in the Common Stock account
D)   $400,000 in the Paid-in Capital in Excess of Par account

Question 13

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, currently dividends are subject to a maximum tax rate of 8 percent.

Accepted Answer

A) True 
 B)False

Question 14

In response to the stock market's reaction to its dividend policy, the Nico's Toy Company has decided to increase its dividend payment at a rate of 4 percent per year. The firm's most recent dividend is $3.25 and the required rate of interest is 9 percent. What is the maximum you would be willing to pay for a share of the stock?

Accepted Answer

The answer of In response to the stock market's reaction...

Question 15

Regarding the tax treatment of payments to securities holders, it is true that ________.

Accepted Answer

A)   interest and preferred stock dividends are not tax-deductible ,while common stock dividends are tax deductible
B)   interest and preferred stock dividends are tax-deductible, while common stock dividends are not tax-deductible
C)   common stock dividends and preferred stock dividends are tax-deductible, while interest is not tax-deductible
D)   common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible

Question 16

If the expected return is above the required return on an asset, rational investors will ________.

Accepted Answer

A)   buy the asset, which will drive the price up and cause expected return to reach the level of the required return
B)   buy the asset, which will drive the price down and cause the expected return to reach the level of the required return
C)   sell the asset, which will drive the price up and cause the expected return to reach the level of the required return
D)   sell the asset, since price is expected to decrease

Question 17

In an inefficient market, securities are typically in equilibrium, which means that they are fairly priced and that their expected returns equal their required returns.

Accepted Answer

A) True 
 B)False

Question 18

Common stockholders are sometimes referred to as ________.

Accepted Answer

A)   non preemptive right holders
B)   managers
C)   creditors
D)   residual owners

Question 19

Ted Corporation expects to generate free-cash flows of $200,000 per year for the next five years. Beyond that time, free cash flows are expected to grow at a constant rate of 5 percent per year forever. If the firm's average cost of capital is 15 percent, the market value of the firm's debt is $500,000, and Ted has a half million shares of stock outstanding, what is the value of Ted stock?

Accepted Answer

A)   $2.43
B)   $3.43
C)   $1.43
D)   $0.00

Question 20

Jia's Kitchen Stuff has recently sold 1,000 shares of preferred stock. What is the value of the stock assuming 10 percent required rate of return and a preferred dividend of $6.75?

Accepted Answer

The answer of Jia's Kitchen Stuff has recently sold 1,000...

Exam 7: Stock Valuation

Which of the following is true of equity?

Preferred stockholders are often referred to as residual claimants.

A proxy statement is a statement transferring ________.

Which of the following valuation methods is superior to others in the list since it considers expected earnings?

If expected return is less than required return on an asset, rational investors will ________.

Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.

The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?

If a market is truly efficient, investors should not waste their time trying to find and capitalize on mispriced securities.

Shares of stock currently owned by a firm's shareholders are called ________.

A firm issued 10,000 shares of no par-value common stock, receiving proceeds of $40 per share. The amount recorded is ________.

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, currently dividends are subject to a maximum tax rate of 8 percent.

Regarding the tax treatment of payments to securities holders, it is true that ________.

If the expected return is above the required return on an asset, rational investors will ________.

In an inefficient market, securities are typically in equilibrium, which means that they are fairly priced and that their expected returns equal their required returns.

Common stockholders are sometimes referred to as ________.

Jia's Kitchen Stuff has recently sold 1,000 shares of preferred stock. What is the value of the stock assuming 10 percent required rate of return and a preferred dividend of $6.75?