Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. 
B)  Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. 
C)  The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. 
D)  One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. 
E)  One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. 
A)  A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. 
B)  Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. 
C)  The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. 
D)  One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. 
E)  One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. B

Question 2

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

Accepted Answer

A)  $104.27 
B)  $106.95 
C)  $109.69 
D)  $112.50 
E)  $115.38 
A)  $104.27 
B)  $106.95 
C)  $109.69 
D)  $112.50 
E)  $115.38 E

Question 3

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

A)  The expected return on the stock is 5% a year. 
B)  The stock's dividend yield is 5%. 
C)  The price of the stock is expected to decline in the future. 
D)  The stock's required return must be equal to or less than 5%. 
E)  The stock's price one year from now is expected to be 5% above the current price. 
A)  The expected return on the stock is 5% a year. 
B)  The stock's dividend yield is 5%. 
C)  The price of the stock is expected to decline in the future. 
D)  The stock's required return must be equal to or less than 5%. 
E)  The stock's price one year from now is expected to be 5% above the current price. E

Question 4

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)  Stock A's expected dividend at t = 1 is only half that of Stock B. 
B)  Stock A has a higher dividend yield than Stock B. 
C)  Currently the two stocks have the same price, but over time Stock B's price will pass that of A. 
D)  Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. 
E)  The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. 
A)  Stock A's expected dividend at t = 1 is only half that of Stock B. 
B)  Stock A has a higher dividend yield than Stock B. 
C)  Currently the two stocks have the same price, but over time Stock B's price will pass that of A. 
D)  Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. 
E)  The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.

Question 5

Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firm's total corporate value, in millions?

Accepted Answer

A)  $2,650.00 
B)  $2,789.47 
C)  $2,928.95 
D)  $3,075.39 
E)  $3,229.16 
A)  $2,650.00 
B)  $2,789.47 
C)  $2,928.95 
D)  $3,075.39 
E)  $3,229.16

Question 6

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Accepted Answer

A)  $2.20 
B)  $2.44 
C)  $2.69 
D)  $2.96 
E)  $3.25 
A)  $2.20 
B)  $2.44 
C)  $2.69 
D)  $2.96 
E)  $3.25

Question 7

Kale Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, what is the firm's total corporate value, in millions?

Accepted Answer

A)  $1,456 
B)  $1,529 
C)  $1,606 
D)  $1,686 
E)  $1,770 
A)  $1,456 
B)  $1,529 
C)  $1,606 
D)  $1,686 
E)  $1,770

Question 8

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Accepted Answer

A)  $0.95 
B)  $1.05 
C)  $1.16 
D)  $1.27 
E)  $1.40 
A)  $0.95 
B)  $1.05 
C)  $1.16 
D)  $1.27 
E)  $1.40

Question 9

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)  Stock A must have a higher stock price than Stock B. 
B)  Stock A must have a higher dividend yield than Stock B. 
C)  Stock B's dividend yield equals its expected dividend growth rate. 
D)  Stock B must have the higher required return. 
E)  Stock B could have the higher expected return. 
A)  Stock A must have a higher stock price than Stock B. 
B)  Stock A must have a higher dividend yield than Stock B. 
C)  Stock B's dividend yield equals its expected dividend growth rate. 
D)  Stock B must have the higher required return. 
E)  Stock B could have the higher expected return.

Question 10

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

Accepted Answer

A)  $17.39 
B)  $17.84 
C)  $18.29 
D)  $18.75 
E)  $19.22 
A)  $17.39 
B)  $17.84 
C)  $18.29 
D)  $18.75 
E)  $19.22

Question 11

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Accepted Answer

A)  6.50% 
B)  6.83% 
C)  7.17% 
D)  7.52% 
E)  7.90% 
A)  6.50% 
B)  6.83% 
C)  7.17% 
D)  7.52% 
E)  7.90%

Question 12

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Accepted Answer

A) True 
 B)False

Question 13

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

A) True 
 B)False

Question 14

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Accepted Answer

A) True 
 B)False

Question 15

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

Accepted Answer

A)  8.37% 
B)  8.59% 
C)  8.81% 
D)  9.03% 
E)  9.27% 
A)  8.37% 
B)  8.59% 
C)  8.81% 
D)  9.03% 
E)  9.27%

Question 16

Ryan Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year 3. What is the firm's total corporate value, in millions?

Accepted Answer

A)  $314.51 
B)  $331.06 
C)  $348.48 
D)  $366.82 
E)  $386.13 
A)  $314.51 
B)  $331.06 
C)  $348.48 
D)  $366.82 
E)  $386.13

Question 17

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Accepted Answer

A)  6.01% 
B)  6.17% 
C)  6.33% 
D)  6.49% 
E)  6.65% 
A)  6.01% 
B)  6.17% 
C)  6.33% 
D)  6.49% 
E)  6.65%

Question 18

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Accepted Answer

A)  7.54% 
B)  7.73% 
C)  7.93% 
D)  8.13% 
E)  8.34% 
A)  7.54% 
B)  7.73% 
C)  7.93% 
D)  8.13% 
E)  8.34%

Question 19

You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

A)  $40.35 
B)  $41.82 
C)  $43.33 
D)  $44.85 
E)  $46.42 
A)  $40.35 
B)  $41.82 
C)  $43.33 
D)  $44.85 
E)  $46.42

Question 20

Based on the corporate valuation model, Morgan Inc.'s total corporate value is $300 million. The balance sheet shows $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share?

Accepted Answer

A)  $12.00 
B)  $12.64 
C)  $13.30 
D)  $14.00 
E)  $14.70 
A)  $12.00 
B)  $12.64 
C)  $13.30 
D)  $14.00 
E)  $14.70

Which of the following statements is CORRECT?

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firm's total corporate value, in millions?

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Kale Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, what is the firm's total corporate value, in millions?

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

Ryan Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year 3. What is the firm's total corporate value, in millions?

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Hybrid Financing

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Exam 10: Stocks

Which of the following statements is CORRECT?

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firm's total corporate value, in millions?

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Kale Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, what is the firm's total corporate value, in millions?

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

Ryan Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year 3. What is the firm's total corporate value, in millions?

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Hybrid Financing

Mergers

Filters