Finance Exam 2 Ch. 7

Unlike creditors, equity-holders are owners of the firm.w True
Unlike equityholders, creditors are owners of the firm. False
Holders of equity have claims on both income and assets that are secondary to the claims of creditors. True
The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing. True
Interest paid to bondholders is tax deductible. True
Dividends paid to stockholders is tax deductible. False
Which of the following is an advantage for a firm to issue common stock over long-term debt?A) the cost of equity financing is less than the cost of debt financingB) the primary claim of equityholders on income and assets in the event of liquidationC) no maturity date on which the par value of the issue must be repaidD) the tax deductibility of dividends which lowers the cost of equity financing C) no maturity date on which the par value of the issue must be repaid
Which of the following is a difference between common stock and bonds?A) Bondholders have a voice in management; common stockholders do not.B) Bondholders have a senior claim on assets and income relative to stockholders.C) Stocks have a stated maturity but bonds do not.D) Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not. B) Bondholders have a senior claim on assets and income relative to stockholders.
Holders of equity capital ________. Own the firm
Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings, they expect ________. greater returns from their investment in the firm’s stock
If bankruptcy were to occur, ________ would have the first claim on assets. secured creditors
The market value of common stock is related to its par value because both are sensitive to the reactions of investors to new information. False
Common stockholders are often referred to as residual claimants. True
Common stock can be either privately owned by private investors or publicly owned by public investors. True
The market value of common stock is completely unrelated to its par value. True
The par value on a common stock is used as a basis for determining its fixed dividend. False
The number of authorized shares of common stock is always greater than or equal to the number of outstanding shares of common stock. True
The number of outstanding shares of common stock is always greater than or equal to the number of authorized shares of common stock. False
Supervoting shares of common stock provide shareholders with ten times the voting power of ordinary shares of common stock. False
Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, currently dividends are subject to a maximum tax rate of 8 percent. False
Treasury stocks held within the corporation do not have voting rights but have a claim on assets in liquidation. False
Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds. False
In the case of liquidation, bondholders are paid first, followed by preferred stockholders, followed by common stockholders. True
In the case of liquidation, common stockholders are paid first, followed by preferred stockholders, followed by bondholders. False
Preferred stock has characteristics of debt since it provides a fixed periodic cash payment. True
The amount of the claim of preferred stockholders in liquidation is normally equal to the market value of the preferred stock. False
Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders. True
Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm’s creditors. True
No-par preferred stock has no stated face value, but its annual dividend is stated as a percentage of the market value. False
A preferred stockholder is sometimes referred to as a residual owner, since in essence he or she receives what is left—the residual—after all other claims on the firm’s income and assets have been satisfied. False
A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock. False
Although preferred stock provides added financial leverage in much the same way as bonds, it differs from bonds in that the issuer can pass a dividend payment without suffering the consequences that result when an interest payment is missed on a bond. True
Preferred stockholders are often referred to as residual claimants. False
Which of the following typically applies to common stock but not to preferred stock?A) par valueB) dividend yieldC) legally considered as equity in the firmD) voting rights D) Voting rights
Which of the following is true of common stocks?A) The common stock of a corporation can be either privately or publicly owned.B) Firms often issue common stock with no par value.C) Preemptive rights often result in a dilution of ownership.D) A firm’s corporate charter indicates the rate at which dividends are paid. A) The common stock of a corporation can be either privately or publicly owned.
Which of the following is true of equity?A) equityholders do not have voting rights.B) It does not mature, so repayment is not required.C) It is a temporary form of financing for a firm.D) Equity financing is obtained from creditors. B) It does not mature, so repayment is not required.
Equity capital can be raised through ________. The stock market
Common stockholders are sometimes referred to as ________. residual owners
Which of the following is true of common stock?A) It is often considered quasi-debt due to fixed payment obligation.B) It has less restrictive covenants than debt.C) It gives the holder voting rights which permit selection of the firm’s directors.D) Its holders have priority over preferred stockholders in the event of liquidation of assets. C) It gives the holder voting rights which permit selection of the firm’s directors.
