6) World Wide Interlink Corp. has decided to undertake a large project. Consequently, there is a
need for additional funds. The financial manager plans to issue preferred stock with an annual
dividend of $5 per share. The stock will have a par value of $30. If investors’ required rate of
return on this investment is currently 20%, what should the preferred stock’s market value be?
A) $10
B) $15
C) $20
D) $25
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
7) Davis Gas & Electric issued preferred stock in 1985 that had a par value of $50. The stock
pays a dividend of 7.875%. Assume that shares are currently selling for $62.50. What is the
preferred stockholder’s expected rate of return? Round to the nearest 0.01%.
A) 6.30%
B) 7.88%
C) 10.25%
D) 5.02%
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
8) Murky Pharmaceuticals has issued preferred stock with a par value of $100 and a 5%
dividend. The investors’ required yield is 10%. What is the value of a share of Murky preferred?
A) $100
B) $75
C) $50
D) $25
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
21
9) Edison Power of light has an outstanding issue of cumulative preferred stock with an annual
fixed dividend of $2.00 per share. It has not paid the preferred dividend for the last 3 years, but
intends to pay a dividend on the common stock in the coming year. Before Edison can pay a
dividend on the common stock
A) preferred shareholders may cast all their votes for a single director.
B) preferred shareholders must receive dividends totaling $8.00 per share.
C) preferred shareholders must receive $2.00 per share.
D) will not necessarily receive any dividend.
Topic: 10.3 Preferred Stock
Keywords: cumulative preferred
Principles: Principle 3: Cash Flows Are the Source of Value
10) Which of the following provisions is unique to preferred stockholders and usually NOT
available to common stockholders?
A) Cumulative dividends feature
B) Voting rights
C) Fixed dividend
D) Both A and C
Topic: 10.3 Preferred Stock
Keywords: cumulative preferred
Principles: Principle 3: Cash Flows Are the Source of Value
11) McMillen House of Books recently paid a $3 dividend on its preferred stock. Investors
require a 6% return on the stock. The stock is currently selling for $45. Is the stock a good buy?
A) Yes, as it is undervalued $5.
B) Yes, as it is undervalued $10.
C) No, as it is overvalued $5.
D) No, as it is overvalued $10.
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
22
12) Tri State Pickle Company preferred stock pays a perpetual annual dividend of 2 1/2% of its
par value. Par value of TSP preferred stock is $100 per share. If investors’ required rate of return
on this stock is 15%, what is the value of per share?
A) $37.50
B) $15.00
C) $16.67
D) $6.00
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
13) Petrified Forest Skin Care, Inc. pays an annual perpetual dividend of $1.70 per share. If the
stock is currently selling for $21.25 per share, what is the expected rate of return on this stock.
A) 36.13%
B) 12.5%
C) 8.0%
D) 13.6%
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
14) Horizon Communications stock pays a fixed annual dividend of of $3.00. Because of lower
inflation, the market’s required yield on this preferred stock has gone from 12% to 10%. As a
result:
A) Horizon’s dividend decreased by 6 cents.
B) The value of Horizon’s preferred increased by $3.00.
C) The value of Horizon’s preferred decreased by $5.00.
D) The value of Horizon’s preferred increased by $5.00.
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 1: Money Has a Time Value
15) Style Corp. preferred stock pays $3.15. What is the value of the stock if your required rate of
return is 8.5% (round your answer to the nearest $1, and assume no transaction costs)?
A) $33
B) $23
C) $27
D) $37
Topic: 10.3 Preferred Stock
Keywords: market required yield
23
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
17) Solitron Manufacturing Company preferred stock is selling for $14. If it has a yearly
dividend of $1, what is your expected rate of return if you purchase the stock at its market price
(round your answer to the nearest .1%, and assume no transaction costs)?
A) 25.0%
B) 14.2%
C) 7.1%
D) 9.3%
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
18) An decrease in the ________ will increase the value of preferred stock.
A) expected rate of return
B) life of the investment
C) dividend paid
D) both A and C
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
19) Texon’s preferred stock sells for $85 and pays $11 each year in dividends. What is the
expected rate of return?
11$
20) What is the value of a preferred stock that pays a $2.10 dividend to an investor with a
required rate of return of 11% (round your answer to the nearest $1)?
A) $19
B) $23
C) $17
D) $21
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
21) Which of the following formulas is appropriate to find the value of preferred stock with a
fixed dividend?
A) Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate)/Market’s
Required Yield on Preferred Stock
B) Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate)/Market’s
Required Yield on Preferred Stock – growth rate
C) Value of preferred stock = Annual Preferred Stock Dividend/Market’s Required Yield on
Preferred Stock
D) Value of preferred stock = Annual Preferred Stock Dividend/Investor’s Required Yield on
Preferred Stock
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
22) An issue of preferred stock currently sells for $52.50 per share and pays a constant annual
expected dividend of $2.25 per share. The expected return on this security is:
A) 4.29%.
B) 0.04%.
C) 8.33%.
D) 13.33%.
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
25
23) Expected cash flow for a preferred stock primarily consists of:
A) dividend payments .
B) changes in the price of the stock.
C) interest payments.
D) both A and B.
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
24) Preferred stock is similar to common stock in that:
A) it has no fixed maturity date.
B) the nonpayment of dividends can bring on bankruptcy.
C) dividends are limited in amount.
D) all of the above.
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
25) How is preferred stock affected by a decrease in the required rate of return?
A) The value of a share of preferred stock decreases.
B) The dividend increases.
C) The dividend decreases.
D) The value of a share of preferred stock increases.
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
26) In the event of bankruptcy, preferred stockholders and common stockholders have the same
claim on the firm’s assets.
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
27) A company may issue multiple classes of preferred stock.
Topic: 10.3 Preferred Stock
Keywords: market required yield
Principles: Principle 3: Cash Flows Are the Source of Value
26