978-0133423822 Chapter 10 Part 3

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10) Apple stock is now selling for $460 per share. The P/E ratio based on current earnings

is 10.98 and the P/E ratio based on expected earnings is 10.16. The expected growth rate

in Apples earnings must be

A) 2.39%.

B) 8.07%.

C) -7.5%.

D) 5.5%.

Question Status: Previous edition

Objective: 10.2 Use the price-to-earnings ratio to value 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.

Question Status: Previous edition

Objective: 10.2 Use the price-to-earnings ratio to value common stock.

Keywords: price/earnings ratio

Principles: Principle 3: Cash Flows Are the Source of Value

12) The higher a irm’s P/E ratio, the more optimistic investors feel about the irm’s growth

prospects.

Question Status: Previous edition

Objective: 10.2 Use the price-to-earnings ratio to value 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.

Question Status: Previous edition

Objective: 10.2 Use the price-to-earnings ratio to value 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.

Question Status: Previous edition

Objective: 10.2 Use the price-to-earnings ratio to value common stock.

Keywords: price/earnings ratio

Principles: Principle 3: Cash Flows Are the Source of Value

15) Walmart’s current earnings per share of $5.02 are expected to grow at a rate of 17%

per year for the next few years. Using a P/E ratio of 13.46, what is a reasonable value for a

share of Walmart Stock.

Question Status: Previous edition

Objective: 10.2 Use the price-to-earnings ratio to value common stock.

Keywords: price/earnings ratio

Principles: Principle 3: Cash Flows Are the Source of Value

16) RAH Inc. is not publicly traded, but the P/E ratios of it’s 4 closest competitors are 15,

15.3, 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?

Question Status: Previous edition

Objective: 10.2 Use the price-to-earnings ratio to value common stock.

Keywords: price/earnings ratio

Principles: Principle 3: Cash Flows Are the Source of Value

10.3 Preferred Stock

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

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

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%

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

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

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

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 luctuate in value primarily

as the result of market rates of interest.

D) All of the above.

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

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 irm 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 irm than bonds.

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

6) World Wide Interlink Corp. has decided to undertake a large project. Consequently, there

is a need for additional funds. The inancial 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

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

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%

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

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

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

9) Edison Power and Light has an outstanding issue of cumulative preferred stock with an

annual ixed 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.

Question Status: Revised

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

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

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

11) Piercing Publishers recently issued preferred stock with a ixed annual dividend of

$3.00 per share. Investors require a 5% return on similar preferred stock issues. The stock

is currently selling for $65. 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.

Question Status: New question

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

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

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

13) Petriied 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%

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

14) Horizon Communications stock pays a ixed annual dividend of $3.00. Because of lower

inlation, 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.

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

15) The required rate of return on TKF preferred has fallen from 5.75% at the time of issue

to the present rate of 5%. The stock now sells for $115. What was the original price?

A) $75.61

B) $132.25

C) $114

D) $100

Question Status: New question

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

16) Preferred stock is similar to a bond in which of the following ways?

A) Preferred stock always contains a maturity date.

B) Both investments provide a ixed income.

C) Both contain a growth factor similar to common stock.

D) None of the above.

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

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%).

A) 25.0%

B) 14.2%

C) 7.1%

D) 9.3%

Question Status: Revised

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

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

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

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

required rate of return?

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

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 6% (round your answer to the nearest $1)?

A) $35

B) $23

C) $17

D) $21

Question Status: Revised

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value

21) Which of the following formulas is appropriate to ind the value of preferred stock with

a ixed 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

Question Status: Previous edition

Objective: 10.3 Identify the basic features and characteristics and features of preferred stock and

value preferred shares.

Keywords: preferred stock

Principles: Principle 3: Cash Flows Are the Source of Value