Exam 7: Stock Valuation

The disadvantages of issuing common stock versus long-term debt include all of the following EXCEPT

An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.

In an inefficient market, stock prices adjust quickly to new public information.

The free cash flow valuation model is based on the same principle as dividend valuation models; that is, the value of a share of stock is the present value of future cash flows.

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 often in mergers. _____ 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.

Like bonds, common stock is usually sold with a par value.

Colin 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 Colin 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.

Assuming that economic conditions remain stable, any management action that would cause current and prospective stockholders to raise their dividend expectations should decrease the firm's value.

In common stock valuation, any action taken by the financial manager that increases risk will cause an increase the required return.

Stock rights provide the stockholder with

The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?

If a market is truly efficient, investors should not waste their time trying to find and capitalize on mispriced securities.

Preferred stockholders are often referred to as residual claimants.

Due to growing demand for computer software, the Perry Company has had a very successful year and expects its earnings per share to grow by 25 percent to reach $5.50 for this year. Estimate the price of the company's common stock assuming the industry's price/earning ratio is 12.

Julian is considering purchasing the stock of Pepsi Cola because he really loves the taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to pay a $2 dividend in one year and he expects dividends to grow at 5 percent indefinitely? Julian requires a 12 percent return to make this investment.

A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend. For the past two years, the board of directors has decided not to pay a dividend. The preferred stockholders must be paid ________ prior to paying the common stockholders.

Which of the following is false?

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, dividends are subject to a maximum tax rate of 15 percent.

Treasury stock generally does not have voting rights, does not earn dividends, and does not have a claim on assets in liquidation.