CF chapter 9
90. Preferred Stock Yield-to-Maturity: Durango Water Works has an outstanding issue of preferred stock that has a par (maturity value) of $75.00. The stock, which pays a quarterly dividend of $1.10, will be retired by the firm in 20 years. If the preferred stock is currently selling for $68.00, what is the preferred stock's yield-to-maturity? (Round off to the nearest 0.01%) A) 6.72% B) 5.64% C) 4.28% D) 7.73%
A) 6.72%
88. Which of the following statements is true? A) In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g. B) From a practical perspective, the growth rate in the constant growth dividend model must be greater than the sum of the long-term rate of inflation and the long-term real growth rate of the economy. C) In order for the constant growth dividend model to properly value a firm's common stock, g must be greater than R. D) The constant growth dividend model can be used effectively to value the common shares of a mixed growth stock.
A) In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.
84. Which of the following statements is true about the general dividend valuation model? A) It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate. B) It implies that the value of a firm's common stock can be determined only if the expected future dividends are infinite. C) It implies that the value of a growth stock can be determined by forecasting the future price of the stock. D) The model cannot be used to calculate the value of a common stock unless the dividends exceed the firm's expected growth rate.
A) It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.
89. Which of the following statements about preferred stock is false? A) Preferred stock has a higher-priority claim on the firm's assets than common stock. B) Failure to pay dividends will result in default. C) Preferred stock has a lower-priority claim on the firm's assets than the firm's creditors in the event of default. D) Preferred stock typically pays a fixed dividend.
B) Failure to pay dividends will result in default.
81. Which of the following is not a widely know stock market index? A) The Dow Jones Industrial Average. B) The OTQ Composite Index. C) The New York Stock Exchange Index. D) The Standard and Poor's 500 Index.
B) The OTQ Composite Index.
85. Which of the following is the most typical example of a zero-growth dividend stock? A) The common stock of a firm in the biotechnology industry. B) The preferred stock of a utility company. C) The stock of a firm in the health care industry. D) The stock of a firm in the information technology industry.
B) The preferred stock of a utility company.
87. Supernormal growth: Suppose a firm's expected dividends for the next three years are as follows: D1 = $1.10, D2 = $1.20, and D3 = $1.30. After three years, the firm's dividends are expected to grow at 5.00 percent per year. What is should the current price of the firm's stock (P0) be today if investors require a rate of return of 12.00 percent on the stock? (Round off to the nearest $0.01) A) $61.30 B) $10.10 C) $16.74 D) $24.12
C) $16.74
82. Which of the following statements is true? A) Preferred stockholders are considered to be the true owners of public corporations. B) Dividends paid to preferred stockholders are not fixed. C) Preferred stockholders do not typically have voting rights. D) Preferred stock can never be converted to common stock.
C) Preferred stockholders do not typically have voting rights.
83. One-Period Model: Assume that you are considering the purchase of a stock which will pay dividends of $4.50 during the next year. Further assume that you will be able to sell the stock for $85.00 one year from today and that your required rate of return is 15 percent. How much would you be willing to pay for the stock today? (Round off to the nearest $0.01) A) $89.50 B) $65.37 C) $94.10 D) $77.82
D) $77.82
86. The constant growth dividend model would be useful to determine the value of all but which of the following firms? A) A firm whose earnings and dividends are declining at a fairly steady rate. B) A firm whose sales, profits, and dividends are growing at an annual average compound rate of 5 percent. C) A firm whose earnings and dividends are growing at a fairly steady rate. D) A firm whose expected sales, profits, and dividends are flat.
D) A firm whose expected sales, profits, and dividends are flat.
56. PV of dividends: Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? a. $10.76 b. $9.80 c. $11.88 d. $11.50
a. $10.76
80. Nonconstant growth: Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of 35 percent for the next four years. After four years, the firm will grow at a constant rate of 6 percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is 20 percent, what is the stock worth today? a. $14.64 b. $32.18 c. $36.43 d. $21.82
a. $14.64
76. Nonconstant growth: Starskeep, Inc., is a fast growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return on such stocks is 20 percent, what is the current price of the stock? a. $15.63 b. $4.70 c. $30.30 d. $22.68
a. $15.63
60. PV of dividends: Jacobs Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent? a. $4.85 b. $5.37 c. $5.50 d. $6.14
a. $4.85
70. Constant growth: A company is growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now? a. $58.31 b. $46.29 c. $51.02 d. $42.83
a. $58.31
79. Nonconstant growth: Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects its growth rate to be at a constant rate of 7 percent. If the required rate of return is 15 percent, what is the current market price of the stock? a. $69.41 b. $93.63 c. $57.54 d. $80.29
a. $69.41
65. Zero growth: A communications company pays annual dividends of $8.50 with no possibility of it changing in the next several years. If the firm's stock is currently selling at $60.71, what is the required rate of return? (Round to nearest whole number.) a. 14% b. 16% c. 13% d. 15%
a. 14%
54. Which one of the following statements is NOT true about constant-growth stocks? a. Dividend stays constant over time. b. Mature companies with a history of stable growth show this pattern. c. Dividends grow at a constant rate each period forever. d. Dividends that are to be paid out in the distant future have a very small present value and add little to the stock's price.