A proxy statement is a statement transferring ________. the votes of a stockholder to another party
Which of the following is typically a feature of common stock?A) Most common stocks are callable.B) Most common stocks are cumulative.C) Common stocks have a maturity value.D) Common stocks may or may not pay dividends. D) Common stocks may or may not pay dividends.
ADRs are ________. securities, backed by American depositary shares (ADSs), that permit U.S. investors to hold shares of non-U.S. companies and trade them in U.S. markets
________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends. Preferred stockholders
Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________. cumulative
An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________. $8.00
From a corporation’s point of view, a disadvantage of issuing preferred stock is ________. that the dividends are not tax-deductible
Which of the following is a disadvantage of issuing preferred stock from the common stockholders’ perspective?A) There is a seniority of preferred stockholder’s claim over common stockholders.B) The preferred stockholders have superior voting rights in the selection of board of directors.C) The preferred stockholders are always paid a higher proportion of dividend payments.D) Issuance of preferred stocks will result in a higher risk, to the disadvantage of common stockholders. A) There is a seniority of preferred stockholder’s claim over common stockholders.
The cost of preferred stock is ________. higher than the cost of long-term debt and lower than the cost of common stock
Preferred stock is characterized by ________. quasi-debt nature
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. $36/share
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 passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of third year? $24,000
A violation of preferred stock restrictive covenants usually permits preferred shareholders to ________. force the retirement of the preferred stock at or above its par value
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. A) Preferred stock with a conversion feature allows holders to change each share into a stated number of shares of common stock.
Preferred stockholders ________.A) do not have preference over common stockholders in the case of liquidationB) have preference over bondholders in the case of liquidationC) do not have preference over bondholders in the case of liquidationD) have preference over creditors in the case of liquidation C) do not have preference over bondholders in the case of liquidation
Which of the following is usually a right of a preferred stockholder?A) right to convert shares to common stock on demandB) preemptive right to participate in the issuance of new common sharesC) right to receive dividend payments before any dividends are paid to common stockholdersD) right to sue company in bankruptcy proceedings if promised preferred dividends are not paid C) right to receive dividend payments before any dividends are paid to common stockholders
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. A) They are settled prior to common stocks during liquidation.
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 passed the preferred dividend for the last two years, how much must preferred stockholders be paid prior to paying dividends to common stockholders? $27,000
The claims of the equityholders on a firm’s assets have priority over the claims of creditors because the equityholders are the owners of the firm. False
Preemptive rights allow common stockholders to maintain their proportionate ownership in the corporation when new issues are made. True
Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own. True
A common stockholder has no guarantee of receiving any cash inflows, but receives what is left after all other claims on the firm’s income and assets have been satisfied. True
Preemptive rights allow existing shareholders to maintain voting control and protect themselves against the dilution of their ownership. True
Treasury stock generally does not have voting rights, does not earn dividends, and does not have a claim on assets in liquidation. True
Treasury stock is generally reclassified as class B common stock and has voting rights. False
Firms occasionally repurchase stock in order to alter capital structure or to increase the returns to the owners. True
Dilution of ownership occurs when a new stock issue results in each present stockholder having a larger number of shares and, thus, a claim to a larger part of the firm’s earnings than previously. False
Corporate venture capital funds are subsidiaries of financial institutions, particularly banks, set up to help young firms grow and, it is hoped, become major customers of the institutions. False
Small business investment companies (SBICs) are corporations chartered by the federal government that can borrow at attractive rates from the U.S. Treasury and use the funds to make venture capital investments in private companies. True
Angel capitalists or angels are wealthy individual investors who do not operate as a business but invest in early-stage companies in exchange for a portion of equity. True
Venture capitalists invest in promising early-stage companies in exchange for a portion of the firm’s equity. False
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. False
A prospectus is another term for a firm’s annual report showing the firm’s prospects for the coming year. False
A prospectus is a portion of the security registration statement that describes the key aspects of the issue, the issuer, and its management and financial position. True
An underwritten issue of common stock is one in which a firm purchases insurance to cover unexpected losses suffered by shareholders. False
Regarding the tax treatment of payments to securities holders, it is true that ________.A) interest and preferred stock dividends are not tax-deductible, while common stock dividends are tax deductibleB) interest and preferred stock dividends are tax-deductible, while common stock dividends are not tax-deductibleC) common stock dividends and preferred stock dividends are tax-deductible, while interest is not tax-deductibleD) common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible D) common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible
Which of the following is a marketable security?A) mutual fundsB) treasury billC) provident fundD) forward contracts B) treasury bill
Which of the following is true of outstanding shares?A) A firm cannot sell more shares than the outstanding shares mentioned in the charter.B) Authorized shares become outstanding shares when they are issued or sold to investors.C) Outstanding shares are indicated in a firm’s corporate charter.D) Outstanding shares are the shares repurchased by the firm. B) Authorized shares become outstanding shares when they are issued or sold to investors.
