Exam

Name___________________________________

 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


1)


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 ________.


1)


_______


A)


$28.00


B)


$22.40


C)


$56.00


D)


$18.67





 


2)


A proxy statement gives the shareholder the right


2)


_______


A)


to give up their vote to another party.


B)


to sell their share of stock at a premium.


C)


to maintain their proportionate ownership in the corporation when new common stock is issued.


D)


of one vote for each share owned.





 


TRUE/FALSE.  Write 'T' if the statement is true and 'F' if the statement is false.


3)


Like bonds, common stock is usually sold with a par value.


3)


_______





 


4)


Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own.


4)


_______





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


5)


The investment banker does all of the following EXCEPT


5)


_______


A)


act as a middleman between the issuer and buyer of a new security.


B)


advise clients.


C)


make long-term investments for banking institutions.


D)


bear the risk of selling a security issue.





 


6)


An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.


6)


_______


A)


$8.00


B)


$4.00


C)


$80.00


D)


$8.80





 


ESSAY.  Write your answer in the space provided or on a separate sheet of paper.


7)


The Erie Heating Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.20 in the second year, $4.41 in the third year, and its most recent dividend was $4.63. The company wishes to continue this dividend growth indefinitely. What is the value of the company's stock if the required rate of return is 12 percent?





 


TRUE/FALSE.  Write 'T' if the statement is true and 'F' if the statement is false.


8)


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.


8)


_______





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


9)


Shares of stock currently owned by the firm's shareholders are called


9)


_______


A)


issued.


B)


authorized.


C)


outstanding.


D)


treasury shares.





 


TRUE/FALSE.  Write 'T' if the statement is true and 'F' if the statement is false.


10)


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.


10)


______





 


ESSAY.  Write your answer in the space provided or on a separate sheet of paper.


11)


Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is currently 10 percent, and the required return on the market portfolio is 16 percent. The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 2000-2003 period.

 

 

(a)   Estimate the value of Tangshan Antiques stock.

(b)   A lawsuit has been filed against the company by a competitor, and the potential loss has increased risk, which is reflected in the company's beta, increasing it to 1.6. What is the estimated price of the stock following the filing of the lawsuit.





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


Table 7.1

 

 


12)


According to Table 7.1, Ford's common stock must have closed at ________ per share on the previous trading day.


12)


______


A)


$31.55


B)


$29.64


C)


$30.99


D)


$30.76





 


TRUE/FALSE.  Write 'T' if the statement is true and 'F' if the statement is false.


13)


If the expected return were above the required return, investors would buy the asset, driving its price up and its expected return down.


13)


______





 


14)


Like bonds, the par value on a common stock is used as a basis for determining its fixed dividend.


14)


______





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


15)


Which of the following valuation methods is superior to the others in the list since it considers expected earnings?


15)


______


A)


P/E multiple


B)


book value


C)


present value of the interest


D)


liquidation value





 


TRUE/FALSE.  Write 'T' if the statement is true and 'F' if the statement is false.


16)


A preferred stockholder is sometimes referred to as a residual owner, since in essence he or she receives what is leftthe residualafter all other claims on the firm's income and assets have been satisfied.


16)


______





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


17)


In the Gordon model, the value of the common stock is the


17)


______


A)


present value of a non-growing dividend stream.


B)


present value of a constant, growing dividend stream.


C)


actual amount each common stockholder would expect to receive if the firm's assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.


D)


net value of all assets which are liquidated for their exact accounting value.





 


ESSAY.  Write your answer in the space provided or on a separate sheet of paper.


18)


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?





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


19)


Key differences between common stock and bonds include all of the following EXCEPT


19)


______


A)


bonds have a stated maturity but stock does not.


B)


dividends paid to bondholders are tax-deductible but interest paid to stockholders is not.


C)


common stockholders have a voice in management; bondholders do not.


D)


common stockholders have a junior claim on assets and income relative to bondholders.





 


ESSAY.  Write your answer in the space provided or on a separate sheet of paper.


20)


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?





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


21)


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 ________.


21)


______


A)


8.00%


B)


4.00%


C)


6.00%


D)


none of the above





 


22)


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?


22)


______


A)


$13.50


B)


$26.50


C)


$15.00


D)


$30.00





 


23)


Nico Corporation's common stock currently sells for $180 per share. Nico 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 Nico Corporation's stock sell for one year from now?


23)


______


A)


$179.84


B)


$190.80


C)


$195.40


D)


$187.04





 


24)


________ is the actual amount each common stockholder would expect to receive if the firm's assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.


24)


______


A)


The P/E multiple


B)


Liquidation value


C)


The present value of the dividends


D)


Book value





 


TRUE/FALSE.  Write 'T' if the statement is true and 'F' if the statement is false.


25)


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.


25)


______





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


26)


The advantages of issuing preferred stock from the common stockholder's perspective include all of the following EXCEPT


26)


______


A)


flexibility.


B)


increased leverage.


C)


use in mergers.


D)


seniority of preferred stockholder's claim over common stockholders.





 


ESSAY.  Write your answer in the space provided or on a separate sheet of paper.


27)


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. The expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.20.

(a)   What is the expected return based on the dividend valuation model?

(b)   What is the required return based on the CAPM?

(c)   Would Tangshan China be a good investment at this time? Explain





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


28)


Holders of equity capital


28)


______


A)


own the firm.


B)


receive interest payments.


C)


have loaned money to the firm.


D)


receive guaranteed income.





 


ESSAY.  Write your answer in the space provided or on a separate sheet of paper.


Table 7.2

 

 


29)


The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock. (See Table 7.2.)





 


MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.


30)


Which of the following is not typically a feature of preferred stock?


30)


______


A)


Most preferred stock is cumulative.


B)


Preferred stock is typically convertible.


C)


Most preferred pay dividends that grow at a constant rate.


D)


Preferred stock is generally callable.






 


1)


C


 


2)


A


 


3)


TRUE


 


4)


TRUE


 


5)


C


 


6)


A


 


7)


FVIFg, 3 = 4.63/4.00 = 1.158 g = 5%

P = D5/(k - g) = 4.63 (1 + 0.05)/(0.12 - 0.05) = $69.46


 


8)


FALSE


 


9)


C


 


10)


FALSE


 


11)


(a)   ks = 0.10 + 1.4(0.16 - 0.10) = 0.184

        growth rate of dividends = $3.40/$2.70 = 1.259 FVIF3, k = 8%

        Po = $3.40(1.08)/(0.184 - 0.08) = $35.31

(b)   ks = 0.10 + 1.6(0.16 - 0.10) = 0.196

        Po = $3.40(1.08)/(0.196 - 0.08) = $31.66


 


12)


D


 


13)


TRUE


 


14)


FALSE


 


15)


A


 


16)


FALSE


 


17)


B


 


18)


P = D/k = 2.50/0.085 = $29.41


 


19)


B


 


20)


P = (1,500,000 - 950,000)/7,500 = $73.33


 


21)


A


 


22)


D


 


23)


B


 


24)


B


 


25)


TRUE


 


26)


D


 


27)


(a)   ks = [$5.50(1.05)]/$160.00 + 0.05 = 8.6%

(b)   ks = 0.03 + 1.2(0.08 - 0.03) = 9%

(c)   The expected return is 8.6 percent but the required return is 9 percent. Based on this information, Tangshan is overvalued and would not be a good investment at this time.


 


28)


A


 


29)


 = $109.67


 


30)


C