Finn-2130 Exam 2 ch. 8

B) 8.6%

14) 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%

B) a proxy.

14) 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.

B) $44.40

13) 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

A) 15%; 20%; 35%

10) Bevel Building Products, Inc., whose common stock is currently selling for $12 per share, is expected to pay a $1.80 dividend, and sell for $14.40 one year from now. What are the dividend yield, growth rate, and total rate of return, respectively? A) 15%; 20%; 35% B) 10%; 5%; 15% C) 15%; 12%; 27% D) 20%; 15%; 35%

A) The value of a share of preferred stock increases.

10) 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.

A) $37.50

11) 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

C) No, the stock is overpriced.

11) LED Corp.'s common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If LED's current market price is $40.00, and your required rate of return is 23 percent, should you purchase the stock? A) No, the percentage return on the stock is too high, thus it is too risky. B) Yes, the stock is expected to return more than you require. C) No, the stock is overpriced. D) Not enough information is given.

D) $818.18

12) 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

C) 6.9%

14) 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%

C) $20.83.

15) 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.

A) $83.33

15) 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

A) cumulative voting.

15) 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.

A) The required return decreases.

16) Which of the following changes will make the value of a stock go up, other things being held constant? A) The required return decreases. B) The required return increases. C) In general, investors become more risk averse. D) The growth rate of dividends decreases.

D) Dividend payments, like interest payments, are fixed.

16) 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.

D) fourth

17) 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

A) false, because the required return could be different

17) If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium. A) false, because the required return could be different B) true, because we are using a dividend valuation model C) true, if markets are semi-strong form efficient D) true, if investors are risk-averse

D) fourth

18) 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

B) perpetuity.

18) Preferred stock valuation usually treats the preferred stock as a A) capital asset. B) perpetuity. C) common stock. D) long-term bond.

D) $62.57

18) You are considering the purchase of a common stock that paid a dividend of $2.00 yesterday. You expect this stock to have a growth rate of 15 percent for the next 3 years, resulting in dividends of D1 = $2.30, D2 = $2.645, and D3 = $3.04. The long-run normal growth rate after year 3 is expected to be 10 percent (that is, a constant growth rate after year 3 of 10% per year forever). If you require a 14 percent rate of return, how much should you be willing to pay for this stock? A) $89.75 B) $83.65 C) $56.46 D) $62.57

B) Both investments provide a stated income stream.

19) 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

D) the preemptive right

19) 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

D) The higher the risk, the higher the required return, other things being equal.

19) Which of the following statements concerning the required rate of return on stocks is true? A) The higher an investor's required rate of return, the higher the value of the stock. B) If risk is reduced, the required return will decrease because more investors are risk-averse. C) The required return on preferred stock is generally higher than the required return on common stock. D) The higher the risk, the higher the required return, other things being equal.

A) requires dividends in arrears to be carried over into the next period.

20) 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.

D) all of the above

20) 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

A) The required rate of return must exceed the growth rate.

20) Which of the following statements concerning the constant growth dividend valuation model is true? A) The required rate of return must exceed the growth rate. B) The dividend growth rate must be bigger than 8%. C) The growth rate must increase every year. D) The required rate of return must be equal to the growth rate for dividends.

B) Investors believe the stock is worth $1 per share because future earnings (and cash flows) are expected to be positive.

21) A small biotechnology research corporation has been experiencing losses for the first three years of its existence, and thus has a negative balance in retained earnings. The corporation's stock price, however, is $1 per share. Which of the following statements is MOST correct? A) Investors are irrational to pay $1 per share when earnings per share have been negative for three years. B) Investors believe the stock is worth $1 per share because future earnings (and cash flows) are expected to be positive. C) The corporation's accountants must have made a mistake because retained earnings may not be negative. D) The required return on the stock will be small because the company has very few assets.

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

21) 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.

C) common stockholders

21) 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.

C) cause the stock price to increase because rcs (the required return) is likely to decrease and g (the growth rate in future dividends) is likely to increase.

22) A small company struggling to reach profitability just announced a major new government contract that will validate its technology and generate revenue for the next several years. The announcement of the contract will A) cause the stock price to increase because rcs (the required return) is likely to increase. B) cause the stock price to decrease because the government usually pays below market price for the goods and services it purchases. C) cause the stock price to increase because rcs (the required return) is likely to decrease and g (the growth rate in future dividends) is likely to increase. D) have no effect on the stock price because the company has not yet paid any dividends.

B) cumulative

22) 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

C) callable

23) 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

A) growth rate in dividends, g.

23) Using the constant growth dividend valuation model and assuming dividends will growth a constant rate forever, the increase in the value of the stock each year should be equal to the A) growth rate in dividends, g. B) required return on the stock, rcs. C) dividend yield plus the capital gains yield. D) dividend yield.

D) sinking fund

24) 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

B) the value of the stock can be estimated as $0.50 divided by an investor's required rate of return.

