67) The risk cost of preferred stock is ________.
A) lower than the cost of long-term debt.
B) higher than the cost of common stock.
C) higher than the cost of long-term debt and lower than the cost of common stock.
D) lower than the cost of convertible long-term debt and higher than the cost of common stock.
68) Preferred stock is characterized by ________.
A) voting rights
B) maturity date
C) quasi-debt nature
D) preemptive rights
69) 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.
A) $0/share
B) $12/share
C) $24/share
D) $36/share
70) 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 not paid the preferred dividend for the
prior two years, how much must the preferred stockholders be paid (in total, not per share) prior
to paying dividends to common stockholders at the end of third year?
A) $8,000
B) $16,000
C) $24,000
D) $25,000
71) A violation of preferred stock restrictive covenants usually permits preferred shareholders to
________.
A) force the company into bankruptcy
B) suit against the shareholders
C) force the retirement of the preferred stock at or above its par value
D) force the company to repurchase the shares at a stated amount below par
72) 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.
B) Like bonds, preferred stocks are due for payment on a fixed maturity date along with interest.
C) Restrictive covenants of preferred stocks include provisions about listing of stocks on the
securities exchange and determining the price of stock.
D) A firm’s bond indenture indicates how many authorized preferred shares and bonds it can
issue.
73) Preferred stockholders ________.
A) do not have preference over common stockholders in the case of liquidation
B) have preference over bondholders in the case of liquidation
C) do not have preference over bondholders in the case of liquidation
D) have preference over creditors in the case of liquidation
74) Which of the following is usually a right of a preferred stockholder?
A) right to convert shares to common stock on demand
B) preemptive right to participate in the issuance of new common shares
C) right to receive dividend payments before any dividends are paid to common stockholders
D) right to sue company in bankruptcy proceedings if promised preferred dividends are not paid
75) Which of the following is typically a feature of preferred stocks?
A) They are settled prior to common stocks during liquidation.
B) They are mostly noncumulative in nature.
C) They are paid dividends that grow at a constant rate.
D) They carry voting rights and have maturity date.
76) Identify whether the key characteristic describes common stock (CS) or preferred stock (PS).
________ 1. Source of financing which places minimum constraints on the firm
________ 2. Used by young firms receiving investment funds from venture capital firms
________ 3. Potential dilution of earnings and voting power
________ 4. Fixed financial obligation
________ 5. Increases the firm’s borrowing power
________ 6. May have cumulative and participating features
________ 7. May be convertible into another type of security
________ 8. Last to receive earnings or distribution of assets in the event of bankruptcy
________ 9. Frequently includes a call feature
77) Edward Accounting Services has an outstanding issue of 1,000 shares preferred stock with a
$100 par value, an 9 percent annual dividend, and 5,000 shares of common stock outstanding. If
the stock is cumulative and the board of directors has not paid the preferred dividend for the last
two years, how much must preferred stockholders be paid (in total, not per share) before
dividends are paid to common stockholders?
78) American Depositary Receipts (ADRs) are claims issued by U.S. banks representing
ownership of shares of a foreign company’s stock held on deposit by the U.S. bank in the foreign
market and issued in dollars to U.S. investors.
1) Which of the following is TRUE of securities analysts?
A) They raise initial external equity finance privately for firms.
B) They are primarily involved in underwriting of securities.
C) They find prospective buyers for new stocks or bonds issue.
D) They use a variety of models and techniques to value stocks.
2) Investors purchase a stock when they believe that it is undervalued and sell when they feel
that it is overvalued.
3) In an efficient market, the expected return and the required return are equal.
4) In an efficient market, stock prices adjust quickly to new public information.
5) In an inefficient market, stock prices adjust quickly to new public information.
6) In an inefficient market, securities are typically in equilibrium, which means that they are
fairly priced and that their expected returns equal their required returns.
7) In an efficient market, securities are typically in equilibrium, which means that they are fairly
priced and that their expected returns equal their required returns.
8) To a buyer, an asset’s value represents the minimum price that he or she would pay to acquire
it.
9) If the expected return is less than the required return, investors will sell the asset, because it is
not expected to earn a return commensurate with its risk.
10) If the expected return were above the required return, investors would buy an asset, driving
its price up and its expected return down.
11) Efficient-market hypothesis is the theory describing the behavior of a market in which
securities are typically in equilibrium, security prices fully reflect all public information
available and react swiftly to new information, and, because stocks are fairly priced, investors
need not waste time looking for mispriced securities.
