Corporate Finance Final Exam

Features of Preferred Stock

dividends and does not carry voting rights

preferred stock

equity with dividend priority and in bankruptcy over common stock, typically without voting rights

Common stock

equity without priority for dividends or in bankruptcy

Burnett Corp. pays a constant $21 dividend on its stock. The company will maintain this dividend for the next 10 years and will then cease paying dividends forever. If the required return on this stock is 14 percent, what is the current share price? Multiple Choice $210.00 $109.54 $115.02 $124.87 $107.35

$109.54

Mannix Corporation stock currently sells for $115 per share. The market requires a return of 11 percent on the firm's stock. If the company maintains a constant 7 percent growth rate in dividends, what was the most recent dividend per share paid on the stock? Multiple Choice $4.60 $6.47 $4.30 $4.13 $20.77

$4.30

Flex Co. just paid total dividends of $600,000 and reported additions to retained earnings of $1,800,000. The company has 525,000 shares of stock outstanding and a benchmark PE of 15.4 times. What stock price would you consider appropriate? Multiple Choice $17.60 $66.88 $52.80 $63.36 $70.40

$70.40

Dividend characteristics

-Dividends are not a liability of the firm until a dividend has been declared by the Board -Consequently, a firm cannot go bankrupt for not declaring dividends

features of common stock

-voting rights -proxy voting -classes of stock -other rights

The next dividend payment by Savitz, Inc., will be $3.35 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. If the stock currently sells for $48 per share, what is the required return? Multiple Choice 11.38% 5.00% 11.74% 11.98% 6.98%

11.98%

Voltanis Corp. has preferred stock outstanding that will pay an annual dividend of $3.69 every year in perpetuity. If the stock currently sells for $97.63 per share, what is the required return? Multiple Choice 3.40% 3.78% 2.65% 3.54% 4.32%

3.78%

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.30 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. a. If investors require a return of 9 percent on the company's stock, what is the current price? b. What will the price be in 17 years?

$27.04 $52.67

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 16 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $1.60 per share. What is the current value of one share of this stock if the required rate of return is 7.10 percent? Multiple Choice $279.17 $212.18 $220.03 $221.63 $280.77

$220.03

Lohn Corporation is expected to pay the following dividends over the next four years: $10, $6, $4, and $2. Afterward, the company pledges to maintain a constant 8 percent growth rate in dividends forever. If the required return on the stock is 18 percent, what is the current share price? Multiple Choice $28.21 $26.02 $35.69 $27.39 $26.86

$27.39

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 13 years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $11 per share 14 years from today and will increase the dividend by 7 percent per year thereafter. If the required return on this stock is 14 percent, what is the current share price? Multiple Choice $29.47 $25.10 $27.18 $28.61 $30.04

$28.61

Suppose you know a company's stock currently sells for $90 per share and the required return on the stock is 13 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? Multiple Choice $5.22 $10.99 $5.85 $5.49 $5.92

$5.49

Two Factors Determining Stock Prices

1. the fundamental factor relates stock price movements to expectations about the discounted value of company cash flows 2. the speculative factor relates stock price movements to market psychology and investor trading behavior

Estimating Dividends: Special Cases

Constant dividend Constant dividend growth Supernormal growth

Stock Market

Primary vs. Secondary New York Stock Exchange (largest in the world) NASDAQ

If you buy a share of stock, you can receive cash in two ways

company pays dividends or you sell your shares

NYSE License Holders

designated market makers, floor brokers, supplemental liquidity providers

Zero Growth

if dividends are expected at regular intervals forever, then this is like preferred stock and is valued as a perpetuity Po = D / R

NASDAQ

not a physical exchange, computer based quotation system