Shares of stock currently owned by a firm’s shareholders are called ________. Outstanding Shares
If a firm has class A and class B common stock outstanding, it means that ________. one of the classes is probably nonvoting stock
Common stockholders expect to earn a return by receiving ________. Dividends
The purpose of nonvoting common stock is to ________. raise capital without giving up any voting control
A proxy statement gives shareholders the right ________. to give up their vote to another party
A proxy battle is the attempt by ________. a nonmanagement group to unseat the existing management and gain control of the firm
The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called a ________. Proxy Battle
Which of the following is true of par value of a common stock?A) It is determined on the basis of the stock’s market value.B) It is an arbitrary value established for legal purposes in a firm’s corporate charter.C) It indicates the market value at which the stock was originally sold.D) It allows stockholders to purchase additional shares at a price below the market price.
A firm issued 5,000 shares of $1 par-value common stock, receiving proceeds of $20 per share. The amount recorded for the paid-in capital in excess of par account is ________. $95,000
A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of $40 per share. The amount recorded for the paid-in capital in excess of par account is ________. $380,000
A firm issued 10,000 shares of no par-value common stock, receiving proceeds of $40 per share. The amount recorded is ________. $400,000 in the Common Stock account
________ are financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares. Rights offering
Which of the following is true of a common stock?A) It gives voting rights which permit determination of the amount of dividend receivable.B) It gives claims on income and assets which are superior to the claims of creditors of the firm.C) Dividends on commonstock are fully tax-deductible.D) There is no fixed dividend payment obligation for the company. D) There is no fixed dividend payment obligation for the company.
Stock rights provide the stockholder with ________. the right to purchase additional shares in direct proportion to their number of owned shares
The preemptive right gives shareholders the right ________. to maintain their proportionate ownership in the corporation when new common stock is issued
A firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $10,000 and $250,000, respectively. The firm has 10,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________. $26/share
A firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $40,000 and $500,000, respectively. The firm has 40,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________. $13.50/share
A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue. investment banker
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. D) They use a variety of models and techniques to value stocks.
In a ________, new shares are sold to the existing shareholders. rights offering
Treasury stock refers to the ________. repurchase of outstanding stock
Which of the following is an attribute of investment bankers?A) They make long-term investments for banking institutions.B) They bear the risk of selling a security issue.C) They act as middlemen between the issuer and the banker.D) They provide the issuer with advice relating to the amounts of dividend to be paid. B) They bear the risk of selling a security issue.
Which of the following is true of the issuance of nonvoting common stock?A) It is issued in the event of a hostile takeover to preserve the interests of existing owners.B) It helps the corporation to raise capital through the sale of common stock, without giving up its voting control.C) It helps the existing stockholders to automatically transfer their voting rights to new stockholders without any legal proceeding.D) It tends to result in the dilution of voting rights of current stockholders. B) It helps the corporation to raise capital through the sale of common stock, without giving up its voting control.