12) If a market is truly efficient, investors should not waste their time trying to find and
capitalize on mispriced securities.
13) Behavioral finance is a growing body of research that anomalies that are not consistent with
the efficient markets theory.
14) The constant growth model is an approach to dividend valuation that assumes a constant
future dividend.
15) The constant growth model is an approach to dividend valuation that assumes that dividends
grow at a constant rate indefinitely.
16) 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?
A) To a buyer the asset’s value represents the minimum price that he or she would pay to acquire
it.
B) To a seller the asset’s value represents the maximum sale price.
C) To a buyer the asset’s value represents the maximum price that he or she would pay to acquire
it.
D) To a seller the asset’s value represents the price at which he acquired the asset.
17) According to the efficient market hypothesis, prices of actively traded stocks ________.
A) can be under- or overvalued in an efficient market
B) can only be undervalued in an efficient market
C) do not differ from their true values in an efficient market
D) can only be overvalued in an efficient market
18) If an asset’s expected return is less than its required return, 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
B) sell the asset, which will drive the price down and cause the expected return to reach the level
of the required return
C) sell the asset, which will drive the price up and cause the expected return to reach the level of
the required return
D) buy the asset, since price is expected to increase
19) 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
B) buy the asset, which will drive the price down and cause the expected return to reach the level
of the required return
C) sell the asset, which will drive the price up and cause the expected return to reach the level of
the required return
D) sell the asset, since price is expected to decrease
20) Which of the following is TRUE of efficient-market hypothesis?
A) Securities are typically in disequilibrium, meaning they are fairly priced and their expected
returns are more than their required returns.
B) Insider trading scandals have proven that stocks are not fully and fairly priced; as a result, it
would be worthwhile for investors should spend time searching for mispriced (over- or
undervalued) stocks.
C) At any point in time, security prices fully reflect all internal information available about the
firm and its securities, and these prices are insensitive to new information.
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.
21) Preferred stock is valued as if it were a ________.
A) fixed-income obligation
B) bond
C) perpetuity
D) common stock
22) 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 ________.
A) $64
B) $16
C) $25
D) $50
23) A certain preferred stock will pay a dividend of $1.20 per share till perpetuity. If the required
return is 10 percent, the value of the preferred stock is ________.
A) $120
B) $10
C) $12
D) $100
24) 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 ________.
A) 4.00%
B) 6.00%
C) 8.00%
D) 12.00%
25) The ________ is utilized to value preferred stock.
A) capital asset pricing model
B) arbitrage pricing model
C) zero-growth model
D) Black-Scholes model
26) In the Gordon model, the value of a common stock is the ________.
A) net value of all assets which are liquidated for their exact accounting value
B) actual amount each common stockholder would expect to receive if the firm’s assets are sold
C) present value of a non-growing dividend stream
D) present value of a constant growing dividend stream
27) 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 ________.
A) $28.00
B) $56.00
C) $22.40
D) $18.67
28) 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 required
return on the firm’s stock is 12 percent. The value of the firm’s common stock is ________.
A) $22.50/share
B) $9/share
C) $90/share
D) $30/share
29) 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?
A) $75.45
B) $77.24
C) $81.52
D) $85.66
30) 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?
A) 10%
B) 12%
C) 13%
D) 14%
31) 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
B) $29.33
C) $31.43
D) $43.14
32) Harry Corporation’s common stock currently sells for $179.85 per share. Harry paid a
dividend of $10.18 yesterday, 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, immediately after it pays its next dividend?
A) $190.64
B) $187.04
C) $195.40
D) $179.84
33) 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%
B) 9%
C) 10%
D) 11%
34) 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?
A) 7.3%
B) 8.6%
C) 9.5%
D) 10.6%
35) 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?
A) $25.33
B) $18.73
C) $29.86
D) $22.68
36) 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%?
A) $54.90
B) $60.80
C) $59.16
D) $69.30
37) The board of directors of Ride World, Inc. has declared $5.00 common stock dividend,
payable one year from today, and accepted a plan to freeze the dividend at $5 per year
indefinitely. What is the value of the Ride World’s common stock if the required rate of interest
is 15 percent?
38) Jia’s Kitchen Stuff has recently sold 1,000 shares of preferred stock. What is the per share
value of the stock assuming 10 percent required rate of return and a preferred dividend of $6.75?
39) Aunt Tilly’s Fur Company has been experiencing several years of financial difficulty and,
thus, has considered maintaining its dividend payment at $2.50 indefinitely. What is the value of
its common stock if the required rate of return is 8.5 percent?