Deck 7: Common Stock

Question 1

Why is common stock financing lower risk to the firm than financing with bonds?

A)The lack of a fixed dividend provides the firm greater flexibility versus the interest cost of a bond.
B)Common stock typically has a shorter maturity than bonds.
C)Although common stock dividends are typically fixed, they are usually lower than the interest on bonds.
D)The sinking fund feature on common stock lowers its risk.

Answer 1

A

Question 2

Common stock's residual claim on assets implies owners have a prior claim on assets before other claim holders are paid.

Answer 2

False

Question 3

The most typical common stock maturity is 20 years.

Answer 3

False

Question 4

The lack of a fixed common stock dividend provides the corporation greater flexibility versus the use of bonds or preferred stock.

Question 5

Common stock provides the investor a residual claim on both the firm's assets and the firm's cash flow.

Question 6

Investors view common stock as a riskier investment than bonds or preferred stock.

Question 7

Everything else being the same, the greater an investor's required rate of return, what is true of the value of common stock?

A)It is worth more.
B)It is worth less.
C)The impact on value could be up or down.
D)The value will not change.

Question 8

Which of the following is not a defining feature of common stock?

A)a residual claim on assets
B)voting rights
C)a residual claim on cash flows
D)a fixed return

Question 9

In the case of corporate bankruptcy, common stock's residual claim becomes especially valuable.

Question 10

Typically a corporation's board of directors would not make which one of the following decisions?

A)compensation for the president of the corporation
B)who can purchase the corporation's common stock
C)determine long-term corporate policy
D)decide whether to build a new $1 billion casino or not

Question 11

The costs involved with issuing common stock are much lower than the costs involved with issuing bonds and preferred stock.

Question 12

The valuation of common stock with zero growth is similar to the valuation of preferred stock.

Question 13

Into which two parts is a firm's earnings divided?

A)dividends and debt repayments
B)dividends and tax payments
C)dividends and addition to retained earnings
D)dividends and interest payments

Question 14

If a corporation has two classes of common stock, what is typically unique about the second or class B common stock?

A)It has superior voting rights.
B)It has inferior dividend payments.
C)It has no voting rights.
D)It has superior dividend payments.

Question 15

Everything else being the same, the higher a firm's earnings growth, the lower the value of its common stock.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Question 16

Which of the following is true the longer a common stock investor's expected holding period?

A)The current value of the common stock is greater.
B)The current value of the common stock is lower.
C)The investor's holding period has no impact on the current value of common stock.
D)None of the above.

Question 17

Which of the following is true for corporate stockholders?

A)They elect the chief executive officer.
B)They elect the board of directors.
C)They determine the dividend through a ballot to each stockholder.
D)They determine the maturity through a ballot to each stockholder.

Question 18

Valuing common stock is less difficult and more precise than valuing bonds.

Question 19

Why do investors require a higher expected rate of return on common stock than on bonds?

A)Common stock is a riskier investment than bonds.
B)Common stock is a lower risk investment than bonds.
C)Common stock has a shorter maturity than bonds.
D)Dividends are considered taxable income, but interest is not.

Question 20

Why is valuing common stock more difficult than valuing bonds?

A)Common stock is a long-term security and a bond is a short-term security.
B)Because bonds have more seniority than common stocks.
C)Because common stock is less risky to the investor than a bond.
D)It is more difficult to forecast future common stock cash flows than bond cash flow.

Question 21

Gourrier Sleepy Motels currently pays a $2.00 common stock dividend. Dividends have been growing at a 3% annual rate and are expected to continue growing at this rate for the next 4 years. Thereafter the growth rate is expected to be 0% for the foreseeable future. What is the current value of Gourrier common stock to an investor requiring a 12% rate of return?

A)$18.44
B)$17.17
C)$22.89
D)$17.01

Question 22

Keong is considering an investment in Leong's Bar & Grille Corporation. Keong is planning to buy the stock today, hold it for 2 years, and then expects to sell the stock for $30 at the end of 2 years. Keong expects the first dividend to be $1.00 and the second dividend to be $1.30. If Keong requires a 15% rate of return, what is the value of Leong's Bar & Grille common stock to Keong today?

A)$21.58
B)$23.55
C)$24.54
D)$23.67

Question 23

Bednar's Bed & Breakfasts, Incorporated currently pays a $3.10 common stock dividend. Dividends have been recently growing at a 15% annual rate and are expected to continue growing at this rate for the next 2 years. Then dividends are expected to continue growing at a 10% rate for another 2 years years 3 and 4)and thereafter the growth rate is expected to be 5% for the foreseeable future. What is the current value of Casey's common stock to an investor requiring an 13% rate of return?

A)$47.87
B)$52.47
C)$27.42
D)$44.56

Question 24

Wiley & Jose's Corporation currently pays a $1.50 common stock dividend. Dividends are expected to grow at a 3% rate into the foreseeable future. What is the value of Wiley & Jose's common stock to an investor requiring a 14% rate of return?

A)$11.04
B)$51.50
C)$13.64
D)$14.05

Question 25

Mehmet is considering an investment in Cho's Korean Restaurant. Mehmet is planning to buy the stock today, hold it for 3 years, and then expects to sell the stock for $40 at the end of 3 years. Mehmet expects the first dividend to be $1.00, the second dividend to be $1.50, and the third dividend to be $2.25. If Mehmet requires a 17% rate of return, what is the value of Cho's Korean Restaurant to Mehmet today?

A)$28.33
B)$26.93
C)$13.24
D)$24.70

Question 26

Dolci's Theme Parks currently pays a $1.00 common stock dividend. Dividends have been growing at a 5% annual rate and are expected to continue growing at this rate for the next 2 years. Thereafter the growth rate is expected to be 0% for the foreseeable future. What is the current value of Dolci common stock to an investor requiring a 16% rate of return?

A)$6.03
B)$9.55
C)$6.85
D)$6.56

Question 27

Casey's Sports Books currently pays a $2.30 common stock dividend. Dividends have been recently growing at a 12% annual rate and are expected to continue growing at this rate for the next 3 years. Thereafter the growth rate is expected to be 5% for the foreseeable future. What is the current value of Casey's common stock to an investor requiring an 14% rate of return?

A)$28.98
B)$32.11
C)$18.40
D)$28.62

Question 28

Gongoras Gorgeous Hotels currently pays a $1.80 common stock dividend. Dividends have been recently growing at a 10% annual rate and are expected to continue growing at this rate for the next 2 years. Thereafter the growth rate is expected to be 4% for the foreseeable future. What is the current value of Gongoras common stock to an investor requiring an 18% rate of return?

A)$14.14
B)$11.00
C)$14.86
D)$13.09

Question 29

Lapidus Restaurants Incorporated currently pays a $5.00 common stock dividend. The dividend is expected to remain at $5.00 and not expected to grow in the future. What is the current value of Lapidus Restaurants common stock to an investor requiring an 11% rate of return?

A)$100.00
B)$83.33
C)$50.45
D)$45.45

Question 30

Jabbar Hotels Incorporated currently pays a $3.00 common stock dividend. Dividends have been growing at a 5% annual rate and are expected to continue growing a this rate into the foreseeable future. What is the current value of Jabbar Hotels common stock to an investor requiring a 12% rate of return?

A)$26.25
B)$45.00
C)$63.00
D)$42.86