a. Dividend stays constant over time.
32. Which ONE of the following statements is true about secondary markets? a. In secondary markets, outstanding shares of stock are bought and sold among investors. b. For an investor, the function of secondary markets is to provide profitability for the shares of securities they own. c. An active secondary market causes firms to sell their new debt or equity issues at a higher cost of funds. d. All of the above are true statements
a. In secondary markets, outstanding shares of stock are bought and sold among investors.
34. Which one of the following statements is NOT true about secondary markets? a. In terms of total volume of activity and total capitalization of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest. b. In terms of the number of companies listed and shares traded on a daily basis, the NASDAQ is larger than the NYSE. c. Firms listed on the NYSE tend to be, on average, larger in size and their shares trade more frequently than firms whose securities trade on NASDAQ. d. In the United States, most secondary market transactions are done on one of the many stock exchanges.
a. In terms of total volume of activity and total capitalization of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
55. The constant-growth dividend model will provide invalid solutions when a. the growth rate of the stock exceeds the required rate of return for the stock. b. the growth rate of the stock is less than the required rate of return for the stock. c. the growth rate of the stock is smaller than 10%. d. None of the above.
a. the growth rate of the stock exceeds the required rate of return for the stock.
77. Nonconstant growth: BioSci, Inc., a biotech firm has forecast the following growth rates for the next three years: 30 percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate of 7 percent for the next several years. The company paid a dividend of $2.00 last week. If the required rate of return is 16 percent, what is the market value of this stock? a. $51.03 b. $36.86 c. $56.12 d. $46.37
b. $36.86
62. Zero growth: Zephyr Electricals is a company with no growth potential. Its last dividend was $4.50, and it expects no change in future dividends. What is the current price of the company's stock given a discount rate of 9 percent? a. $40.50 b. $50.00 c. $45.00 d. $500.00
b. $50.00
66. Constant growth: You are interested in investing in a company that expects to grow steadily at an annual rate of 6 percent for the foreseeable future. The firm paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this stock? (Round to the nearest dollar.) a. $58 b. $61 c. $23 d. $24
b. $61
72. Preferred stock valuation: The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent? a. $23.06 b. $65.88 c. $37.57 d. $43.25
b. $65.88
71. Preferred stock valuation: Ajax Company has issued perpetual preferred stock with a par of $100 and a dividend of 5.5 percent. If the required rate of return is 7.75 percent, what is the stock's current market price? a. $12.90 b. $70.97 c. $53.27 d. $62.14
b. $70.97
57. PV of dividends: Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years? a. $13.50 b. $9.72 c. $12.50 d. $11.63
b. $9.72
69. Constant growth: Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Round to the nearest percent.) a. 13% b. 16% c. 20% d. 21%
b. 16%
33. Which ONE of the following statements is true about secondary markets in the United States? a. In terms of total volume of activity and total capitalization of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest. b. In terms of the number of companies listed and shares traded on a daily basis, NASDAQ is larger than the NYSE. c. Firms listed on the NASDAQ tend to be, on average, larger in size, and their shares trade more frequently than firms whose securities trade on NYSE. d. In the United States, most secondary market transactions are done over the counter.
b. In terms of the number of companies listed and shares traded on a daily basis, NASDAQ is larger than the NYSE.
50. Which one of the following statements is NOT true about the general dividend valuation model? a. The model does not assume any specific pattern for dividend growth. b. It makes a specific assumption about when the stock is going to be sold in the future. c. The model calls for forecasting an infinite number of dividends for a stock. d. All of the above are true.
b. It makes a specific assumption about when the stock is going to be sold in the future.
