chapter 7 finance

45) Which of the following is typically a feature of preferred stocks?

A) They are settled prior to common stocks during liquidation.

28) Which of the following is true of common stock?

C) It gives the holder voting rights which permit selection of the firm's directors.

31) Harry Corporation's common stock currently sells for $180 per share. Harry just paid a dividend of $10.18 and dividends are expected to grow at a constant rate of 6 percent forever. If the required rate of return is 12 percent, what will Harry Corporation's stock sell for one year from now?

A) $190.64

30) Julian is considering purchasing the stock of Pepsi Cola because he really loves the taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to pay a $2 dividend in one year and he expects dividends to grow at 5 percent indefinitely? Julian requires a 12 percent return to make this investment.

A) $28.57

22) A firm has to pay a dividend of $1.20 per share till perpetuity, a zero growth rate of dividends, and a required return of 10 percent. The value of the firm's preferred stock is ________.

C) $12

37) A firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $40,000 and $500,000, respectively. The firm has 40,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________.

C) $13.50/share

34) Daniel Custom Cycles' common stock currently pays no dividends. The company plans to begin paying dividends beginning 3 years from today. The first dividend will be $3.00 and dividends will grow at 5 percent per year thereafter. Given a required return of 15 percent, what would you pay for the stock today?

D) $22.68

17) The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?

D) $30.00

30) Which of the following is typically a feature of common stock?

D) Common stocks may or may not pay dividends.

10) Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market premium is 4 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be ________.

B) undervalued because the market price is less than the resulting share value

37) The cost of preferred stock is ________.

C) higher than the cost of long-term debt and lower than the cost of common stock

7) Which of the following is an advantage for a firm to issue common stock over long-term debt?

C) no maturity date on which the par value of the issue must be repaid

21) Shares of stock currently owned by a firm's shareholders are called ________.

C) outstanding shares

20) Preferred stock is valued as if it were a ________.

C) perpetuity

27) The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called a ________.

C) proxy battle

38) Preferred stock is characterized by ________.

C) quasi-debt nature

24) The purpose of nonvoting common stock is to ________.

C) raise capital without giving up any voting control

41) Treasury stock refers to the ________.

C) repurchase of outstanding stock

44) Which of the following is usually a right of a preferred stockholder?

C) right to receive dividend payments before any dividends are paid to common stockholders

40) In a ________, new shares are sold to the existing shareholders.

C) rights offering

26) Equity capital can be raised through ________.

C) the stock market

29) A proxy statement is a statement transferring ________.

C) the votes of a stockholder to another party

35) The preemptive right gives shareholders the right ________.

C) to maintain their proportionate ownership in the corporation when new common stock is issued

39) A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend. For the past two years, the board of directors has decided not to pay a dividend. At the end of the current year, the preferred stockholders must be paid ________ prior to paying the common stockholders.

D) $36/share

29) Smith Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return?

D) 14%

19) Which of the following is true of efficient-market hypothesis?

D) Since stocks are fully and fairly priced, it follows that investors should not waste their time trying to find and capitalize on miss-priced (undervalued or overvalued) securities.

33) Which of the following is true of a common stock?

D) There is no fixed dividend payment obligation for the company.

39) Which of the following is true of securities analysts?

D) They use a variety of models and techniques to value stocks.

18) Regarding the tax treatment of payments to securities holders, it is true that ________.

D) common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible

38) A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue.

D) investment banker

22) If a firm has class A and class B common stock outstanding, it means that ________.

D) one of the classes is probably nonvoting stock

25) In the Gordon model, the value of a common stock is the ________.

D) present value of a constant growing dividend stream

27) Common stockholders are sometimes referred to as ________.

D) residual owners

11) If bankruptcy were to occur, ________ would have the first claim on assets.

D) secured creditors

35) From a corporation's point of view, a disadvantage of issuing preferred stock is ________.

D) that the dividends are not tax-deductible

23) Which of the following typically applies to common stock but not to preferred stock?

D) voting rights

29) A firm issued 5,000 shares of $1 par-value common stock, receiving proceeds of $20 per share. The amount recorded for the paid-in capital in excess of par account is ________.

B) $95,000

33) Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. Assuming Tangshan China's most recent dividend was $5.50, what is the required rate of return on Tangshan's stock?

B) 8.4%

20) Which of the following is true of outstanding shares?

B) Authorized shares become outstanding shares when they are issued or sold to investors.

8) Which of the following is a difference between common stock and bonds?

B) Bondholders have a senior claim on assets and income relative to stockholders.

12) ________ is the value of a firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.

B) Book value

25) Which of the following is true of equity?

B) It does not mature, so repayment is not required.

43) Which of the following is true of the issuance of nonvoting common stock?

B) It helps the corporation to raise capital through the sale of common stock, without giving up its voting control.

28) Which of the following is true of par value of a common stock?