A group formed by an investment banker to share the financial risk associated with underwriting new securities is called a(n) ________. underwriting syndicate
Investors purchase a stock when they believe that it is undervalued and sell when they feel that it is overvalued. True
In an efficient market, the expected return and the required return are equal. True
In an efficient market, stock prices adjust quickly to new public information. True
In an inefficient market, stock prices adjust quickly to new public information. False
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. False
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. True
To a buyer, an asset’s value represents the minimum price that he or she would pay to acquire it. False
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. True
If the expected return were above the required return, investors would buy an asset, driving its price up and its expected return down. True
Efficient-market hypothesis is the theory describing the behavior of an assumed “perfect” 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. True
If a market is truly efficient, investors should not waste their time trying to find and capitalize on mispriced securities. True
Behavioral finance is a growing body of research that focuses on investor behavior and its impact on investment decisions and stock prices. True
The constant growth model is an approach to dividend valuation that assumes a constant future dividend. False
The constant growth model is an approach to dividend valuation that assumes that dividends grow at a constant rate indefinitely. True
According to the efficient market hypothesis, prices of actively traded stocks ________. do not differ from their true values in an efficient market
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. C) To a buyer the asset’s value represents the maximum price that he or she would pay to acquire it.
If expected return is less than required return on an asset, rational investors will ________. sell the asset, which will drive the price down and cause the expected return to reach the level of the required return
If the expected return is above the required return on an asset, rational investors will ________. buy the asset, which will drive the price up and cause expected return to reach the level of the required return
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 under-valued) 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. 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.
Preferred stock is valued as if it were a ________. Perpetuity
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 ________. $25
A firm has to pay a dividend of $1.20 per share till perpetuity, a zero growth rate of dividends, and a required return of 10 percent. The value of the firm’s preferred stock is ________. $12
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 ________. 8 percent
The ________ is utilized to value preferred stock. zero-growth model
In the Gordon model, the value of a common stock is the ________. present value of a constant growing dividend stream
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 ________. $56
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 firm can earn 12 percent on similar risk involvements. The value of the firm’s common stock is ________. $90/share
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? $81.52
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? 14 percent
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. $28.57
Harry Corporation’s common stock currently sells for $180 per share. Harry just paid a dividend of $10.18 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? $190.64
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? 8 percent
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? 8.4 percent
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? $22.68
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%? $59.16
The board of directors of Ride World, Inc. has declared $5.00 common stock dividend 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? $33.33
Jia’s Kitchen Stuff has recently sold 1,000 shares of preferred stock. What is the value of the stock assuming 10 percent required rate of return and a preferred dividend of $6.75? $67.50
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? $29.41
In response to the stock market’s reaction to its dividend policy, the Nico’s Toy Company has decided to increase its dividend payment at a rate of 4 percent per year. The firm’s most recent dividend is $3.25 and the required rate of interest is 9 percent. What is the maximum you would be willing to pay for a share of the stock? $67.60
Uncle Tim’s Inventions has an expected dividend next year of $3.60 and a required return of 12 percent. Assuming the dividends will be paid indefinitely, calculate the value of a share of common stock assuming a zero growth rate of dividends. $30
Ted has 10 shares of Grand Company. Based on the company’s dividend policy, Ted will receive a total of $450 a year in perpetuity. What is the value of each share if the rate of interest is 8 percent? $45
The free cash flow valuation model can be used to determine the value of an entire company as the present value of its expected free cash flows discounted at the firm’s weighted average cost of capital. True
The free cash flow valuation model is based on the same principle as the P/E valuation approach; that is, the value of a share of stock is the present value of future cash flows. False
The free cash flow valuation model is based on the same principle as dividend valuation models; that is, the value of a share of stock is the present value of future cash flows. True
In valuation of common stock, the price/earnings multiple approach is considered superior to the use of book or liquidation values since it considers expected earnings. True
The common stock book value model ignores a firm’s expected earnings potential and generally lacks any true relationship to the firm’s value in the marketplace. True