45. Which one of the following statements is NOT true about preferred stock? a. Preferred stock represents ownership in the firm. b. Owners of preferred stock are not guaranteed dividend payments by the firm. c. Preferred stock dividends are fixed financial amounts paid regularly by the firm just like bond coupon payments. d. Preferred stock holders have limited voting privileges relative to common-stock owners.
b. Owners of preferred stock are not guaranteed dividend payments by the firm.
46. Which ONE of the following statements is NOT true about preferred stock? a. Preferred dividend payments are fixed amounts paid regularly by the firm, similar to the interest payments on corporate bonds. b. Preferred dividends are deductable from taxable income just like the interest on bonds. c. Preferred stock holders have limited voting privileges relative to common-stock owners. d. While preferred stock is legally classified as perpetuities, some issues do have a fixed maturity.
b. Preferred dividends are deductable from taxable income just like the interest on bonds.
42. Which one of the following statements is NOT true about auction markets? a. In an auction market, buyers and sellers face each other directly and bargain over price. b. The NASDAQ is the most efficient stockmarket in the United States. c. The New York Stock Exchange is the best-known example of an auction market. d. The auctioneer in this case is the specialist, who is designated by the exchange to represent orders placed by public customers.
b. The NASDAQ is the most efficient stockmarket in the United States.
51. Which ONE of the following statements is true about fast growth stocks? a. These are firms that grow their sales at above-average rates and are expected to do so for a length of time. b. These are firms that grow their earnings at above-average rates and are expected to do so for a length of time. c. They generally pay dividends during their fast growth phase. d. None of the above.
b. These are firms that grow their earnings at above-average rates and are expected to do so for a length of time.
37. The least efficient of all the different types of secondary markets is the a. auction market. b. direct search market. c. dealer market. d. broker market.
b. direct search market.
48. Preferred stock is sometimes regarded like a debt security because a. legally preferred stock is a debt security. b. preferred dividend payments like bond interest payments are fixed amounts regardless of the firm's earnings. c. preferred dividends are deductable from taxable income just like interest payments on bonds. d. preferred stock holders receive a residual value and not a stated value.
b. preferred dividend payments like bond interest payments are fixed amounts regardless of the firm's earnings.
Level of Difficulty: Medium 73. Preferred stock: The preferred stock of Acme International is selling currently at $110.35. If your required rate of return is 9.75 percent, what is the dividend paid by this stock? a. $9.75 b. $11.32 c. $10.76 d. $8.53
c. $10.76
74. Preferred stock: Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly dividend paid by this firm? a. $8.76 b. $10.50 c. $2.19 d. $2.63
c. $2.19
61. Zero growth: Xinhua Manufacturing Company has been generating stable revenues but sees no growth in it for the foreseeable future. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? a. $39.00 b. $3.69 c. $27.08 d. $21.23
c. $27.08
78. Nonconstant growth: Grant, Inc., is a fast growth stock and expects to grow at a rate of 25 percent for the next four years. It then will settle to a constant-growth rate of 10 percent. The first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of the stock? a. $85.94 b. $97.19 c. $50.59 d. $65.68
c. $50.59
58. PV of dividends: Kleine Toymakers is introducing a new line of robotic toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Kleine plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of rat of return is 15 percent? a. $13.24 b. $12.00 c. $6.57 d. $10.24
c. $6.57
67. Constant growth: Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock? (Round to the nearest dollar.) a. $74 b. $32 c. $80 d. $60
c. $80
53. Which one of the following statements is NOT true about zero-growth stocks? a. Dividend stays constant over time. b. The cash flow pattern resembles a perpetuity with a constant cash flow. c. Dividend payment pattern shows constant growth over time. d. There is no growth in dividends over time.
c. Dividend payment pattern shows constant growth over time.
43. Which one of the following statements is NOT true about common stock? a. Common-stock holders have the right to vote on the selection of the board of directors for the firm. b. Common stock is considered to have no fixed maturity. c. Owners of common stock are guaranteed dividend payments by the firm. d. Common-stock holders have limited liability.
c. Owners of common stock are guaranteed dividend payments by the firm.
44. Which ONE of the following statements is true about common stock? a. Common stock is considered to have a fixed maturity. b. Owners of common stock are guaranteed dividend payment by the firm. c. Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy. d. Common-stock holders have unlimited liability.
c. Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy.
