Managerial Finance ch 7

55. Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

(A) If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

58. Which of the following statements is CORRECT?

(A) Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.

14. Which of the following statements is NOT CORRECT?

(A) The free cash flow valuation model discounts free cash flows by the required return on equity.

57. Which of the following statements is CORRECT?

(A) The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.

51. Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? Expected dividend, D1 $3.00 Current Price, P0 $50 Expected constant growth rate 6.0%

(A) The stock's expected dividend yield and growth rate are equal.

24. Which of the following statements is CORRECT?

(B) The free cash flow valuation model for constant growth, Vop = FCF1/(WACC − g), can be used to value firms whose free cash flows are expected to decline at a constant rate, i.e., to grow at a negative rate.

15. Which of the following statements is CORRECT?

(B) The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.

59. Which of the following statements is CORRECT?

(B) The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.

41. Which of the following statements is CORRECT?

(B) The stock valuation model, P0 = D1/(rs − g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

43. You, in analyzing a stock, find that its expected return exceeds its required return. This suggests that you think

(B) the stock is a good buy.

53. Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

(C) The stock price is expected to be $54 a share one year from now.

4. The preemptive right is important to shareholders because it

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

7. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

(D) Some class or classes of common stock are entitled to more votes per share than other classes.

45. A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = −5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

(D) The company's expected stock price at the beginning of next year is $9.50.

13. If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

(D) The company's value of operations one year from now is expected to be 5% above the current price.

46. If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

(D) The stock's price one year from now is expected to be 5% above the current price.

42. If a firm's expected growth rate increased then its required rate of return would

(D) possibly increase, possibly decrease, or possibly remain constant.

12. Which of the following statements is CORRECT?

(E) The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

44. Which of the following statements is CORRECT?

(E) The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

56. Which of the following statements is CORRECT, assuming stocks are in equilibrium?

(E) The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.