finance conceptual chapter 9

True or False: An investor using the DCF stock valuation model would assign a value based on the length of time he or she plans to hold the stock.

False

True or False: A preemptive right gives stockholders the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

False A preemptive right is used to maintain shareholder positions if new shares are issued

True or False: To find the total return on a share of stock, find the dividend yield and subtract any commissions paid when the stock is purchased and sold.

False Total return is dividend yield plus capital appreciation

Your sister-in-law, a stockbroker at Invest Inc., is trying to sell you a stock with a current market price of $25. The stock's last dividend (D0) was $2.00, and earnings and dividends are expected to increase at a constant growth rate of 10%. Your required return on this stock is 20%. From a strict valuation standpoint, you should: -Buy the stock; it is undervalued by $2.00. -Not buy the stock; it is overvalued by $2.00. -Buy the stock; it is fairly valued. -Not buy the stock; it is overvalued by $3.00. -Buy the stock; it is undervalued by $3.00.

Not buy the stock; it is overvalued by $3.00.

Assume that a company's dividends are expected to grow at a rate of 25% per year for 5 years and then to slow down and to grow at a constant rate of 5% thereafter. The required (and expected) total return, rs, is expected to remain constant at 12%. Which of the following statements is correct? -The stock price will grow each year at the same rate as the dividends. -The stock price will grow at a different rate each year during the first 5 years, but its average growth rate over this period will be the same as the average growth rate in dividends; that is, the average stock price growth rate will be (25% + 5%)/2. -The dividend yield will be higher in the early years and then will decline as the annual capital gains yield gets larger and larger, other things held constant. -Because the growth rate is 25% in the first 5 years, the stock's realized return will always be greater than the stock's required return. -Right now, it would be easier (require fewer calculations) to find the dividend yield expected in Year 7 than the dividend yield expected in Year 3.

Right now, it would be easier (require fewer calculations) to find the dividend yield expected in Year 7 than the dividend yield expected in Year 3.

Which of the following statements about stock classes is CORRECT? -All common stocks fall into one of three classes: A, B, and C. -All common stocks, regardless of class, must have the same voting rights. -All common stocks, regardless of class, must pay the same dividend. -Some classes of common stock are entitled to more votes per share than other classes. -All firms have several classes of common stock.

Some classes of common stock are entitled to more votes per share than other classes.

Which of the following assumptions would cause the constant growth stock valuation model to be invalid? The constant growth model is given below: Po = Do(1+g)/(rs-g) -The required rate of return is less than the growth rate. -The required rate of return is above 30%. -The growth rate is negative. -None of the above assumptions would invalidate the model. -The growth rate is zero.

The required rate of return is less than the growth rate.

True or False: A document that gives one party the authority to act for another party is a proxy. This includes the power to vote shares of common stock. Proxies can be important tools relating to control of firms.

True

True or False: Because stock has a residual claim rather than a contractual obligation, the cash flows associated with common stock are more difficult to estimate than those related to bonds.

True

True or False: Classified stock is the differentiation of different shares of common stock. It gives companies a way to meet special needs such as when owners of a start-up firm need additional equity capital but do not want to relinquish voting control.

True

True or False: The marginal investor determines the price at which a new issue of stock will trade when it is brought to market.

True

True or False: The type of classified stock where the shares are owned by the firm's founders is called founder's shares. With founders' shares, shareholders generally have more votes per share than with other classes of common stock. True

True

True or False: To find the firm's total corporate value, discount projected free cash flows at the firm's weighted average cost of capital.

True

True or false: In order to prevent dilution of control or dilution of value, shareholders use preemptive rights to purchase, on a pro rata basis, any new shares issued by the firm.

True

When stockholders assign their right to vote to another party, this is called _____. -an ex right. -a proxy. -a privilege. -a takeover. -a preemptive right.

a proxy

The preemptive right is important to shareholders because it _____. -will result in higher dividends per share. -is included in every corporate charter. -enables the firm to issue debt with a relatively low interest rate because the bondholders are protected. -protects the current shareholders against a dilution of their ownership interests. -allows managers to buy additional shares below the current market price.

protects the current shareholders against a dilution of their ownership interests.