Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
d.
11.06%
a
64. The stock of Melody Music City is selling for $37.50 and pays a current annual dividend of $1.10. What is the implied
growth rate of dividends for this firm (assume dividends are expected to grow at a constant rate) if an investor’s required
rate of return is 14 percent?
a.
11.07%
b.
14.0%
c.
11.4%
d.
10.75%
65. Many regulated companies are required by their regulatory commissions to sell new security issues via _____.
a.
negotiated underwriting
b.
competitive bidding
c.
purchasing syndicates
d.
private placement
66. Phillips Industries common stock currently sells for $50 and is expected to pay a dividend of $3.00 next year.
Determine the implied growth rate for Phillips Industries dividends assuming that an investor’s required rate of return on
this stock is 14%.
a.
6%
b.
8%
c.
14%
d.
20%
67. CPU Company currently (t = 0) pays a dividend of $2.50 per share on its common stock. Dividends are expected to
increase at the rate of $0.25 per share for the next several years. Determine the current value of CPU’s common stock to
an investor who expects to be able to sell the stock for $35 per share after 3 years, given that the investor requires a 14
percent rate of return on this security.
a.
$24.00
b.
$30.54
c.
$19.64
d.
$68.75
68. What is the current value of Frocks & Socks Clothiers, Inc., to an investor who has a required rate of return of 12
percent? The current dividend is $1.00, and the dividends are expected to grow 8 percent per year for 3 years. At the end
of 3 years the investor expects to sell the security for $76.
a.
$79.51
b.
$56.90
c.
$51.13
d.
$76.00
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
69. What is the current value of a share of MoreGro common stock that does not pay a current dividend? Earnings are
growing at a 20 percent per year rate for the next 10 years. Assume the investor has a required rate of return of 15 percent
and expects to sell the security in 5 years. Current earnings are $1.50 per share.
a.
$56.87
b.
$62.21
c.
$25.00
d.
There is insufficient information to solve this problem.
70. What is the current value of a share of ABC common stock if its current dividend is $1.50 and dividends are expected
to grow at the annual compound growth rate of 20 percent into the foreseeable future? Assume the investor has a required
rate of return of 15 percent and expects to sell the security in 5 years.
a.
$56.87
b.
$30.00
c.
$25.00
d.
The constant growth rate model cannot be used because the growth rate is greater than the required rate of
return.
71. What is the current value of a share of McDonalds if its current dividend is $1.50 and dividends are expected to grow
at an annual rate of 20 percent for the next 5 years? Assume the investor has a required rate of return of 15 percent and
expects to sell the security in 5 years for $72.
a.
$44.31
b.
$35.78
c.
$39.63
d.
$72.00
a
72. The earnings and dividends of Nebula Computer Co. are expected to grow at an annual rate of 15 percent over the
next 4 years and then slow to a constant growth rate of 8 percent per year. Nebula currently pays a dividend of $0.50 per
share. What is the value of Nebula stock to an investor who requires a 14 percent rate of return?
a.
$9.31
b.
$15.73
c.
$11.35
d.
$2.04
c
73. During the past 8 years, UTX Company common stock dividends have grown from $2.70 to $5.00 per share
(currently). Determine the value of UTX common stock to an investor who requires a 16% rate of return, assuming that
dividends continue growing for the foreseeable future at the same rate as over the past 8 years.
a.
$62.50
b.
$31.25
c.
$67.50
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
d.
$46.96
c
74. Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2. Determine the implied
growth rate for Lawton assuming that an investor’s required rate of return is 12% and that the stock can be evaluated using
a constant growth valuation model.
a.
6.74%
b.
17.26%
c.
6.40%
d.
3.80%
c
75. Helix common stock currently sells for $30, and its current dividend is $1.50. If the required rate of return on Helix
stock is 15%, what is the implied growth rate of its earnings and dividends?
a.
13.5%
b.
9.5%
c.
10.0%
d.
30.0%
76. Over the past 5 years, Dippity Doo–Dah Party Dips’ common stock earnings per share have grown from $0.62 to
$0.91. If an investor in Dippity’s stock is assumed to have a required rate of return of 14%, what is the current value of
Dippity if its current dividend is 0.12? Assume EPS will continue to grow at a constant rate.
a.
$2.16
b.
$1.62
c.
$4.94
d.
$2.00
a
77. High Brow Cow Farms, producers of the finest dairy products, has common stock that sells for $54. Dividends are
expected to continue to grow at a rate of 8% annually. If investors in High Brow require a 13% rate of return, what is the
current dividend?
a.
$2.70
b.
$2.50
c.
$4.00
d.
$3.25
78. Keeping Pace Enterprises, makers of track and field equipment, has common stock that sells for $29, and its dividends
are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected
dividend next year?
a.
