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Exam 7: Stocks

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Question 31

True/False

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Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

A) True
B) False

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Question 32

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Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?

A) The stock's required return is 10%.
B) The stock's expected dividend yield and growth rate are equal.
C) The stock's expected dividend yield is 5%.
D) The stock's expected capital gains yield is 5%.
E) The stock's expected price 10 years from now is $100.00.

F) C) and E)
G) C) and D)

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Question 33

True/False

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cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Which of the following statements is CORRECT?

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00.The dividend is expected to decline at a rate of 5% a year forever If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs) is 11%, what is its current stock price?

proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor's required return.

Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Schnusenberg Corporation 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?

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Ramirez Company's last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever.Its required return (rs) is 12%.What is the best estimate of the current stock price?