24) Nogrowth Corporation expects their dividend to stay at $0.50 per share each year into the foreseeable future. Therefore A) the stock will be valued at $0.50 times the number of years an investor plans to keep it. B) the value of the stock can be estimated as $0.50 divided by an investor's required rate of return. C) the value of the stock cannot be determined using the dividend valuation model because the growth rate is zero. D) the value of the stock is positive only if the required return is negative.

A) $20.99

25) A financial analyst expects Crane Service Inc. to pay a dividend of $2 per share one year from today, a dividend of $3 per share in years two, and estimates the value of the stock at the end of year two to be $22. If your required return on Crane Service stock is 14 %, what is the most you would be willing to pay for the stock today if you plan to sell the stock in two years? A) $20.99 B) $26.75 C) $26.90 D) $27.00

C) preferred stock dividends are fixed.

25) 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.

B) Investors cannot sue a corporation for the non-payment of dividends.

26) 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.

C) $59.44

26) Perrine Industrial Inc. just paid a dividend of $5 per share. Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the required return is 16%? A) $33.44 B) $55.56 C) $59.44 D) $65.87

D) 11.81%

27) Backford Company just paid a dividend yesterday of $2.25 per share. The company's stock is currently selling for $60 per share, and the required rate of return on Backford Company stock is 16%. What is the growth rate expected for Backford Company dividends assuming constant growth? A) 9.47% B) 9.89% C) 10.87% D) 11.81%

B) The price of the common stock could be higher than the price of the preferred stock if the common stock dividends are expected to grow in the future.

28) TellTrue Corporation has preferred stock which paid an annual dividend in 2009 of $5 per share. TellTrue also has common stock which paid a dividend in 2009 of $5. Which of the following statements is MOST correct concerning TellTrue stock? A) The price of the preferred stock should equal the price of the common stock since the dividends are the same. B) The price of the common stock could be higher than the price of the preferred stock if the common stock dividends are expected to grow in the future. C) The price of the preferred stock is expected to be higher than the price of the common stock because the required return on preferred stock is higher than the required return on common stock. D) If the required return on the preferred stock is the same as the required return on the common stock, then the price of preferred stock should equal the price of the common stock if markets are efficient.

C) Other things being equal, if Company A and Company B have the same firm value, Company A may have more shares of stock outstanding than Company B.

29) Using the dividend valuation method, an analyst determines the value of Company A's stock to be $10 and the value of Company B's stock to be $14. Based on this information, which of the following statements is most accurate? A) Company B must be riskier than Company A, and risk requires a reward. B) Other things being equal, if Company A and Company B have the same firm value, Company B must have more debt, thus leveraging its returns for the benefit of shareholders. C) Other things being equal, if Company A and Company B have the same firm value, Company A may have more shares of stock outstanding than Company B. D) Company B's required rate of return is higher than Company A's required return.

D) the stock and paid-in-capital amounts on the balance sheet.

30) All of the following affect the value of a share of common stock EXCEPT A) the dollar amount of the dividends. B) investors' required rate of return. C) the future growth rate for dividends. D) the stock and paid-in-capital amounts on the balance sheet.

D) $22.22

31) The Western State Company's common stock is expected to pay a $2.00 dividend in the coming year. If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be? A) $11.76 B) $24.00 C) $23.11 D) $22.22

B) retaining profits in order to reinvest into the firm

32) An example of the growth factor in common stock is A) acquiring a loan to fund an investment in Asia. B) retaining profits in order to reinvest into the firm. C) issuing new stock to provide capital for future growth. D) two strong companies merging together to increase their economy of scale.

D) $30.80

33) You are considering the purchase of a share of Ranch's common stock. You expect to sell it at the end of 1 year for $32.00. You will also receive a dividend of $2.50 at the end of the year. Ranch just paid a dividend of $2.25. If your required return on this stock is 12%, what is the most you would be willing to pay for it now? A) $28.57 B) $33.05 C) $20.83 D) $30.80

A) $81.38

34) Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company's dividends are expected to grow at a constant rate of 8.5% indefinitely. If the required rate of return on this stock is 15.5%, compute the current value per share of Bensen Co. stock. A) $81.38 B) $76.43 C) $56.23 D) $43.90

B) Yes, the market price is below the intrinsic value of the stock.

35) Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company's dividends are expected to grow at a constant rate of 8.5% indefinitely. The required rate of return on this stock is 15.5%. You observe a market price of $78.50 for the stock. Should you purchase this stock? A) No, the market price is above the intrinsic value of the stock. B) Yes, the market price is below the intrinsic value of the stock. C) No, the growth rate in dividends is too far below the required return. D) Yes, but only if you can keep the stock for at least 5 years.

