Question 1

For income tax purposes, preferred stock is more like debt than it is like common stock.

Accepted Answer

A) True 
 B)False  False

Question 2

Michael's Inc. 9% preferred stock is currently priced at $124.30. If Michael's wishes to sell some new preferred stock at par, what rate should it assign to the new shares?

Accepted Answer

A)  6.76% 
B)  7.24% 
C)  8.05% 
D)  9.00% 
E)  11.19% 
A)  6.76% 
B)  7.24% 
C)  8.05% 
D)  9.00% 
E)  11.19% B

Question 3

Kettle Korn, Inc. just paid a $1.40 per share annual dividend. The company is planning on paying $1.50, $1.65, $1.90, and $2.00 a share over the next 4 years, respectively. After that, the dividend will be a constant $2.25 per share per year. What is the market price of this stock if the market rate of return is 12%?

Accepted Answer

A)  $15.47 
B)  $16.08 
C)  $16.67 
D)  $17.19 
E)  $17.60 
A)  $15.47 
B)  $16.08 
C)  $16.67 
D)  $17.19 
E)  $17.60 D

Question 4

Gen-Y corporation's current stock price is $50 per share and investor's return is 12%. If current dividends are $4 per share, calculate the dividend growth rate.

Accepted Answer

A)  (3.37%) 
B)  (1.58%) 
C)  0% 
D)  1.58% 
E)  3.37% 
A)  (3.37%) 
B)  (1.58%) 
C)  0% 
D)  1.58% 
E)  3.37%

Question 5

Suppose Pale Hose, Inc. has just paid a dividend of $1.40 per share. Sales and profits for Pale Hose are expected to grow at a rate of 5% per year. Its dividend is expected to grow by the same amount. If the required return is 10%, what is the value of a share of Pale Hose?

Accepted Answer

A)  $14.00 
B)  $15.25 
C)  $25.80 
D)  $28.00 
E)  $29.40 
A)  $14.00 
B)  $15.25 
C)  $25.80 
D)  $28.00 
E)  $29.40

Question 6

In a liquidation, each share of 5% preferred stock is generally entitled to a liquidation payment of _____ as long as there are sufficient funds available. The par value of the preferred stock is $100.

Accepted Answer

A)  $1 
B)  $5 
C)  $10 
D)  $50 
E)  $100 
A)  $1 
B)  $5 
C)  $10 
D)  $50 
E)  $100

Question 7

Explain how supernormal growth of dividends is possible, but only in the short-term.

Accepted Answer

Supernormal growth is often associated w

Question 8

A form of equity which receives preferential treatment in the payment of dividends is called _____ stock.

Accepted Answer

A)  Dual class. 
B)  Cumulative. 
C)  Deferred. 
D)  Preferred. 
E)  Common. 
A)  Dual class. 
B)  Cumulative. 
C)  Deferred. 
D)  Preferred. 
E)  Common.

Question 9

Stocks are different from bonds because ___________________.

Accepted Answer

A)  Stocks, unlike bonds, are major sources of funds. 
B)  Stocks, unlike bonds, represent residual ownership. 
C)  Stocks, unlike bonds, give owners legal claims to payments. 
D)  Bonds, unlike stocks, represent voting ownership. 
E)  Bonds pay dividends. 
A)  Stocks, unlike bonds, are major sources of funds. 
B)  Stocks, unlike bonds, represent residual ownership. 
C)  Stocks, unlike bonds, give owners legal claims to payments. 
D)  Bonds, unlike stocks, represent voting ownership. 
E)  Bonds pay dividends.

Question 10

The Merriweather Co. just announced that it is increasing its annual dividend to $1.60 and establishing a policy whereby the dividend will increase by 3.5% annually thereafter. How much will one share of this stock be worth five years from now if the required rate of return is 12%?

Accepted Answer

A)  $21.60 
B)  $22.36 
C)  $23.14 
D)  $23.95 
E)  $24.79 
A)  $21.60 
B)  $22.36 
C)  $23.14 
D)  $23.95 
E)  $24.79

Question 11

J&J Exporters paid a $1.80 per share annual dividend last month. The company is planning on paying $2.00, $2.50, $2.75, and $3.00 a share over the next four years, respectively. After that the dividend will be constant at $3.20 per share per year. What is the market price of this stock if the market rate of return is 13%?

Accepted Answer

A)  $7.47 
B)  $15.96 
C)  $20.73 
D)  $22.57 
E)  $24.37 
A)  $7.47 
B)  $15.96 
C)  $20.73 
D)  $22.57 
E)  $24.37

Question 12

Q-Tel Corporation's dividends in year 1 and 2 are expected to be $2 and $3 respectively. Year 2's stock price is expected to be $25 per share. If the investor's return is 12%, determine the stock price now.

Accepted Answer

A)  $22.58 
B)  $23.14 
C)  $23.68 
D)  $24.11 
E)  $24.89 
A)  $22.58 
B)  $23.14 
C)  $23.68 
D)  $24.11 
E)  $24.89

Question 13

Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4% forever. Stocks of similar risk yield 10%.

What is expected capital gains yield on Bradley Broadcasting stock during year 8?

Accepted Answer

A)  3% 
B)  4% 
C)  9% 
D)  10% 
E)  14% 
A)  3% 
B)  4% 
C)  9% 
D)  10% 
E)  14%

Question 14

If a company has a current stock price of $45, an EPS of $3/share; EPS growth rate of 10% and the investors rate of return is 15%, calculate the cash cow price.

