Question 1

Which of the following is true of the issuance of nonvoting common stock?

Accepted Answer

A)  It is issued in the event of a hostile takeover to preserve the interests of existing owners. 
B)  It helps the corporation to raise capital through the sale of common stock, without giving up its voting control. 
C)  It helps the existing stockholders to automatically transfer their voting rights to new stockholders without any legal proceeding. 
D)  It tends to result in the dilution of voting rights of current stockholders.

Question 2

Which of the following is true of outstanding shares?

Accepted Answer

A)  A firm cannot sell more shares than the outstanding shares mentioned in the charter. 
B)  Authorized shares become outstanding shares when they are issued or sold to investors. 
C)  Outstanding shares are indicated in a firm's corporate charter. 
D)  Outstanding shares are the shares repurchased by the firm.

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

Dilution of ownership occurs when a new stock issue results in each present stockholder having a larger number of shares and, thus, a claim to a larger part of the firm's earnings than previously.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

________ is the actual amount each common stockholder would expect to receive if a firm's assets are sold for their market value, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.

Accepted Answer

A)  Liquidation value 
B)  Book value 
C)  The P/E multiple 
D)  The present value of the dividends

Question 7

Supervoting shares of common stock provide shareholders with ten times the voting power of ordinary shares of common stock.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is a disadvantage of issuing preferred stock from the common stockholders' perspective?

Accepted Answer

A)  There is a seniority of preferred stockholder's claim over common stockholders. 
B)  The preferred stockholders have superior voting rights in the selection of board of directors. 
C)  The preferred stockholders are always paid a higher proportion of dividend payments. 
D)  Issuance of preferred stocks will result in a higher risk, to the disadvantage of common stockholders.

Question 9

The market value of common stock is completely unrelated to its par value.

Accepted Answer

A) True 
 B)False

Question 10

Ria's Doll Company has an outstanding preferred issue of stock with a par value of $100 and an annual dividend of 10 percent (of par). Similar risk preferred stocks are yielding an 11.5 percent annual rate of return.
(a) What is the current value of the outstanding preferred stock?
(b) What will happen to price as the risk-free rate increases? Explain.

Accepted Answer

The answer of Ria's Doll Company has an outstanding preferred...

Question 11

Equity capital can be raised through ________.

Accepted Answer

A)  the money market 
B)  the NYSE bond market 
C)  the stock market 
D)  a private placement with an insurance company

Question 12

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?

Accepted Answer

The answer of Karina's Caribbean Foods had total assets as...

Question 13

American Depositary Receipts (ADRs) are claims issued by U.S. banks representing ownership of shares of a foreign company's stock held on deposit by the U.S. bank in the foreign market and issued in dollars to U.S. investors.

Accepted Answer

A) True 
 B)False

Question 14

A firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $10,000 and $250,000, respectively. The firm has 10,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________.

Accepted Answer

A)  $24/share 
B)  $25/share 
C)  $26/share 
D)  $30/share

Question 15

A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of $40 per share. The amount recorded for the paid-in capital in excess of par account is ________.

Accepted Answer

A)  $420,000 
B)  $380,000 
C)  $400,000 
D)  $800,000

Question 16

In the case of liquidation, common stockholders are paid first, followed by preferred stockholders, followed by bondholders.

Accepted Answer

A) True 
 B)False

Question 17

Firms occasionally repurchase stock in order to alter capital structure or to increase the returns to the owners.

Accepted Answer

A) True 
 B)False

Question 18

A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of third year?

Accepted Answer

A)  $8,000 
B)  $16,000 
C)  $24,000 
D)  $25,000

Question 19

Due to growing demand for computer software, the Shine 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.

Accepted Answer

The answer of Due to growing demand for computer software,...

Question 20

If a firm has class A and class B common stock outstanding, it means that ________.

Accepted Answer

A)  each class receives a different dividend 
B)  the par value of each class is different 
C)  the dividend paid to one of the classes is tax deductible by the corporation 
D)  one of the classes is probably nonvoting stock

Exam 7: Stock Valuation

Which of the following is true of the issuance of nonvoting common stock?

Which of the following is true of outstanding shares?

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.

Dilution of ownership occurs when a new stock issue results in each present stockholder having a larger number of shares and, thus, a claim to a larger part of the firm's earnings than previously.

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

________ is the actual amount each common stockholder would expect to receive if a firm's assets are sold for their market value, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.

Supervoting shares of common stock provide shareholders with ten times the voting power of ordinary shares of common stock.

Which of the following is a disadvantage of issuing preferred stock from the common stockholders' perspective?

The market value of common stock is completely unrelated to its par value.

Equity capital can be raised through ________.

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?

American Depositary Receipts (ADRs) are claims issued by U.S. banks representing ownership of shares of a foreign company's stock held on deposit by the U.S. bank in the foreign market and issued in dollars to U.S. investors.

A firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $10,000 and $250,000, respectively. The firm has 10,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________.

A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of $40 per share. The amount recorded for the paid-in capital in excess of par account is ________.

In the case of liquidation, common stockholders are paid first, followed by preferred stockholders, followed by bondholders.

Firms occasionally repurchase stock in order to alter capital structure or to increase the returns to the owners.

Due to growing demand for computer software, the Shine 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.

If a firm has class A and class B common stock outstanding, it means that ________.