The liquidation value per share of common stock is the amount per share of common stock that would be received if all of a firm’s assets were sold for their accounting value and the proceeds remaining were divided among common stockholders. False
The book value per share of common stock is the amount per share of common stock that would be received if all of a firm’s assets were sold for their accounting value and the proceeds remaining were divided among common stockholders. True
Ted Corporation expects to generate free-cash flows of $200,000 per year for the next five years. Beyond that time, free cash flows are expected to grow at a constant rate of 5 percent per year forever. If the firm’s average cost of capital is 15 percent, the market value of the firm’s debt is $500,000, and Ted has a half million shares of stock outstanding, what is the value of Ted stock? $2.43
Patrick Company expects to generate free-cash of $120,000 per year forever. If the firm’s required return is 12 percent, the market value of debt is $300,000, the market value of preferred stock is $70,000, and the company has 100,000 shares of stock outstanding. What is the value of Patrick’s stock? $6.30
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. In addition, Tangshan China’s most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market premium is 4 percent, and Tangshan has a beta of 1.2, Tangshan’s stock would be ________. undervalued because the market price is less than the resulting share value
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. In addition, Tangshan China’s most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.2, Tangshan’s stock would be ________. overvalued because the market price is higher than the resulting share value
_______ is the value of a firm’s ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders. Book Value
________ is the actual amount each common stockholder would expect to receive if a firm’s assets are sold for their market value, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders. Liquidation Value
________ is a guide to a firm’s value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry. The P/E multiple
Which of the following valuation methods is superior to others in the list since it considers expected earnings?A) liquidation valueB) book valueC) P/E multipleD) present value of the interest C) P/E multiple
The use of the ________ is especially helpful in valuing firms that are not publicly traded. P/E Multiple
The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF’s stock in the future? $30
At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Based on this information, Tangshan’s book value per share of common stock is ________. $15
At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. If Tangshan could sell its assets for $52.5 million, Tangshan’s liquidation value per share of common stock is ________. $7.50
At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting that it will have net income of $1.5 million. If the average P/E multiple in Tangshan’s industry is 15, what should be the price of Tangshan’s stock? $22.50
China Imports currently has 2,000 shares of common stock outstanding. The firm has assets of $200,000 and total liabilities including preferred stock of $75,000. Calculate the book value per share of China Imports common stock. $62.50/share
Based on analysis of the company and expected industry and economic conditions, China Imports is expected to earn $4.60 per share of common stock next year. The average price/earnings ratio for firms in the same industry is 8. Calculate the estimated value of a share of China Imports common stock. $36.80/share
Due to growing demand for computer software, the Shine Company has had a very successful year and expects its earnings per share to grow by 25 percent to reach $5.50 for this year. Estimate the price of the company’s common stock assuming the industry’s price/earning ratio is 12. $66
Karina’s Caribbean Foods had total assets as recorded on its balance sheet are $1,500,000. What is the value of the Karina’s common stock if it has $950,000 in liabilities, and 7,500 shares of common stock outstanding? $73.33
Ride World has estimated the market value of its assets to be $1,250,000. What is the value of Ride World’s common stock if it has $900,000 in liabilities, $50,000 in preferred stock, and 7,500 shares of common stock outstanding? $40
Smith has current assets of $800,000, which can be liquidated at 90 percent of book value. Total liabilities, including preferred stock, equal $270,000. The firm has 15,000 shares of common stock outstanding. What is the liquidation value per share of common stock? $30/share
Any action taken by a financial manager that increases risk will also increase the required return. True
An action on the part of a firm that increases the level of expected cash flows without a corresponding increase in risk should reduce share value; an action that reduces the level of expected cash flows without a corresponding decline in risk should increase share value. False
Assuming that economic conditions remain stable, any management action that would cause current and prospective stockholders to raise their dividend expectations should decrease a firm’s value. False
The required return can be affected by changes in the risk free rate, even if the risk premium remains constant. True
If the risk-free rate decreases due to a shift in government policy, the required return goes up. False
Milton Glasses recently paid a dividend of $1.70 per share, is currently expected to grow at a constant rate of 5%, and has a required return of 11%. Milton Glasses has been approached to buy a new company. Milton estimates if it buys the company, its constant growth rate would increase to 6.5%, but the firm would also be riskier, therefore increasing the required return of the company to 12%. Should Milton go ahead with the purchase of the new company? Yes, because the value of the Milton Co. will increase by $3.17 per share.

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