Question 1

Preferred stock cannot be retired.

Accepted Answer

A) True 
 B)False

Question 2

Piercing Publishers recently issued preferred stock with a fixed annual dividend of $3.00 per share.Investors require a 5% return on similar preferred stock issues.The stock is currently selling for $65.Is the stock a good buy?

Accepted Answer

A) Yes,as it is undervalued $5. 
B) Yes,as it is undervalued $10. 
C) No,as it is overvalued $5. 
D) No,as it is overvalued $10.

Question 3

The stock valuation model D1/(Rc - g)requires Rc > G.

Accepted Answer

A) True 
 B)False

Question 4

WSU Inc.is a young company that does not yet pay a dividend.You believe that the company will begin to pay dividends 5 years from now,and that the company will then be worth $50 per share.If your required rate of return on this risky stock is 20%,what is the stock worth today?

Accepted Answer

A) $40 
B) $10 
C) $20.09 
D) $0.00

Question 5

The XYZ Company,whose common stock is currently selling for $40 per share,is expected to pay a $2.00 dividend in the coming year.If investors believe that the expected rate of return on XYZ is 14%,what growth rate in dividends must be expected?

Accepted Answer

A) 5% 
B) 14% 
C) 9% 
D) 6%

Question 6

An issue of preferred stock currently sells for $52.50 per share and pays a constant annual expected dividend of $2.25 per share.The expected return on this security is

Accepted Answer

A) 4.29%. 
B) 0.04%. 
C) 8.33%. 
D) 13.33%.

Question 7

An issue of common stock currently sells for $50.00 per share,has an expected dividend to be paid at the end of the year of $2.50 per share,and has an expected growth rate to infinity of 5% per year.If investors' required rate of return for this particular security is 12% per year,then this security is

Accepted Answer

A) overvalued and offering an expected return higher than the required return. 
B) undervalued and offering an expected return higher than the required return. 
C) overvalued and offering an expected return lower than the required return. 
D) undervalued and offering an expected return lower than the required return.

Question 8

Profitable companies often prefer to issue debt rather than preferred stock because

Accepted Answer

A) debt creates less risk for the company. 
B) interest payments are fixed but preferred shareholders expect dividends to grow. 
C) preferred shares dilute the voting rights of common shareholders but bonds do not. 
D) interest on debt is deductible for tax purposes,but preferred dividends are not.

Question 9

In the event of bankruptcy,preferred stockholders and common stockholders have the same claim on the firm's assets.

Accepted Answer

A) True 
 B)False

Question 10

The higher a firm's P/E ratio,the more optimistic investors feel about the firm's growth prospects.

Accepted Answer

A) True 
 B)False

Question 11

The shareholder can cast all votes for a single candidate or split them among various candidates through

Accepted Answer

A) proxy fights. 
B) cumulative voting. 
C) call provisions. 
D) majority voting.

Question 12

Determine the rate of return on a $25 common stock that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.

Accepted Answer

The answer of Determine the rate of return on a...

Question 13

The required rate of return on TKF preferred has fallen from 5.75% at the time of issue to the present rate of 5%.The stock now sells for $115.What was the original price?

Accepted Answer

A) $75.61 
B) $132.25 
C) $114 
D) $100

Question 14

Texon's preferred stock sells for $85 and pays $11 each year in dividends.What is the required rate of return?

Accepted Answer

The answer of Texon's preferred stock sells for $85 and...

Question 15

The GAP's most recent earnings per share were $1.75.Analysts forecast next year's earnings per share at $1.88.If the appropriate P/E ratio is 15,a share of GAP stock should be valued at

Accepted Answer

A) $28.20. 
B) $26.25. 
C) $27.23. 
D) $8.57.

Question 16

The largest market stock exchange in the U.S.is

Accepted Answer

A) NYSE. 
B) Nasdaq. 
C) AMEX. 
D) the CBOT.

Question 17

Common stock represents a claim on residual income.

Accepted Answer

A) True 
 B)False

Question 18

Fris B.Corporation stock is currently selling for $42.86.It is expected to pay a dividend of $3.00 at the end of the year.Dividends are expected to grow at a constant rate of 3% indefinitely.Compute the required rate of return on FBC stock.

Accepted Answer

A) 10% 
B) 33% 
C) 7% 
D) 4.3%

Question 19

Marble Corporation's ROE is 17%.Their dividend payout ratio is 20%.The last dividend,just paid,was $2.58.If dividends are expected to grow by the company's sustainable growth rate indefinitely,what is the current value of Marble common stock if its required return is 18%?

Accepted Answer

A) $14.33 
B) $18.27 
C) $47.67 
D) $66.61

Question 20

In addition to stocks in individual companies,the AMEX conducts trading in such securities as ETFs and options.

Accepted Answer

A) True 
 B)False

Exam 10: Stock Valuation

Preferred stock cannot be retired.

Piercing Publishers recently issued preferred stock with a fixed annual dividend of $3.00 per share.Investors require a 5% return on similar preferred stock issues.The stock is currently selling for $65.Is the stock a good buy?

The stock valuation model D₁/(R_c - g)requires R_c > G.

WSU Inc.is a young company that does not yet pay a dividend.You believe that the company will begin to pay dividends 5 years from now,and that the company will then be worth $50 per share.If your required rate of return on this risky stock is 20%,what is the stock worth today?

The XYZ Company,whose common stock is currently selling for $40 per share,is expected to pay a $2.00 dividend in the coming year.If investors believe that the expected rate of return on XYZ is 14%,what growth rate in dividends must be expected?

An issue of preferred stock currently sells for $52.50 per share and pays a constant annual expected dividend of $2.25 per share.The expected return on this security is

Profitable companies often prefer to issue debt rather than preferred stock because

In the event of bankruptcy,preferred stockholders and common stockholders have the same claim on the firm's assets.

The higher a firm's P/E ratio,the more optimistic investors feel about the firm's growth prospects.

The shareholder can cast all votes for a single candidate or split them among various candidates through

Determine the rate of return on a $25 common stock that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.

The required rate of return on TKF preferred has fallen from 5.75% at the time of issue to the present rate of 5%.The stock now sells for $115.What was the original price?

Texon's preferred stock sells for $85 and pays $11 each year in dividends.What is the required rate of return?

The GAP's most recent earnings per share were $1.75.Analysts forecast next year's earnings per share at $1.88.If the appropriate P/E ratio is 15,a share of GAP stock should be valued at

The largest market stock exchange in the U.S.is

Common stock represents a claim on residual income.

Fris B.Corporation stock is currently selling for $42.86.It is expected to pay a dividend of $3.00 at the end of the year.Dividends are expected to grow at a constant rate of 3% indefinitely.Compute the required rate of return on FBC stock.

Marble Corporation's ROE is 17%.Their dividend payout ratio is 20%.The last dividend,just paid,was $2.58.If dividends are expected to grow by the company's sustainable growth rate indefinitely,what is the current value of Marble common stock if its required return is 18%?

In addition to stocks in individual companies,the AMEX conducts trading in such securities as ETFs and options.