$1.33
b.
$2.40
c.
$1.45
d.
$1.60
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
c
79. The common stock of Kute & Kuddly Kids Clothes, Inc., currently sells for $88.50, and its current (D0) dividend is
$1.10. Determine the implied growth rate for Kute assuming that an investor’s required rate of return is 14% and that
earnings and dividends are expected to grow at a constant rate.
a.
13.9%
b.
12.3%
c.
13.8%
d.
12.6%
80. Helluva stock currently pays a dividend of $1.20 per share. Dividends are expected to increase at the rate of $0.10 per
share for the next eight years. Determine the current value of Helluva common stock to an investor who expects to be able
to sell the stock for $28 after 5 years. Assume that the investor requires a 12 percent rate of return on the security.
a.
$66.00
b.
$28.00
c.
$21.20
d.
$15.88
c
81. Over the past 10 years the dividends of Allegro have grown from $0.45 to $1.82 per share. Determine the value of
Allegro’s common stock to an investor who requires a 20% rate of return, assuming that dividends continue growing at the
same rate as they grew over the past 10 years.
a.
$36.40
b.
$41.86
c.
$43.68
d.
$20.93
82. Zimmer’s common stock sells for $37, and its dividends are expected to grow at a rate of 8 percent annually. What is
the expected dividend (D1) given that an investor requires a return of 16 percent?
a.
$2.74
b.
$3.20
c.
$5.92
d.
$2.96
83. The earnings of Foggy Futures Weather Forecasting Company are expected to grow at an annual rate of 14% over the
next 5 years and then slow to a constant rate of 10% per year. Foggy currently pays a dividend of $0.36 per share. What is
the value of Foggy’s stock to an investor who requires a 16% rate of return?
a.
$7.97
b.
$7.76
c.
$14.42
d.
$11.11
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
84. During the past 10 years, Saturn’s common stock dividends have grown from $0.24 to $0.62. If the past growth of
dividends is expected to continue at the same rate in the future, what is the current value of Saturn’s common stock to an
investor who requires an 18% rate of return?
a.
$7.75
b.
$3.79
c.
$8.53
d.
$10.42
c
85. HiGlo’s common stock sells for $23.50, and its earnings are expected to grow at a rate of 12% annually. What is the
current dividend (Do) for an investor who requires a 15% return?
a.
$0.71
b.
$0.63
c.
$0.34
d.
$0.31
86. During the past 7 years, Burger Flippin’ Corp.’s earnings have grown from $0.78 to $1.95 per share. If the past growth
rates are expected to continue into the future, what is the current value of Flippin’s common stock to an investor who
requires a 16% rate of return?
a.
$97.50
b.
$13.93
c.
$111.15
d.
$48.50
c
87. Quantum Inc. has 5.4 million shares outstanding, and the firm’s charter provides for cumulative voting. The company
has a twelve-member board of directors, all of whom are up for reelection. What is the minimum number of shares needed
to ensure the election of one director?
a.
450,001
b.
415,386
c.
431,251
d.
425,421
88. AVIX has 6.8 million shares outstanding, and the firm’s charter provides for cumulative voting. The company has a
seven-member board of directors, all of whom are up for reelection. What is the minimum number of shares needed to
ensure the election of two directors?
a.
850,001
b.
5,950,001
c.
3,400,001
d.
1,700,001
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
89. What is the estimated price of Once in a Blue Moon stock that has the following dividends? The return on similar
investments is 18%. (Round the growth rate to the nearest whole percent.)
YEAR
DIVIDENDS
2014
$2.50
2013
$2.48
2012
$2.36
2011
$2.32
a.
$17
b.
$13
c.
$22
d.
$50
a
90. Listed below are some of the responsibilities of investment bankers. Which of the following is NOT one of them?
a.
They can purchase securities.
b.
They market securities.
c.
They directly influence the objectives and direction of the company.
d.
They arrange private loans and leases.
c
91. The zero growth method is used to value _____.
a.
common stock
b.
required rate of return
c.
bonds
d.
preferred stock
92. All of the following are ways that securities are offered to the public in a public offering EXCEPT _____.
a.
securities are sold through competitive bidding
b.
securities are sold through negotiated underwriting to a purchasing syndicate
c.
securities are sold through excess-market pricing
d.
securities are sold on a best-efforts basis
c
93. In a liquidation of a firm due to bankruptcy, whose claims are considered last?
a.
the government
b.
preferred stockholders
c.
common stockholders
d.
debt holders
c
94. Standby underwriting is a procedure whereby an investment banker agrees to _____ during a rights offer.
a.
purchase any shares not sold to rights holders
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
b.
set the subscription price
c.
underwrite a new security issue and sell it to the public
d.
underwrite all of the firm’s future security issues in exchange for a large underwriter’s fee
a
95. By-Your-Leave Travel Agency has reported the dividends listed below. What return could be expected? The price of
the stock is $18. (Round the growth rate to the nearest whole percent.)