Accepted Answer

A)  $18 
B)  $19 
C)  $20 
D)  $21 
E)  $22 
A)  $18 
B)  $19 
C)  $20 
D)  $21 
E)  $22

Question 15

Peterson Nurseries just paid a $3.20 annual dividend. The company has a policy whereby the dividend increases by 3% annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another two years. If you desire a 12% rate of return, how much should you expect to pay for 100 shares when you can afford to buy this stock?

Accepted Answer

A)  $3,468 
B)  $3,772 
C)  $3,885 
D)  $4,110 
E)  $4,225 
A)  $3,468 
B)  $3,772 
C)  $3,885 
D)  $4,110 
E)  $4,225

Question 16

All else constant, a decrease in the stock price will increase the dividend yield of a stock

Accepted Answer

A) True 
 B)False

Question 17

Jack owns 35 shares of stock in Beta, Inc. and wants to exercise as much control as possible over the company. Beta, Inc. has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect two new directors. Which one of the following statements must be true given this information?

Accepted Answer

A)  If straight voting applies, Jack is assured one seat on the board. 
B)  If straight voting applies, Jack can control both open seats. 
C)  If cumulative voting applies, Jack is assured one seat on the board. 
D)  If cumulative voting applies, Jack can control both open seats. 
E)  Regardless of the type of voting employed, Jack does not own enough shares to control any of the seats. 
A)  If straight voting applies, Jack is assured one seat on the board. 
B)  If straight voting applies, Jack can control both open seats. 
C)  If cumulative voting applies, Jack is assured one seat on the board. 
D)  If cumulative voting applies, Jack can control both open seats. 
E)  Regardless of the type of voting employed, Jack does not own enough shares to control any of the seats.

Question 18

Jackson Supply has 2,500 shares of stock outstanding. There are three positions open on the board of directors. Amy wants to be elected to one of those positions. How many more shares must Amy own to guarantee her election if Jackson Supply uses straight voting as opposed to cumulative voting?

Accepted Answer

A)  625 
B)  626 
C)  834 
D)  1250 
E)  1251 
A)  625 
B)  626 
C)  834 
D)  1250 
E)  1251

Question 19

Which of the following terms is typically associated with BOTH preferred stock and common stock?

Accepted Answer

A)  Proxy. 
B)  Voting rights. 
C)  Dividend yield. 
D)  Arrearage. 
E)  Cumulative voting. 
A)  Proxy. 
B)  Voting rights. 
C)  Dividend yield. 
D)  Arrearage. 
E)  Cumulative voting.

Question 20

Suppose that you have just purchased a share of stock for $22.51. The most recent dividend was $1.50 and dividends are expected to grow at a rate of 5% indefinitely. What must your required return be on the stock?

Accepted Answer

A)  5.00% 
B)  7.00% 
C)  10.25% 
D)  12.00% 
E)  13.67% 
A)  5.00% 
B)  7.00% 
C)  10.25% 
D)  12.00% 
E)  13.67%

Exam 8: Stock Valuation

For income tax purposes, preferred stock is more like debt than it is like common stock.

Michael's Inc. 9% preferred stock is currently priced at $124.30. If Michael's wishes to sell some new preferred stock at par, what rate should it assign to the new shares?

Gen-Y corporation's current stock price is $50 per share and investor's return is 12%. If current dividends are $4 per share, calculate the dividend growth rate.

Suppose Pale Hose, Inc. has just paid a dividend of $1.40 per share. Sales and profits for Pale Hose are expected to grow at a rate of 5% per year. Its dividend is expected to grow by the same amount. If the required return is 10%, what is the value of a share of Pale Hose?

In a liquidation, each share of 5% preferred stock is generally entitled to a liquidation payment of _____ as long as there are sufficient funds available. The par value of the preferred stock is $100.

Explain how supernormal growth of dividends is possible, but only in the short-term.

A form of equity which receives preferential treatment in the payment of dividends is called _____ stock.

Stocks are different from bonds because ___________________.

The Merriweather Co. just announced that it is increasing its annual dividend to $1.60 and establishing a policy whereby the dividend will increase by 3.5% annually thereafter. How much will one share of this stock be worth five years from now if the required rate of return is 12%?

Q-Tel Corporation's dividends in year 1 and 2 are expected to be $2 and $3 respectively. Year 2's stock price is expected to be $25 per share. If the investor's return is 12%, determine the stock price now.

If a company has a current stock price of $45, an EPS of $3/share; EPS growth rate of 10% and the investors rate of return is 15%, calculate the cash cow price.

All else constant, a decrease in the stock price will increase the dividend yield of a stock

Jackson Supply has 2,500 shares of stock outstanding. There are three positions open on the board of directors. Amy wants to be elected to one of those positions. How many more shares must Amy own to guarantee her election if Jackson Supply uses straight voting as opposed to cumulative voting?

Which of the following terms is typically associated with BOTH preferred stock and common stock?

Suppose that you have just purchased a share of stock for $22.51. The most recent dividend was $1.50 and dividends are expected to grow at a rate of 5% indefinitely. What must your required return be on the stock?

Introduction to Corporate Finance

Financial Statements, Cash Flow, and Taxes

Working With Financial Statements

Long-Term Financial Planning and Corporate Growth

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Enterprise Risk Management

Options and Corporate Securities

Behavioural Finance: Implications for Financial Management

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