Deck 8: The Valuation and Characteristics of Stock

Question 1

How is preferred stock similar to bonds?

A)Dividend payments to preferred shareholders (much like bond interest payments to bondholders)are tax deductible.
B)Investors can sue the firm if preferred dividend payments are not paid (much like bondholders can sue for non-payment of interest payments).
C)Preferred stockholders receive a dividend payment (much like interest payments to bondholders)that is usually fixed.
D)Preferred stock is not like bonds in any way.

Answer 1

Preferred stockholders receive a dividend payment (much like interest payments to bondholders)that is usually fixed.

Question 2

Preferred stock is similar to a bond in the following way

A)preferred stock always contains a maturity date.
B)both investments provide a stated income stream.
C)both contain a growth factor similar to common stock.
D)both provide interest payments.

Answer 2

both investments provide a stated income stream.

Question 3

Preferred stock is riskier than long-term debt because its claim on assets and income come after those of bonds.

Answer 3

True

Question 4

Public perception and reputation do not affect stock prices,which are strictly a function of dividends and required returns.

Question 5

The amount of the preferred stock dividend is generally fixed either as a dollar amount or as a percentage of the par value.

Question 6

Although under normal operating conditions preferred shareholders do not have voting rights,protective provision generally allow for voting rights in the event of nonpayment of preferred dividends.

Question 7

A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors and asking for more cash.

Question 8

Preferred stock is referred to as a hybrid security because it has many characteristics of both common stock and bonds.

Question 9

For a given constant required rate of return,the greatest portion of a preferred stockholder's return comes from increases in the price of preferred stock.

Question 10

The use of a call provision in addition to a sinking fund can effectively create a maturity date for preferred stock.

Question 11

Because most preferred stocks are perpetuities,their value can be determined by dividing the annual dividend by an investor's required return.

Question 12

In terms of risk,preferred stock is safer than common stock because it has a prior claim on assets and income.

Question 13

Two approaches that allow for the retirement of preferred stock are call provisions and sinking fund provisions.

Question 14

A sinking-fund provision allows for the retirement of a portion of preferred stock each year.

Question 15

If a firm does not have enough money to pay any common stock dividends,it is technically in default to the common shareholders.

Question 16

Cumulative preferred stock

A)requires dividends in arrears to be carried over into the next period.
B)has a right to vote cumulatively.
C)has a claim to dividends before bonds.
D)has a higher required return than common stock.

Question 17

The upper limit on common stock dividends,which is set by the SEC,is generally equal to the sum of dividends paid on the company's preferred stock.

Question 18

A call provision entitles a company to repurchase its preferred stock from holders at stated prices over a given time period.

Question 19

Preferred stock valuation usually treats the preferred stock as a

A)capital asset.
B)perpetuity.
C)common stock.
D)long-term bond.

Question 20

A company's market capitalization is generally greater than its book value,in part due to its reputation for being able to deliver growth,attract top talent,and avoid ethical mistakes.

Question 21

LTM,Inc.has an issue of preferred stock whose par value is $1,000.The preferred stock pays a 4.5% dividend.If investors require a 5.5% rate of return for these shares,what price should the preferred stock sell for?

A)$611.11
B)$508.33
C)$409.09
D)$818.18

Question 22

Stimpson Inc.preferred stock pays a $.50 annual dividend.What is the value of the stock if your required rate of return is 10%?

A)$.05
B)$.50
C)$5.00
D)$50.00

Question 23

A preferred stock that pays an annual dividend of $10,has a par value of $100,and has a required return of 5% will be valued at $200.

Question 24

Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period.What is the name of this provision?

A)cumulative
B)putable
C)callable
D)convertible

Question 25

Glacier Inc.preferred stock has a 5% stated dividend percentage,and a $100 par value.What is the value of the stock if your required rate of return is 6% per year?

A)$83.33
B)$94.05
C)$100.00
D)$30.00

Question 26

Lithium Lakes Industries preferred stock has a par value of $100 and pays a dividend of $6.00 per share.It presently sells for $87 per share.What do investors require as a rate of return on this stock? Round off to the nearest .10%.

A)14.5%
B)9.3%
C)6.9%
D)6.0%

Question 27

Whistle Corp.has a preferred stock that pays a dividend of $2.40.If you are willing to purchase the stock at $11,what is your required rate of return (round your answer to the nearest .1% and assume that there are no transaction costs)?

