Fundamentals of Business Finance Chapter 8

Which of the following features, or benefits, belong to a firm’s common stockholders? limited liability ownership of the firm voting rights> all of these
Which of the following statements concerning the required rate of return on stocks is true? The higher the risk, the higher the required return, other things being equal.
All of the following affect the value of a share of common stock except: the stock and paid-in-capital amounts on the balance sheet.
Cumulative preferred stock: requires dividends in arrears to be carried over into the next period.
Which of the following is not true regarding common stock? Dividend payments, like interest payments, are fixed.
Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock. What is the name of this feature? Sinking fund
Preferred stock is similar to a bond in the following way: both investments provide a stated income stream.
If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium. False, because the required return could be different
Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period. What is the name of this provision? Callable
Nuray Corp. preferred stock pays a $.50 annual dividend. What is the value of the stock if your required rate of return is 10%? $5.00
Casino Games Company preferred stock pays a perpetual annual dividend of 3.5% of its $100 par value. If investors’ required rate of return on this stock is 11%, what is the value per share? $31.82
Yanti Corp. preferred stock has a 5% stated dividend percentage, and a $100 par value. What is the value of the stock if your required rate of return is 6% per year? $83.33
United Financial Corp had a return on equity of 15%. The corporation’s earnings per share was $6.00, its dividend payout ratio was 40% and its profit-retention rate was 60%. If these relationships continue, what will be United Financial Corp’s internal growth rate? 8.6%
Greenland Airlines has net income of $2 million this year. The book value of Greenland Airlines common equity is $8 million dollars. The company’s dividend payout ratio is 60% and is expected to remain this way. What is Greenland Airlines’ internal growth rate? 10%
Johnstown Supply Corporation stock is currently selling for $58.00. It is expected to pay a dividend of $5.00 at the end of the year. Dividends are expected to grow at a constant rate of 7.5% indefinitely. Compute the required rate of return on Johnstown Supply Corporation stock. 16.12%
Using the constant growth dividend valuation model and assuming dividends will growth a constant rate forever, the increase in the value of the stock each year should be equal to the growth rate in dividends, g.
Preferred stock valuation usually treats the preferred stock as a: perpetuity.
How is preferred stock affected by a decrease in the required rate of return? The value of a share of preferred stock increases.
Which of the following changes will make the value of a stock go up, other things being held constant? The required return decreases.
Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid. What is the name of this feature? Cumulative
Which of the following statements concerning the constant growth dividend valuation model is true? The required rate of return must exceed the growth rate.
Preferred stock is similar to a bond in the following way: both investments provide a stated income stream.
Bell Corp. has a preferred stock that pays a dividend of $2.40. If you are willing to purchase the stock at $11, what is your required rate of return (round your answer to the nearest .1% and assume that there are no transaction costs)? 21.8%
Keyes Corporation preferred stock pays an annual dividend of $7 per share. Which of the following statements is true for an investor with a required return of 9%? The value of the preferred stock is $77.78 per share.
CMT, Inc. has an issue of preferred stock whose par value is $500. The preferred stock pays a 4.5% dividend. If investors require a 5.5% rate of return for these shares, what price should the preferred stock sell for? $409.09
The PDQ Company’s common stock is expected to pay a $2.00 dividend in the coming year. If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be? $22.22
Kilsheimer Company just paid a dividend of $5 per share. Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the required return is 16%? $59.44
Creamy Custard common stock is currently selling for $79.00. It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely. What is the required rate of return on Creamy Custard’s stock? 11.11%

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