Question 1

Angel recently purchased a block of 100 shares of Hayley's Optical common stock for $6,000. The stock is expected to provide an annual cash flow of dividends of $400 indefinitely. Assuming a discount rate of 8 percent, how does the price Angel paid compare to the value of the stock?

Accepted Answer

The answer of Angel recently purchased a block of 100...

Question 2

The constant growth model is an approach to dividend valuation that assumes that dividends grow at a constant rate indefinitely.

Accepted Answer

A) True 
 B)False

Question 3

Based on analysis of the company and expected industry and economic conditions, China Imports is expected to earn $4.60 per share of common stock next year. The average price/earnings ratio for firms in the same industry is 8. Calculate the estimated value of a share of China Imports common stock.

Accepted Answer

The answer of Based on analysis of the company and...

Question 4

Efficient-market hypothesis is the theory describing the behavior of an assumed "perfect" market in which securities are typically in equilibrium, security prices fully reflect all public information available and react swiftly to new information, and, because stocks are fairly priced, investors need not waste time looking for mispriced securities.

Accepted Answer

A) True 
 B)False

Question 5

Preemptive rights allow common stockholders to maintain their proportionate ownership in the corporation when new issues are made.

Accepted Answer

A) True 
 B)False

Question 6

Table 7.1 
-The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock for 2014. (See Table 7.1)

Accepted Answer

The answer of Table 7.1 
-The required return is assumed...

Question 7

Jia's Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Jia's Fashions common stock sell for today if her required return is 10.5%?

Accepted Answer

A)  $54.90 
B)  $60.80 
C)  $59.16 
D)  $69.30

Question 8

Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever?

Accepted Answer

A)  8% 
B)  9% 
C)  10% 
D)  11%

Question 9

The liquidation value per share of common stock is the amount per share of common stock that would be received if all of a firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

Accepted Answer

A) True 
 B)False

Question 10

In an efficient market, the expected return and the required return are equal.

Accepted Answer

A) True 
 B)False

Question 11

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. If Tangshan could sell its assets for $52.5 million, Tangshan's liquidation value per share of common stock is ________.

Accepted Answer

A)  $15 
B)  $7.50 
C)  $52.50 
D)  $75

Question 12

Which of the following is a difference between common stock and bonds?

Accepted Answer

A)  Bondholders have a voice in management; common stockholders do not. 
B)  Bondholders have a senior claim on assets and income relative to stockholders. 
C)  Stocks have a stated maturity but bonds do not. 
D)  Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not.

Question 13

Identify whether the key characteristic describes common stock (CS) or preferred stock (PS).
________ 1. Source of financing which places minimum constraints on the firm
________ 2. Used by young firms receiving investment funds from venture capital firms
________ 3. Potential dilution of earnings and voting power
________ 4. Fixed financial obligation
________ 5. Increases the firm's borrowing power
________ 6. May have cumulative and participating features
________ 7. May be convertible into another type of security
________ 8. Last to receive earnings or distribution of assets in the event of bankruptcy
________ 9. Frequently includes a call feature

Accepted Answer

The answer of Identify whether the key characteristic describes common...

Question 14

According to the efficient market hypothesis, prices of actively traded stocks ________.

Accepted Answer

A)  can be under- or over-valued in an efficient market 
B)  can only be under-valued in an efficient market 
C)  do not differ from their true values in an efficient market 
D)  can only be over-valued in an efficient market

Question 15

Zheng Sen's Chinese Take-Out had earnings before interest and taxes of $4,000,000 last year. The firm has a marginal tax rate of 40 percent and currently has the following capital structure:  (a) Calculate the firm's after-tax return on equity (ROE) and earnings per share (EPS).
(b) If the firm retires $4,000,000 of preferred stock using the proceeds from an equal increase in long-term debt, what would have been the after-tax return on equity (ROE) and earnings per share (EPS)?
(c) If the firm retires $4,000,000 of preferred stock using the proceeds from the sale of 500,000 shares of common stock, what would have been the after-tax return on equity (ROE) and earnings per share (EPS)?

Accepted Answer

The answer of Zheng Sen's Chinese Take-Out had earnings before...

Question 16

The Bradshaw Company's most recent dividend was $6.75. The historical dividend payment by the company shows a constant growth rate of 5 percent per year. What is the maximum you would be willing to pay for a share of its common stock if your required rate of return is 8 percent?

Accepted Answer

The answer of The Bradshaw Company's most recent dividend was...

Question 17

Aunt Tilly's Fur Company has been experiencing several years of financial difficulty and, thus, has considered maintaining its dividend payment at $2.50 indefinitely. What is the value of its common stock if the required rate of return is 8.5 percent?

Accepted Answer

The answer of Aunt Tilly's Fur Company has been experiencing...

Question 18

Unlike creditors, equityholders are owners of the firm.

Accepted Answer

A) True 
 B)False

Question 19

Ted has 10 shares of Grand Company. Based on the company's dividend policy, Ted will receive a total of $450 a year in perpetuity. What is the value of each share if the rate of interest is 8 percent?

Accepted Answer

The answer of Ted has 10 shares of Grand Company....

Question 20

Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own.

Accepted Answer

A) True 
 B)False

Exam 7: Stock Valuation

Angel recently purchased a block of 100 shares of Hayley's Optical common stock for $6,000. The stock is expected to provide an annual cash flow of dividends of $400 indefinitely. Assuming a discount rate of 8 percent, how does the price Angel paid compare to the value of the stock?

The constant growth model is an approach to dividend valuation that assumes that dividends grow at a constant rate indefinitely.

Based on analysis of the company and expected industry and economic conditions, China Imports is expected to earn $4.60 per share of common stock next year. The average price/earnings ratio for firms in the same industry is 8. Calculate the estimated value of a share of China Imports common stock.

Preemptive rights allow common stockholders to maintain their proportionate ownership in the corporation when new issues are made.

Table 7.1 -The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock for 2014. (See Table 7.1)

Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever?

The liquidation value per share of common stock is the amount per share of common stock that would be received if all of a firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

In an efficient market, the expected return and the required return are equal.

Which of the following is a difference between common stock and bonds?

According to the efficient market hypothesis, prices of actively traded stocks ________.

The Bradshaw Company's most recent dividend was $6.75. The historical dividend payment by the company shows a constant growth rate of 5 percent per year. What is the maximum you would be willing to pay for a share of its common stock if your required rate of return is 8 percent?

Aunt Tilly's Fur Company has been experiencing several years of financial difficulty and, thus, has considered maintaining its dividend payment at $2.50 indefinitely. What is the value of its common stock if the required rate of return is 8.5 percent?

Unlike creditors, equityholders are owners of the firm.

Ted has 10 shares of Grand Company. Based on the company's dividend policy, Ted will receive a total of $450 a year in perpetuity. What is the value of each share if the rate of interest is 8 percent?

Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own.