Question 1

Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

Accepted Answer

A)  8.03% 
B)  8.24% 
C)  8.45% 
D)  8.67% 
E)  8.89% 
A)  8.03% 
B)  8.24% 
C)  8.45% 
D)  8.67% 
E)  8.89%

Question 2

Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price?

Accepted Answer

A)  $28.90 
B)  $29.62 
C)  $30.36 
D)  $31.12 
E)  $31.90 
A)  $28.90 
B)  $29.62 
C)  $30.36 
D)  $31.12 
E)  $31.90

Question 3

The value of Broadway-Brooks Inc.'s operations is $900 million, based on the free cash flow valuation model. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock's price per share?

Accepted Answer

A)  $23.00 
B)  $25.56 
C)  $28.40 
D)  $31.24 
E)  $34.36 
A)  $23.00 
B)  $25.56 
C)  $28.40 
D)  $31.24 
E)  $34.36

Question 4

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

Accepted Answer

A) True 
 B)False

Question 5

Preferred stock is a hybrid-a sort of cross between a common stock and a bondσin the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Accepted Answer

A) True 
 B)False

Question 6

If a firm's expected growth rate increased then its required rate of return would

Accepted Answer

A)  decrease. 
B)  fluctuate less than before. 
C)  fluctuate more than before. 
D)  possibly increase, possibly decrease, or possibly remain constant. 
E)  increase. 
A)  decrease. 
B)  fluctuate less than before. 
C)  fluctuate more than before. 
D)  possibly increase, possibly decrease, or possibly remain constant. 
E)  increase.

Question 7

Sawchuck Consulting has been profitable for the last 5 years, but it has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value?
 $\begin{array}{lccccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Growth rate } & \text { NA } & \text { NA } & \text { NA } & \text { NA } & 50.00 \% & 25.00 \% & 8.00 \% \
\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506
\end{array}$

Accepted Answer

A)  $9.94 
B)  $10.19 
C)  $10.45 
D)  $10.72 
E)  $10.99 
A)  $9.94 
B)  $10.19 
C)  $10.45 
D)  $10.72 
E)  $10.99

Question 8

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
 $\begin{array} { l c c } 
 & X & Y \
\text { Price }&\$25&\$25\
\text { Frgected dividend yield } & 5 \% & 3 \% \
\text { Required retun } & 12 \% & 10 \%
\end{array}$

Accepted Answer

A)  stock x pays a higher dividend per share than stock y. 
B)  one year from now, stock x should have the higher price. 
C)  stock y has a lower expected growth rate than stock x. 
D)  stock y has the higher expected capital gains yield. 
E)  stock y pays a higher dividend per share than stock x. 
A)  stock x pays a higher dividend per share than stock y. 
B)  one year from now, stock x should have the higher price. 
C)  stock y has a lower expected growth rate than stock x. 
D)  stock y has the higher expected capital gains yield. 
E)  stock y pays a higher dividend per share than stock x.

Question 9

The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  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. 
C)  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. 
D)  one of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. 
E)  a major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. 
A)  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. 
B)  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. 
C)  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. 
D)  one of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. 
E)  a major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.

Question 11

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

Accepted Answer

A)  all common stocks, regardless of class, must have the same voting rights. 
B)  all firms have several classes of common stock. 
C)  all common stock, regardless of class, must pay the same dividend. 
D)  some class or classes of common stock are entitled to more votes per share than other classes. 
E)  all common stocks fall into one of three classes: a, b, and c. 
A)  all common stocks, regardless of class, must have the same voting rights. 
B)  all firms have several classes of common stock. 
C)  all common stock, regardless of class, must pay the same dividend. 
D)  some class or classes of common stock are entitled to more votes per share than other classes. 
E)  all common stocks fall into one of three classes: a, b, and c.

Question 12

Hirshfeld Corporation'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 13

Based on the free cash flow valuation model, Bizzaro Co.'s value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. Bizzaro has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share?

Accepted Answer

A)  $13.72 
B)  $14.44 
C)  $15.20 
D)  $16.00 
E)  $16.80 
A)  $13.72 
B)  $14.44 
C)  $15.20 
D)  $16.00 
E)  $16.80

Question 14

Barnette Inc.'s free cash flows are expected to be unstable during the next few years while the company undergoes restructuring. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5?

Accepted Answer

A)  $719 
B)  $757 
C)  $797 
D)  $839 
E)  $883 
A)  $719 
B)  $757 
C)  $797 
D)  $839 
E)  $883

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  the preferred stock of a given firm is generally less risky to investors than the same firm's common stock. 
B)  corporations cannot buy the preferred stocks of other corporations. 
C)  preferred dividends are not generally cumulative. 
D)  a big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. 
E)  preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. 
A)  the preferred stock of a given firm is generally less risky to investors than the same firm's common stock. 
B)  corporations cannot buy the preferred stocks of other corporations. 
C)  preferred dividends are not generally cumulative. 
D)  a big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. 
E)  preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.

Question 16

According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Accepted Answer

A) True 
 B)False

Question 17

Based on the free cash flow valuation model, the value of Weidner Co.'s operations is $1,200 million. The company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If Weidner has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share?

Accepted Answer

A)  $24.90 
B)  $27.67 
C)  $30.43 
D)  $33.48 
E)  $36.82 
A)  $24.90 
B)  $27.67 
C)  $30.43 
D)  $33.48 
E)  $36.82

Question 18

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?
 $\begin{array}{lcc}
&\mathrm{A} & \underline{\mathrm{B}} \
\text { Price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \% \
\text { Expected return } & 10 \% & 12 \% \
\end{array}$

Accepted Answer

A)  the two stocks could not be in equilibrium with the numbers given in the question. 
B)  a's expected dividend is $0.50. 
C)  b's expected dividend is $0.75. 
D)  a's expected dividend is $0.75 and b's expected dividend is $1.20. 
E)  the two stocks should have the same expected dividend. 
A)  the two stocks could not be in equilibrium with the numbers given in the question. 
B)  a's expected dividend is $0.50. 
C)  b's expected dividend is $0.75. 
D)  a's expected dividend is $0.75 and b's expected dividend is $1.20. 
E)  the two stocks should have the same expected dividend.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  the preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
B)  the preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
C)  the free cash flow valuation model, vops =fcf1/(wacc σ g), cannot be used for firms that have negative growth rates. 
D)  the free cash flow valuation model, vops = fcf1/(wacc σ g), can be used only for firms whose growth rates exceed their wacc. 
E)  if a company has two classes of common stock, class a and class b, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights. 
A)  the preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
B)  the preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
C)  the free cash flow valuation model, vops =fcf1/(wacc σ g), cannot be used for firms that have negative growth rates. 
D)  the free cash flow valuation model, vops = fcf1/(wacc σ g), can be used only for firms whose growth rates exceed their wacc. 
E)  if a company has two classes of common stock, class a and class b, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

Question 20

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner'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

Exam 8: Basic Stock Valuation

Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

Preferred stock is a hybrid-a sort of cross between a common stock and a bondσin the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

If a firm's expected growth rate increased then its required rate of return would

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? X Y Price \2 5 \2 5 Frgected dividend yield 5\% 3\% Required retun 12\% 10\%

The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Which of the following statements is CORRECT?

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

Hirshfeld Corporation'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?

Which of the following statements is CORRECT?

According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

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? Price \ 25 \ 40 Expected growth 7\% 9\% Expected return 10\% 12\%

Which of the following statements is CORRECT?

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

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Risk and Return-Part II

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

Filters

Hirshfeld Corporation'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?

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