FINA Exam 2

Which of the following statements is NOT true about preferred stock? a. Preferred stock holders have limited voting privileges relative to common-stock owners. b.Preferred stock represents ownership in the firm. c. Preferred stockholders are not guaranteed dividend payments by the firm. d. Preferred stock dividends are paid by the issuer with after-tax dollars.

c. Preferred stockholders are not guaranteed dividend payments by the firm

Which of the following statements is NOT true about broker markets? a. brokers bring buyers and sellers together to earn a fee, called a commission b. brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves c. investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search d. brokers can guarantee an order because they have an inventory of securities

d. brokers can guarantee an order because they have an inventory of securities

The least efficient of all the different types of secondary markets is the: a. broker market b. auction market c. dealer market d. direct search market

d. direct search market

The required rate of return is 20.85 percent. Sheridan Corp. has just paid a dividend of $3.12 and is expected to increase its dividend at a constant rate of 5.45 percent. What is the expected price of the stock three years from now?

expected price:

You have won the lottery and will receive 20 annual payments of $10,000 starting today. If you can invest these payments at 8.5%, what is the present value of your winnings? (Round the final answer to the nearest dollar.)

$102,677

Crane Manufacturing Company has been growing at a rate of 5 percent for the past two years, and the CEO expects the company to continue to grow at this rate for the next several years. The company paid a dividend of $ 1.40 last year. If your required rate of return is 15 percent, what is the maximum price that you would be willing to pay for this company's stock?

$14.70 g: 5% R: 15% D1: d0 x (1+ 0.05) = $1.40(1+0.05) = $1.47 p0= d1/ (R-g) = $1.47/ (0.15-0.05) p0= $14.70

You are interested in buying the preferred stock of a bank that pays a dividend of $ 2.25 every quarter. If you discount such cash flows at 6 percent, what is the value of this stock?

$150 P=D/R P= (2.25*4)/ 0.06

The Stagnant Growth Corporation has paid a constant dividend of $2.50 per year for the past 3 years and is expected to continue paying the same dividend per share for the foreseeable future. If the required rate of return on its common stock is 12%, the most an investor should pay per share is _____.

$20.83 (2.50/0.12)

Sheridan Bancorp issued perpetual preferred stock a few years ago. The bank pays an annual dividend of $ 4.45 and your required rate of return is 16.5 percent. what is the value of the stock given your required rate of return?

$26.97 p=d/r p=4.45/ 0.165

Damien McCoy has loaned money to his brother at an interest rate of 5.85 percent. He expects to receive $987, $1,012, $1,062, and $1,162 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.)

$3,657

The First Bank of Flagstaff has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $ 1.50 on this stock. What is the current price of this preferred stock given a required rate of return of 15.0 percent?

$40 p=d/r p=(1.5*4)/.15

Kleine Toymakers is introducing a new line of robotic toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Kleine plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of return is 15 percent? a. $13.24 b. $6.57 c. $10.24 d. $12.00

$6.57 D0: $2.00; D1, D2,D3=$0 D4: $4.00 D5: d4(1+g) = $4.00(1+0.10)= $4.40 D6: d5(1+g)= $4.40(1+0.10)= $4.84 PV= 0+0+0+4.00/(1.15)^4+ 4.40/(1.15)^5 + 4.84/(1.15)^6 PV= $6.57

The Buckeye Corporation expects to pay a dividend of $3.15 per share at the end of next year. The firm expects the dividend to continue growing at the rate of 8% per year for the foreseeable future. If you require a return of 13% per year, the most you should pay for this stock is ______.

$63.00 p0= d1/ (R-g) = 3.15/ (0.13-0.08)

Stowell earns 20% interest compounded annually on his savings. He will deposit $1,500 today, $1,650 one year from today, and $1,820 two years from today. What will be the account balance three years from today?

$7,152

Assume that you are considering the purchase of a stock which will pay dividends of $4.50 during the next year. Further assume that you will be able to sell the stock for $85.00 one year from today and that your required rate of return is 15 percent. How much would you be willing to pay for the stock today?

$77.83 p0= (d1+p1)/(1+R)

Sheridan, Inc., is expected to grow at a constant rate of 6.50 percent. If the company's next dividend, which will be paid in a year, is $ 1.97 and its current stock price is $22.35, what is the required rate of return on this stock?

R: 15.31% d1: $1.97 p0: $22.32 g: 6.50% p0: d1/R-g R= (d1/p0) + g

To calculate the future value of a series of cash flows, we can add up all the cash flows and then calculate their compounded value at the given rate of interest. True/false

False

To determine the monthly payment on a one-year loan, divide the amount of the loan by 12. T/F

False

Ted McKay has just bought the common stock of Blossom Corp. Management of Blossom expects the company expects to grow at the following rates for the next three years: 45 percent, 40 percent, and 30 percent. Last year the company paid a dividend of $ 2.90. Assume a required rate of return of 10 percent. D1: D2: D3: PV:

D1: $4.21 D2: $5.89 D3: $7.66 PV: $14.46

Is preferred stock a debt or an equity security?