A)21.8%
B)11.0%
C)9.1%
D)20.1%

Question 28

Historically,price appreciation,or capital gains yield,has accounted for a greater portion of returns on common stocks than dividend payments.

Question 29

Which of the following statements concerning preferred stock is MOST correct?

A)Preferred stock is valued the same as zero coupon bonds because the cash flow patterns are similar.
B)If a corporation issues 4% preferred stock with a par value of $100,the dividend will increase by 4% per year.
C)Preferred stock dividends are typically the same each year,allowing a preferred stock to be valued as a perpetuity.
D)Preferred stock dividends are calculated as a percentage of common stock dividends,although the preferred stock dividends must be paid first.

Question 30

Maynard Inc.preferred stock pays an annual dividend of $7 per share.Which of the following statements is true for an investor with a required return of 9%?

A)The value of the preferred stock is $7 because the dividend is fixed at $7 each year .
B)The value of the preferred stock is $63.00 per share.
C)The value of the preferred stock is $77.78 per share.
D)The value of the preferred stock is $6.30 per share because of the 9% required return.

Question 31

Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid.What is the name of this feature?

A)participating
B)cumulative
C)provisional
D)convertible

Question 32

ABC Corp 5% preferred stock with a par value of $100 and a market price of $125 will pay an annual dividend this year of $12 per share.

Question 33

The market price of a firm's common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings)divided by the number of shares outstanding.

Question 34

How is preferred stock affected by a decrease in the required rate of return?

A)The value of a share of preferred stock increases.
B)The dividend increases.
C)The dividend decreases.
D)The dividend yield increases.

Question 35

If Neal O'Danny preferred stock pays an annual dividend of $2.80,and investors require a 9% return,what is the value of O'Danny's preferred stock today?

Question 36

Studio 55,Inc.has an issue of preferred stock that pays a dividend of $4.00.The preferred stockholders require a rate of return on this stock of 9%.At what price should the preferred stock sell for? Round off to the nearest $0.10.

A)$36.00
B)$44.40
C)$62.50
D)$88.80

Question 37

Bacon Signs Company preferred stock pays a perpetual annual dividend of 4.5% of its $100 par value.If investors' required rate of return on this stock is 12%,what is the value per share?

A)$37.50
B)$31.82
C)$8.50
D)$45.00

Question 38

The YLD% shown in Wall Street Journal stock quotes stands for the stock's dividend yield and is calculated by dividing the amount of the dividend by the stock's opening price on the first day of the year.

Question 39

Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock.What is the name of this feature?

A)convertible
B)callable
C)cumulative
D)sinking fund

Question 40

What is the value of a preferred stock that pays a $5.55 dividend to an investor with a required rate of return of 10%?

A)$22.22
B)$27.83
C)$45
D)$55.50

Question 41

Cumulative voting is advantageous to minority shareholders because it may allow them to elect a member of the board of directors.

Question 42

Under majority voting a majority (>50%)shareholder will just be able to elect a simple majority of the board of directors.

Question 43

Limited liability for a corporation's common shareholders is a protective provision that aids the corporation in raising funds.

Question 44

If a shareholder cannot attend the corporation's annual meeting,the shares may still be voted using

A)the preemptive right.
B)a proxy.
C)majority voting rules.
D)the cumulative voting right.

Question 45

If a common stockholder cannot personally attend the meeting of shareholders then their votes are lost.

Question 46

Under majority voting a majority (>50%)shareholder will be able to elect the entire board of directors.

Question 47

Bondholders and preferred stockholders can be viewed as creditors,whereas the common stockholders are the true owners of the firm.

Question 48

How is preferred stock similar to common stock?

A)Preferred dividend payments usually have unlimited growth potential.
B)Investors cannot sue a corporation for the non-payment of dividends.
C)Both preferred and common stockholders have voting control of a firm.
D)Preferred stock dividends and common stock dividends are fixed.

Question 49

Shareholders,as owners of the corporation,face unlimited liability for the corporation's debts,while bondholders,as creditors,may only lose the value of their investment if the company goes bankrupt.

Question 50

The common stock of a constant-growth firm is valued in the same manner as its preferred stock.