B) It is an arbitrary value established for legal purposes in a firm's corporate charter.

42) Which of the following is an attribute of investment bankers?

B) They bear the risk of selling a security issue.

25) A proxy statement gives shareholders the right ________.

B) to give up their vote to another party

19) Which of the following is a marketable security?

B) treasury bill

10) Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings, they expect ________.

B) greater returns from their investment in the firm's stock

17) If expected return is less than required return on an asset, rational investors will ________.

B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return

9) Holders of equity capital ________.

A) own the firm

9) Patrick Company expects to generate free-cash of $120,000 per year forever. If the firm's required return is 12 percent, the market value of debt is $300,000, the market value of preferred stock is $70,000, and the company has 100,000 shares of stock outstanding. What is the value of Patrick's stock?

A) $6.30

32) Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever?

A) 8%

13) ________ is the actual amount each common stockholder would expect to receive if a firm's assets are sold for their market value, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.

A) Liquidation value

42) Which of the following is true of preferred stocks?

A) Preferred stock with a conversion feature allows holders to change each share into a stated number of shares of common stock.

32) ________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.

A) Preferred stockholders

32) ________ are financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares.

A) Rights offering

24) Which of the following is true of common stocks?

A) The common stock of a corporation can be either privately or publicly owned.

36) Which of the following is a disadvantage of issuing preferred stock from the common stockholders' perspective?

A) There is a seniority of preferred stockholder's claim over common stockholders.

6) Milton Glasses recently paid a dividend of $1.70 per share, is currently expected to grow at a constant rate of 5%, and has a required return of 11%. Milton Glasses has been approached to buy a new company. Milton estimates if it buys the company, its constant growth rate would increase to 6.5%, but the firm would also be riskier, therefore increasing the required return of the company to 12%. Should Milton go ahead with the purchase of the new company?

A) Yes, because the value of the Milton Co. will increase by $3.17 per share.

18) If the expected return is above the required return on an asset, rational investors will ________.

A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return

33) Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________.

A) cumulative

11) Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be ________.

A) overvalued because the market price is higher than the resulting share value

31) ADRs are ________.

A) securities, backed by American depositary shares (ADSs), that permit U.S. investors to hold shares of non-U.S. companies and trade them in U.S. markets

34) Stock rights provide the stockholder with ________.

A) the right to purchase additional shares in direct proportion to their number of owned shares

20) At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting that it will have net income of $1.5 million. If the average P/E multiple in Tangshan's industry is 15, what should be the price of Tangshan's stock?

B) $22.50

30) A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of $40 per share. The amount recorded for the paid-in capital in excess of par account is ________.

B) $380,000

26) Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is ________.

B) $56.00

19) At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. If Tangshan could sell its assets for $52.5 million, Tangshan's liquidation value per share of common stock is ________.

B) $7.50

34) An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.

B) $8.00

18) At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Based on this information, Tangshan's book value per share of common stock is ________.

C) $15

40) A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of third year?

C) $24,000

21) A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________.

C) $25

36) A firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $10,000 and $250,000, respectively. The firm has 10,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________.

C) $26/share

31) A firm issued 10,000 shares of no par-value common stock, receiving proceeds of $40 per share. The amount recorded is ________.

C) $400,000 in the Common Stock account

35) Jia's Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Jia's Fashions common stock sell for today if her required return is 10.5%?

C) $59.16

28) You are planning to purchase the stock of Ted's Sheds Inc. and you expect it to pay a dividend of $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You expect to sell the stock for $100 in 3 years. If your required return for purchasing the stock is 12 percent, how much would you pay for the stock today?

C) $81.52

27) A firm has experienced a constant annual rate of dividend growth of 9 percent on its common stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk involvements. The value of the firm's common stock is ________.

C) $90/share

23) A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend. If the current market price of the preferred stock is $50, the yield on the preferred stock is ________.

C) 8.00%

15) Which of the following valuation methods is superior to others in the list since it considers expected earnings?

C) P/E multiple

16) The use of the ________ is especially helpful in valuing firms that are not publicly traded.

C) P/E multiple

14) ________ is a guide to a firm's value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.

C) The P/E multiple

15) Rational buyers and sellers use their assessment of an asset's risk and return to determine its value. Relative to this concept, which of the following is true?

C) To a buyer the asset's value represents the maximum price that he or she would pay to acquire it.

26) A proxy battle is the attempt by ________.

C) a nonmanagement group to unseat the existing management and gain control of the firm

23) Common stockholders expect to earn a return by receiving ________.

C) dividends

16) According to the efficient market hypothesis, prices of actively traded stocks ________.

C) do not differ from their true values in an efficient market

43) Preferred stockholders ________.

C) do not have preference over bondholders in the case of liquidation

41) A violation of preferred stock restrictive covenants usually permits preferred shareholders to ________.

C) force the retirement of the preferred stock at or above its par value