Years
Dividends
2010
$1.12
2011
$1.15
2012
$1.18
2013
$1.21
2014
$1.24
a.
10.11%
b.
12.02%
c.
8.15%
d.
9.74%
a
96. Chill Pill Pharmaceuticals is expecting a growth rate of 14% for the next two years due to its new drug. Thereafter it
should level to an 8% growth rate. The last dividend paid was $0.65 per share. What price should the stock sell for if
investors require 12% return?
a.
$18.14
b.
$22.75
c.
$19.47
d.
$20.16
c
97. During negotiated underwriting, in whose interest is it that the issued security be fairly priced?
a.
the issuing firm but not the underwriter
b.
the underwriter but not the issuing firm
c.
both the underwriter and the issuing firm
d.
neither the underwriter nor the issuing firm
c
98. If Crafty Creatures Cage Maker stock sells for $18 per share and the firm nets $12 per share, the difference is called
the ____.
a.
underwriting spread
b.
profit
c.
SEC charge
d.
refund
a
99. An option for selling securities reserved for larger firms (MVE > $150,000,000) whereby the firm files a master
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
registration statement and then can sell small increments of the stock over the next two years by filing a short-form
statement is called _____.
a.
SEC registration
b.
red herring
c.
shelf registration
d.
commission registration
c
100. King of the Roost Chicken Farms has issued the following dividends. What would be the growth rate in dividends
(rounded)?
YEARS
DIVIDENDS
2014
$3.00
2013
$2.50
2012
$1.75
2011
$1.54
a.
15%
b.
25%
c.
12%
d.
21%
101. A rights offering (also called a privileged subscription) allows existing stockholders to _______.
a.
purchase one new share of stock for every ten shares of stock they currently possess
b.
purchase any shares of stock not sold to rights holders
c.
sell existing shares of stock above market price
d.
purchase new shares of stock below market price
102. Haulin’ It Towing Company is selling a stock for $16. The stock just paid a dividend of $0.60, and this dividend is
expected to grow by 15% per year for three years. After that, it will grow at a constant rate of 4%. The stock’s beta is 1.7,
the risk-free rate of interest is 1.75%, and the market risk premium is 5.25%. Should you buy the stock? (Round to dollars
and cents or two decimal points.)
a.
No, the stock is not a good value since it is only worth about $8.
b.
No, the stock is not a good value since it is only worth about $12.
c.
Yes, the stock is a good value since it should sell for about $25.
d.
Yes, the stock is a good value since it should sell for about $18.
103. All of the following statements about common stock are correct EXCEPT _____.
a.
common stock is a variable income security
b.
common stock prices fluctuate more than bonds
c.
common stock is callable
d.
common stockholders have preemptive rights
c
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
104. Of the following common stock rights, which allows common stockholders to buy more shares of common stock in
order to retain their pro-rata share of ownership in the company?
a.
asset rights
b.
preemptive rights
c.
dividend rights
d.
voting rights
105. Stock splits are a sign that the company ______.
a.
is in need of more financial capital
b.
has set its stock price too low
c.
wants to get its stock price to a more desirable trading level
d.
cannot pay its stock dividend
c
106. If a company offers more than one class of stock, corporate governance experts feel that _____.
a.
this is more democratic since some shares are more expensive than others
b.
this is preferable in order to provide a special class of nonvoting stock to executives
c.
super-voting power allows for the election of directors that benefit a specific class of stock
d.
decisions made by the dual class system are more advantageous for the average investor
c
107. Which of the following statements about common stock voting is (are) correct?
I. Majority voting typically prohibits a group of stockholders with a minority viewpoint from having any representation
on the board.
II. Cumulative voting allows each share of stock to represent as many votes as there are directors to be elected.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements I and II are correct.
d.
Neither statement I nor II is correct.
c
108. All of the following are reasons that companies hold treasury stock EXCEPT ______.
a.
compliance with SEC regulations that a certain amount of company shares must be kept by the company
b.
disposition of excess cash
c.
financial restructuring
d.
future corporate needs
a
Essay
109. List the various rights of common stockholders.
2. Asset rights – in liquidation, they have the right to assets that remain after senior obligations have been
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
110. What are the advantages and disadvantages of common stock financing?
111. List the responsibilities of investment bankers.
112. What are some of the costs associated with new security offerings?
113. Why do closely held firms need to have an outside appraiser to determine their value? What are the reasons for
valuation?
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
114. What are the disadvantages of owning minority interest in a closely held corporation, and how can this be overcome?
115. Explain the difference between majority voting and cumulative voting and why one is preferred over the other.