Question 51

Preferred stock differs from common stock in that

A)preferred stock usually has a maturity date.
B)preferred stock investors have a higher required return than common stock investors.
C)preferred stock dividends are fixed.
D)common stock investors have a required return and preferred stock investors do not.

Question 52

Preferred stock is less risky than common stock,but more risky than debt.

Question 53

Common stock cannot be worth less than its book value.

Question 54

Common stockholders demand a return on the price paid for their common stock,but since retained earnings on the balance sheet are merely "on paper" they do not require a return on earnings that have been retained.

Question 55

Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds.

Question 56

Common stock does not mature.

Question 57

Under cumulative voting a 10% shareholder will likely be able to elect 10% of the board of directors.

Question 58

Preferred stock and common stock issued by the same firm will have the same required return because the riskiness of the firm's cash flows is the same for both securities.

Question 59

In theory,shareholders select the board of directors,but in reality,management effectively selects the directors.

Question 60

Minority shareholders have a greater chance of electing a member to the board of directors if the company uses

A)cumulative voting.
B)majority voting.
C)minority voting.
D)proxy voting.

Question 61

Consider the following four types of payments that could be made by a normal operating firm: interest,common dividends,income taxes,and preferred dividends.Compared to the other payments mentioned,where would you rank common dividend payments in terms of the order of payment if the firm is liquidating?

A)first
B)second
C)third
D)fourth

Question 62

Which of the following features,or benefits,belong to a firm's common stockholders?

A)limited liability
B)ownership of the firm
C)voting rights
D)all of the above

Question 63

What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm?

A)the cumulative feature
B)the convertible feature
C)the proportionality clause
D)the preemptive right

Question 64

ACME,Inc.expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future.Therefore,the value of the stock to an investor with a required return of 12% is

A)$3.00.
B)$18.33.
C)$20.83.
D)$30.00.

Question 65

If the expected growth rate for dividends is zero,then the value of common stock will be equal to the current dividend.

Question 66

The change in the value of a corporation's common stock as the result of growth is the same regardless of whether the growth is the result of internal growth or the infusion of new capital.

Question 67

A firm can increase the growth rate of common stockholders' investment in the firm by retaining more earnings or increasing return on equity.

Question 68

A common stock with an expected dividend growth rate of zero would be valued in the same way as preferred stock,that is,the expected dividend divided by the required return.

Question 69

Assume that a firm had such serious financial problems that it was about to be liquidated after a bankruptcy.All of the firm's assets are about to be sold in order to pay the following claims against the firm: bondholders,preferred stockholders,common stockholders,and federal income taxes.Of the claims mentioned,what priority would common stockholders have?

A)first
B)second
C)third
D)fourth

Question 70

Common stock valuation can be based on the present value of future dividends or alternatively on the present value of the firm's future quarterly net income.

Question 71

Because common stock represents a residual interest in the corporation,the value of common stock is equal to the total firm value less the firm's outstanding debt.

Question 72

The retention ratio is equal to 1 minus the dividend payout ratio.

Question 73

An investor's required rate of return for a common stock can be estimated by summing the stock's dividend yield and annual growth rate,assuming the growth rate is constant over time.

Question 74

The stock valuation model D₁/(r_cs - g)requires the stock to grow at a rate greater than the required return; otherwise,the stock is worthless.

Question 75

In general,common stock and preferred stock are both valued by calculating the present value of all expected future cash flows,using the required return as the discount rate.

Question 76

Given the constant growth dividend valuation model,the expected percentage growth in value of a stock is equal to the capital gains yield for that stock.

Question 77

The most relevant form of growth for valuing a firm's common stock is internal growth.

Question 78

Which of the following is NOT true regarding common stock?

A)Dividends,unlike interest payments,are not tax deductible.
B)Common stock,unlike bond principal,does not mature.
C)Common stockholders are owners of the firm,whereas bondholders are creditors.
D)Dividend payments,like interest payments,are fixed.

Question 79

Who bears the greatest risk of loss of value if a firm should fail?

A)bondholders
B)preferred stockholders
C)common stockholders
D)All of the above bear equal risk of loss.

Question 80

Asymmetric Frames Corp had a return on equity of 15%.The corporation's earnings per share was $6.00,its dividend payout ratio was 40% and its profit-retention rate was 60%.If these relationships continue,what will be United Financial Corp's internal growth rate?

A)6.0%
B)8.6%
C)9.0%
D)15.6%