A) $106.84

36) Dynamic Industries paid a dividend of $1.65 on its common stock yesterday. The dividends of Wallace Industries are expected to grow at 9% per year indefinitely. If the risk-free rate is 3% and investors' risk premium on this stock is 8%, estimate the value of Wallace Industries stock 2 years from now. A) $106.84 B) $100.43 C) $91.81 D) $54.71

C) 10%

37) Southland Tours has net income of $2 million this year. The book value of Southland Tours common equity is $8 million dollars. The company's dividend payout ratio is 60% and is expected to remain this way. What is Southland Tours' internal growth rate? A) 6% B) 9% C) 10% D) 15%

A) $22.61

38) Shackleford Corporation net income this year is $800,000. The company generally retains 35% of net income for reinvestment. The company's common equity currently has a book value of $5,000,000. They just paid a dividend of $1.37, and the required rate of return on this stock is 12%. Compute the value of this stock if dividends are expected to continue growing indefinitely at the company's internal growth rate. A) $22.61 B) $11.42 C) $15.63 D) $4.35

A) $17.67

39) Kinard's Kennels Inc. ROE is 20%. Their dividend payout ratio is 70%. The last dividend, just paid, was $2.00. If dividends are expected to grow by the company's internal growth rate indefinitely, what is the current value of Kinard's common stock if its required return is 18%? A) $17.67 B) $16.89 C) $14.92 D) $11.52

D) 16.50%.

4) TC Corp. paid a dividend today of $5 per share. The dividend is expected to grow at a constant rate of 6.5% per year. If TC Corp. stock is selling for $50.00 per share, the stockholders' expected rate of return is A) 11.50%. B) 13.56%. C) 15.49%. D) 16.50%.

D) 16.12%

40) Beaver Corporation stock is currently selling for $58.00. It is expected to pay a dividend of $5.00 at the end of the year. Dividends are expected to grow at a constant rate of 7.5% indefinitely. Compute the required rate of return on Beaver Corporation stock. A) 12.48% B) 15.65% C) 13.64% D) 16.12%

B) $48.51

41) Waterfront Solutions, Inc. paid a dividend of $5.00 per share on its common stock yesterday. Dividends are expected to grow at a constant rate of 4% for the next two years, at which point the stock is expected to sell for $56.00. If investors require a rate of return on Waterfront's common stock of 18%, what should the stock sell for today? A) $50.22 B) $48.51 C) $44.76 D) $40.22

B) $48.05

42) If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way, and if your required rate of return is 16% per year, how much is the stock worth today? A) $42.68 B) $48.05 C) $51.10 D) $74.64

A) 3.365%

43) Distant Thunder, Inc. paid a dividend of $5.00 per share on its common stock yesterday. Dividends are expected to grow at a constant rate of 10% for the next two years, at which point the dividends will begin to grow at a constant rate indefinitely. If the stock is selling for $50 today and the required return is 15%, what it the expected annual dividend growth rate after year two? A) 3.365% B) 3.878% C) 4.556% D) 5.000%

B) $21.24

44) Shasta Co. just paid a dividend of $1.65 (D0) on its common stock. This company's dividends are expected to grow at a constant rate of 3% indefinitely. If the required rate of return on this stock is 11%, compute the current value per share of Shasta stock. A) $20.63 B) $21.24 C) $15.00 D) $55.00

A) yes, because the present value of the expected future cash flows is greater than $40

45) You observe Thundering Herd Common Stock selling for $40.00 per share. The next dividend is expected to be $4.00, and is expected to grow at a 5% annual rate forever. If your required rate of return is 12%, should you purchase the stock? A) yes, because the present value of the expected future cash flows is greater than $40 B) no, because the present value of the expected future cash flows is less than $40 C) yes, because the present value of the expected future cash flows is less than $40 D) no, because the present value of the expected future cash flows is greater than $40

B) $30.00

46) Castle, Inc. paid a dividend yesterday of $2 per share. Castle management expects the dividend to increase next year to $3 annually. If the dividend is expected to stay at $3 per year for the foreseeable future, what is the value of the stock to an investor with a required rate of return of 10%? A) $7.50 B) $30.00 C) $32.00 D) $50.00

C) The value of the preferred stock is $77.78 per share.

5) 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.

B) D1/Vc + g

5) The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following, where D1 is the next dividend and Vc is the current value of the stock? A) (D1 + g)/Vc B) D1/Vc + g C) D1/g D) D1/g + Vc

D) 24.14%

6) Beaver Corp. preferred stock has a market price of $14.50. If it has a yearly dividend of $3.50, what is your expected rate of return if you purchase the stock at its market price? A) 41.43% B) 19.45% C) 22.36% D) 24.14%

C) Preferred stock dividends are typically the same each year, allowing a preferred stock to be valued as a perpetuity.

6) 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.

B) 10.0%

7) South Stage, Inc. preferred stock pays an annual dividend of $2.75 per share. If the stock is currently selling for $27.50 per share, what is the expected rate of return on this stock? A) 2.75% B) 10.0% C) 17.5% D) 27.5%

C) $5.00

7) 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

D) 19.00%

8) Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If Jackson's current market price is $40.00, what is the stock's expected rate of return (nearest .01 percent)? A) 5.50% B) 11.00% C) 18.25% D) 19.00%

A) 21.8%

8) 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%

A) 11.11%

9) Crandle's common stock is currently selling for $79.00. It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely. What is the required rate of return on Crandle's stock? A) 11.11% B) 11.76% C) 12.2% D) 14.21%

D) $55.50

9) 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