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Ch 07 Corporate Valuation and Stock Valuation
57. Which of the following statements is CORRECT?
a.
The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
b.
Corporations cannot buy the preferred stocks of other corporations.
c.
Preferred dividends are not generally cumulative.
d.
A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing
corporation.
e.
Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to
the proceeds in a liquidation.
58. Which of the following statements is CORRECT?
a.
Preferred stock is normally expected to provide steadier, more reliable income to investors than the same
firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax
expected return on the common stock.
b.
The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to
purchase (on a pro rata basis) new issues of preferred stock.
c.
One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received
represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax
Ch 07 Corporate Valuation and Stock Valuation
free.
d.
One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax
deductible to the issuer.
e.
A major disadvantage of financing with preferred stock is that preferred stockholders typically have
supernormal voting rights.
59. Which of the following statements is CORRECT?
a.
The preemptive right gives stockholders the right to approve or disapprove of a merger between their company
and some other company.
b.
The preemptive right is a provision in the corporate charter that gives common stockholders the right to
purchase (on a pro rata basis) new issues of the firm's common stock.
c.
The stock valuation model, P0 = D1/(rs − g), cannot be used for firms that have negative growth rates.
d.
The stock valuation model, P0 = D1/(rs − g), can be used only for firms whose growth rates exceed their
required returns.
e.
If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends,
but under all state charters the two classes must have the same voting rights.
Ch 07 Corporate Valuation and Stock Valuation
60. The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is
CORRECT?
a.
If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains
yield than Stock X.
b.
If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then
Stock Y must sell for a higher price.
c.
The stocks must sell for the same price.
d.
Stock Y must have a higher dividend yield than Stock X.
e.
If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the
higher expected growth rate.
Ch 07 Corporate Valuation and Stock Valuation
61. Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming
the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
A
B
Beta
1.10
0.90
Constant growth rate
7.00%
7.00%
a.
Stock A must have a higher dividend yield than Stock B.
b.
Stock B's dividend yield equals its expected dividend growth rate.
c.
Stock B must have the higher required return.
d.
Stock B could have the higher expected return.
e.
Stock A must have a higher stock price than Stock B.
Ch 07 Corporate Valuation and Stock Valuation
62. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the
expected constant growth rate is g = 6.4%. What is the stock's current price?
a.
$17.39
b.
$17.84
c.
$18.29
d.
$18.75
e.
$19.22
63. A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g
= 4.0%. What is the current stock price?
a.
$23.11
b.
$23.70
c.
$24.31
d.
$24.93
e.
$25.57
Ch 07 Corporate Valuation and Stock Valuation
64. A share of Lash Inc.'s common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock
is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?
a.
$16.28
b.
$16.70
c.
$17.13
d.
$17.57
e.
$18.01
Ch 07 Corporate Valuation and Stock Valuation
65. Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock
sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate,
g, forever. What is the equilibrium expected growth rate?
a.
6.01%
b.
6.17%
c.
6.33%
d.
6.49%
e.
6.65%
Ch 07 Corporate Valuation and Stock Valuation
5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from
today?
a.
$37.86
b.
$38.83
c.
$39.83
d.
$40.85
e.
$41.69
67. Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of
4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from
now?
a.
$40.17
b.
$41.20
c.
$42.26
d.
$43.34
e.
$44.46
Ch 07 Corporate Valuation and Stock Valuation
68. If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the
coming year?
a.
4.12%
b.
4.34%
c.
4.57%
d.
4.81%
e.
5.05%
Ch 07 Corporate Valuation and Stock Valuation
69. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming
year?
a.
4.42%
b.
4.66%
c.
4.89%
d.
5.13%
e.
5.39%
70. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the
coming year?
a.
6.50%
b.
6.83%
c.
7.17%
Ch 07 Corporate Valuation and Stock Valuation
d.
7.52%
e.
7.90%
71. If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming
year?
a.
7.54%
b.
7.73%
c.
7.93%
d.
8.13%
e.
8.34%
Ch 07 Corporate Valuation and Stock Valuation
72. If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming
year?
a.
8.37%
b.
8.59%
c.
8.81%
d.
9.03%
e.
9.27%
Ch 07 Corporate Valuation and Stock Valuation
73. Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is
expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is
5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price?
a.
$28.90
b.
$29.62
c.
$30.36
d.
$31.12
e.
$31.90
74. The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate
of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is
4.00%. What is Jameson's current stock price, P0?
a.
$18.62
b.
$19.08
Ch 07 Corporate Valuation and Stock Valuation
c.
$19.56
d.
$20.05
e.
$20.55
75. National Advertising just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant
rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-
free rate is 4.50%. What is the company's current stock price?
a.
$14.52
b.
$14.89
c.
$15.26
d.
$15.64
e.
$16.03