Equity

Sheridan Corp. paid a dividend of $ 2.32 yesterday. The company's dividend is expected to grow at a steady rate of 5 percent for the foreseeable future. If investors in stocks of companies like Sheridan require a rate of return of 25 percent, what should be the market price of Sheridan stock?

Market Price: $12.18

Chris Anderson is interested in purchasing the common stock of Wildhorse, Inc., which is currently priced at $ 37.30. The company is expected to pay a dividend of $2.58 next year and to increase its dividend at a constant rate of 6.95 percent. What should the market value of the stock be if the required rate of return is 14 percent ? Is this a good buy?

Market value of stock= $36.6 No, this is not a good buy because the current price is more than the market value of the stock.

Equity securities are certificates of ownership of a corporation. T/F

True

Growth stocks typically pay little or no dividends. True or False

True

The dealer's selling price of a given stock is also known as the ask price. true or false

True

The future value of an ordinary annuity is less than the future value of an annuity due. T/F

True

The value of a firm's equity is calculated as the sum of the present value of all expected future cash flows. True or False

True

If a person finds a buyer for the 100 shares of a company he owns, this is: a) a direct search market transaction b) a broker market transaction c) an auction market transaction d) a dealer market transaction

a. a direct search market transaction

Which of the following statements about preferred stock is FALSE? a. failure to pay dividends on preferred stocks will result in a default. b. preferred stock has a higher-priority claim on the firm's assets than the common stock. c. preferred stock has a lower-priority claim on the firm's assets than the firm's creditors in the event of default. d. preferred stock typically pays a fixed dividend.

a. failure to pay dividends on preferred stocks will result in a default.

Which of the following is a characteristic of common stock? a. limited liability for owners b. fixes dividends c. fixed interest d. credit ratings

a. limited liability for owners

Which of the following statements is NOT true about constant-growth stocks? a. The cash dividend remains constant over time. b. Mature companies with a history of stable growth show this pattern. c.The dividends grow at a constant rate from one period to the next forever. d. Far distant-dividends have a very small present value and add little to the stock's price.

a. the cash dividend remains constant over time

If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called: a. a growing perpetuity b. an ordinary annuinity c. an annuity due d. a perpetuity

an ordinary annuity

Which of the following is NOT true about the general dividend valuation model? a. the model does not assume any specific pattern for future dividends, such as constant growth rate b. it makes a specific assumption about when the share of stock is going to be sold in the future c. the model calls for forecasting an infinite number of dividends for a stock d. the price of a share of stock is the PV of all expected future dividends

b. It makes a specific assumption about when the share of stock is going to be sold in the future

Which of the following is NOT a widely-known stock market index? a. the standard and poors 500 index b. the OTQ composite index c. the New York stock exchange index d. the Dow Jones industrial average

b. The OTQ Composite index

The constant growth dividend model would be useful to determine the value of all, but which of the following firms? a. A firm whose earnings and dividends are declining at a fairly steady rate. b. A firm whose expected sales, profits, and dividends are fluctuating. c. A firm whose sales, profits, and dividends are growing at an annual average compound rate of 5 percent. d. A firm whose earnings and dividends are growing at a fairly steady rate.

b. a firm whose expected sales, profits, and dividends are fluctuating.

Which of the following has a right to vote in the election of the board of directors of a company? a. bondholders b. common stockholders c. preferred stockholders d. employees

b. common stockholders.

William deposited $25,000 today that would earn an interest at the rate of 3% for a period of 2 years. The amount of $25,000 represents the: a. future value b. present value c. present value of an annuity d. future value of an annuity

b. present value

An investor predicts that, one year from today, Acme Inc. will pay a common stock dividend of $1.75 and the price per share will be $35. If the investor's required rate of return is 10%, how much should she expect to pay for the stock today? a. $30.52 b. $36.75 c. $33.41 d. $31.82

c. $33.41 D1: $1.75 P1: $35 R: 0.10

Which of the following are the three simplifying assumptions that cover most stock growth patterns? a.Dividends remain constant over time, dividends grow at a constant rate, and dividends are equal to zero. b. Dividends have a zero-growth rate, dividends grow at a varying rate, and dividends are equal to zero. c. Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern. d. None of the above.

c. dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern.

Which of the following statements is NOT true about common stock? a. common-stock holders have limited liability toward the obligations b. common-stock holders have the right to vote on the election of the board of directors of their company c. owners of common stock are guaranteed dividend payments by the firm d. common stock is considered to have no fixed maturity.

c. owners of common stock are guaranteed dividend payments by the firm.

The stocks owned by _____ represent about 35% of the total value of all corporate equity. a. pension funds b. foreign investors c. mutual funds d. households

d. Households

The reason we cannot apply the constant growth dividend model in the case where the growth rate, g, is greater than or equal to the required rate, R, is because it would result in the value of the stock becoming: a. negative b. zero c. negative or infinite above d. infinite

negative

Pharoah, Inc., paid a dividend of $ 4.25 last year. The company's management does not expect to increase its dividend in the foreseeable future. If the required rate of return is 17.0 percent, what is the current value of the stock?

p=d/r p=4.25/0.17