40. Which ONE of the following statements is true about dealer markets? a. NYSE is the best-known example of a dealer market. b. A dealer market involves time-consuming search for a fair deal. c. The advantage of a dealer over a brokered market is that brokers cannot guarantee that an order will be executed promptly, while dealers can because they have an inventory of securities. d. All of the above are true of dealer markets.
c. The advantage of a dealer over a brokered market is that brokers cannot guarantee that an order will be executed promptly, while dealers can because they have an inventory of securities.
52. The three simplifying assumptions that cover most stock growth patterns are a. dividends that stay constant over time, dividends that grow at a constant rate, and dividends that are equal to zero. b. dividends that have a zero-growth rate, dividends that grow at a varying rate, and dividends that are equal to zero. c. dividends that stay constant over time, dividends that grow at a constant rate, and dividends that have a mixed growth pattern. d. None of the above.
c. dividends that stay constant over time, dividends that grow at a constant rate, and dividends that have a mixed growth pattern.
35. In comparison to the NYSE, a. NASDAQ has less companies listed. b. total share volume is lower on the NASDAQ. c. firms listed on the NASDAQ tend to be smaller. d. NASDAQ firms exceed NYSE listed firms in total capitalization.
c. firms listed on the NASDAQ tend to be smaller.
36. Direct search markets are characterized by a. complete price information. b. extensive broker and dealer participation c. private placement transactions and sale of common stock of small private companies. d. a high level of efficiency.
c. private placement transactions and sale of common stock of small private companies.
63. Zero growth: Metasteel Limited Co. has a stable sales track record but does not expect to grow in the next several years. Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price? a. $103.50 b. $13.50 c. $39.30 d. $31.94
d. $31.94
68. Constant growth: Ryder Supplies has its stock currently selling at $63.25. The company is expected to grow at a constant rate of 7 percent. If the appropriate discount rate is 17 percent, what is the expected dividend, a year from now? a. $4.43 b. $3.25 c. $10.75 d. $6.33
d. $6.33
59. PV of dividends: Givens, Inc., is a fast growing technology company that paid a $1.25 dividend last week. The company's expected growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase? a. $1.25 b. $6.46 c. $8.37 d. $7.23
d. $7.23
64. Zero growth: Ambassador Corp. sells household cleaners producing a revenue stream that has remained unchanged in the last few years. The firm does not expect any change in its sales or earnings in the next several years. The stock is currently selling at $46.88. If the required rate of return is 16 percent, what is the dividend paid by this company? a. $2.93 b. $4.65 c. $6.89 d. $7.50
d. $7.50
75. Preferred stock valuation: The Columbia Consumer Products Co. has issued perpetual preferred stock with a $100 par value. The firm pays a quarterly dividend of $2.60 on this stock. What is the current price of this preferred stock given a required rate of return of 12.5 percent? a. $47.25 b. $80.00 c. $20.80 d. $83.20
d. $83.20
39. In brokered markets a. the commission charged by brokers is a lower cost to buyers and sellers than the cost of direct search. b. buyers and sellers are brought together for a transaction fee. c. brokers build a pool of price information through their extensive contacts. d. All of the above are true of broker markets.
d. All of the above are true of broker markets.
49. Applying the valuation procedure to common stocks is more difficult than applying it to bonds because a. the size and timing of the dividend cash flows are less certain than the coupon payments for bonds. b. common stocks have no final maturity date. c. unlike the rate of return, or yield, on bonds, the rate of return on common stock is not directly observable. d. All of the above are true.
d. All of the above are true.
41. Dealer markets are characterized by a. no time-consuming search for a fair deal. b. a guarantee of order fulfillment because the dealer holds an inventory of securities. c. improved market efficiency because dealers provide continuous bid and ask prices for securities. d. All of the above characterize dealer markets.
d. All of the above characterize dealer markets.
47. Owners of preferred stock a. have limited voting rights. b. usually receive fixed dividend payments. c. are given priority treatment over common stock with respect to dividends payments and the claims against the firm's assets in the event of bankruptcy or liquidation. d. All of the above statements are true.
d. All of the above statements are true.
38. Which one of the following statements is NOT true about broker markets? a. Brokers bring buyers and sellers together to earn a fee, called a commission. b. Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves. c. Investors have an incentive to hire a broker because they charge a commission that is less than the cost of direct search. d. Brokers can guarantee an order because they have an inventory of securities.
d. Brokers can guarantee an order because they have an inventory of securities.
31. The largest holders of equity securities are a. mutual funds. b. pension funds. c. foreign investors. d. households.
d. households.
