Exam 7: Stock Valuation

One advantage of preferred stock is its ability to increase leverage, which in turn will magnify the effects of increased earnings on common stockholders' returns.

Like bonds, the par value on a common stock is used as a basis for determining its fixed dividend.

Key differences between common stock and bonds include all of the following EXCEPT

Which of the following terms typically applies to common stock but not to preferred stock?

An underwritten issue of common stock is one in which the firm purchases insurance to cover unexpected losses suffered by shareholders.

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. If Tangshan could sell its assets for $52.5 million, Tangshan's liquidation value per share of common stock is ________.

Preferred stock has characteristics of debt since it provides a fixed periodic cash payment.

Milton Corporation recently paid a dividend of $1.70 per share, is currently expected to grow at a constant rate of 5%, and has a required return of 11%. Milton Corporation has been approached to buy a new company. Milton estimates if it buys the company, their constant growth rate would increase to 6.5%, but the firm would also be riskier, therefore increasing the required return of the company to 12%. Should Milton go ahead with the purchase of the new company?

Nico Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return?

Based on analysis of the company and expected industry and economic conditions, China Imports is expected to earn $4.60 per share of common stock next year. The average price/earnings ratio for firms in the same industry is 8. Calculate the estimated value of a share of China Imports common stock.

The liquidation value per share of common stock is the amount per share of common stock that would be received if all of the firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

A firm issued 5,000 shares of $1 par-value common stock, receiving proceeds of $20 per share. The accounting entry for the paid-in capital in excess of par account is

Holders of equity capital

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

A proxy battle is the attempt by

If the expected return were above the required return, investors would buy the asset, driving its price up and its expected return down.

Tina's Medical Equipment Company paid $2.25 common stock dividend last year. The company's policy is to allow its dividend to grow at 5 percent per year indefinitely. What is the value of the stock if the required rate of return is 8 percent?

Karina's Caribbean Foods had total assets as recorded on its balance sheet are $1,500,000. What is the value of the Karina's common stock if it has $950,000 in liabilities, and 7,500 shares of common stock outstanding?

Uncle Tim's Inventions has an expected dividend next year of $3.60 and a required return of 12 percent. Calculate the value of a share of common stock assuming a zero growth rate of dividends.

Which of the following is false?