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33) A share of common stock just paid a dividend of $3.25 per share. The expected long-run
growth rate for this stock is 18%. If investors require a rate of return of 24%, what should the
price of the stock be?
A) $57.51
B) $62.25
C) $71.86
D) $63.92
E) $44.94
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
34) Common stockholders expect greater returns than bondholders because:
A) they have no legal right to receive dividends.
B) they bear greater risk.
C) in the event of liquidation, they are only entitled to receive any cash that is left after all
creditors are paid.
D) all of the above.
Topic: 10.1 Common Stock
Keywords: NYSE
Principles: Principle 2: There Is a Risk-Return Tradeoff
35) WSU Inc. is a young company that does not yet pay a dividend. You believe that the
company will begin to pay dividends 5 years from now, and that the company will then be worth
$50 per share. If your required rate of return on this risky stock is 20%, what is the stock worth
today?
A) $40
B) $10
C) $20.09
D) $0.00
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 1: Money Has a Time Value
36) Common stockholders are essentially creditors of the firm.
Topic: 10.1 Common Stock
Keywords: market required yield
Principles: Principle 2: There Is a Risk-Return Tradeoff
11
37) Common stock represents a claim on residual income.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
38) The growth rate of future earnings is determined by return on equity and the profit-retention
rate.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
39) The stockholder's expected rate of return consists of a dividend yield and interest.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
40) When bankruptcy occurs, the claims of the common shareholders may go unsatisfied.
Topic: 10.1 Common Stock
Keywords: NYSE
Principles: Principle 2: There Is a Risk-Return Tradeoff
41) Cumulative voting gives each share of stock a number of votes equal to the number of
directors being elected to the board.
Topic: 10.1 Common Stock
Keywords: voting rights
Principles: Principle 4: Market Prices Reflect Information
42) The expected rate of return implied by a given market price equals the required rate of return
for investors at the margin.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 1: Money Has a Time Value
12
43) Stock valuation is more precise than bond valuation as stock cash flows are more certain.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 1: Money Has a Time Value
44) The stock valuation model D1/(Rc - g) requires Rc > G.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 1: Money Has a Time Value
45) Is the following common stock priced correctly? If no, what is the correct price?
Price = $26.25
Required rate of return = 13%
Dividend year 0 = $2.00
Dividend year 1 = $2.10
2.00 - 10.2
47) Tannerly Worldwide's common stock is currently selling for $48 a share. If the expected
dividend at the end of the year is $2.40 and last year's dividend was $2.00, what is the rate of
return implicit in the current stock price?
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 1: Money Has a Time Value
48) Draper Company's common stock paid a dividend last year of $3.70. You believe that the
long-term growth in the dividends of the firm will be 8% per year. If your required return for
Draper is 14%, how much are you willing to pay for the stock?
.08) (70.3$
996.3$
51) You can purchase one share of Sumter Company common stock for $80 today. You expect
the price of the common stock to increase to $85 per share in one year. The company pays an
annual dividend of $3.00 per share. What is your expected rate of return for Sumter stock?
00.3$
00.85$
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
5) The retail analyst at Morgan-Sachs values stock of the GAP at $28.00 per share. They are
using the average industry P/E ratio of 15. Their forecasted earnings per share for next year is:
A) $0.54.
B) $1.50.
C) $1.87.
D) There is not enough information calculate earnings per share.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
6) Home Depot stock is currently selling for $30 per share. Next year's dividend is expected to
be $1.00; next year's earnings per share are expected to be $2.14. Home Depot's P/E ratio is:
A) .07.
B) 14.
C) 2.14.
D) 30.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
16
7) McDonald's stock currently sells for $77.50. It's expected earnings per share are $4.50. The
average P/E ratio for the industry is 23.3. If investors expected the same growth rate and risk for
McDonald's as for an average firm in the same industry, it's stock price would:
A) stay about the same.
B) rise.
C) fall.
D) there is not enough information.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
8) If the ROE on a new investment is less than the firm's required rate of return:
A) the investment increases the firm's value.
B) the investment leaves the firm's value unchanged.
C) the effect on the firm's value is unpredictable.
D) the investment reduces the firm's value.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
9) Zorba's is a small chain of of restaurants whose stock is not publicly traded. The average P/E
ratio for similar restaurant chains is 16.5; the P/E ratio for the S&P 500 Index is 15.2. This year's
earnings were $1.10 per share; next's earnings are expected to be $1.21 per share. A reasonable
price for a share of Zorba's stock is:
A) $19.97.
B) $18.15.
C) $20.23.
D) $16.72.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
17
23.72 and the P/E ratio based on expected earnings is 17.48. The expected growth rate in Apples
earnings must be:
A) -26%.
B) 36%.
C) 7.6%.
D) 5.5%.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
11) The P/E ratio is the market price of a share of stock divided by book equity per share.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
12) The higher a firm's P/E ratio, the more optimistic investors' feel about the firm's growth
prospects.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
13) P/E ratios found in published sources or on the internet are always computed by dividing the
next period's expected earnings into the current price of the stock.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
14) The higher the investor's required rate of return, the higher the P/E ratio will be.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
18
15) Walmart's current earnings per share of $4.39 are expected to grow at a rate of 12% per year
for the next few years. Using a P/E ratio fo 12.5, what is a reasonable value for a share of
Walmart Stock.
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
15.7, and 16.5. RAH's current earnings per share are $1.50. They are expected to grow at 6% for
the next few years. What is a reasonable price for a share of RAH stock?
Topic: 10.2 The Comparables Approach to Valuing Common Stock
Keywords: price/earnings ratio
Principles: Principle 3: Cash Flows Are the Source of Value
1) UVP preferred stock pays $5.00 in annual dividends. If your required rate of return is 13%,
how much will you be willing to pay for one share?
A) $38.46
B) $26.26
C) $65.46
D) $46.38
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
2) Green Corp.'s preferred stock is selling for $20.83. If the company pays $2.50 annual
dividends, what is the expected rate of return on its stock?
A) 8.33%
B) 12.00%
C) 2.50%
D) 20.00%
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
19
3) Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The
preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on
this stock. What is the value of the preferred stock today? Round to the nearest $1.
A) $100
B) $85
C) $75
D) $16
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
4) Which of the following statements is true?
A) Preferred stockholders are entitled to dividends before common stockholders can receive
dividends.
B) Preferred stock, like common stock, usually has no maturity; i.e., the corporation does not pay
back the investment.
C) The market value of preferred stock, like bonds, will usually fluctuate in value primarily as
the result of market rates of interest.
D) All of the above.
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
5) Which of the following statements concerning preferred stock is correct?
A) Preferred stock generally is more costly to the firm than common stock.
B) Most issues of preferred stock have a cumulative feature.
C) Preferred dividend payments are tax-deductible.
D) Preferred stock is a riskier form of capital to the firm than bonds.
Topic: 10.3 Preferred Stock
Keywords: cumulative preferred
Principles: Principle 3: Cash Flows Are the Source of Value
20
