HANDOUT # 13 -.-Questions on Equity Securities 1. One of the fundamental rights of common stock holders is to elect a firm's who will in tarn select the operating management. 2. If a stockholder cannot vote in person. participation in the annual meeting is still possible through a 3. The pre-emptive right protects stockholders against loss of of the corporation as well as of market value from the sale of new shares below market value. 4. A corporation is one whose stock is held by a small group, normally its management. 5. Going public establishes a firms in the market place. a. True b. False 6. Preferred stock has characteristics similar to both and 7. The feature means that preferred stockholders must receive all dividends in arrears before common dividends may be paid. 8. When stockholders assign their right to vote to another party, this is called a. a privilege b. a preemptive right c. an ex right d. a proxy e. a prospectus 9. Preferred stock is generally regarded as equity by bond holders and debt by common stockholders. a. True b. False 10. Which of the following features of common stock would stock holders consider to be a disad vantage of hold ing the stock? a) Limited liability b) Residual claim c) preemptive right 11. How would you rank the following financial assets of a particular firmu from most risky to least risky? a) Bonds, preferred stock, common stock b) Prefened stock, bonds, common stock c) Common stock, bonds, preferred stock d) Common stock, preferred stock, bonds e) Bonds, cortmon stock, preferred stock 12. A company which is going public issues stock collectively called a) Private placement b) Seasoned issues c) Initial public offerings (IPO) d) All of the above c) None of the above 13. A bond issue which is sold to few institutional investors is known as (a) a) Private placement b) Seasoned issues c) Initial public offerings (IPO) d) Ail of the above e) None of the above STOCK VALUATION Zero Growth Model 83 Notes 14. What would you be willing to pay for a stock that promises to pay a $20 annual dividend forever? The required rate of return is 8%. Po =0.08$20=$250 Constant Growth Model 16. Find the price of a common stock which is going to pay a $2 dividend 1 year from today, where dividends are expected to grow at 3% per year. The cost of equity (rss)=8% 17. A share of common stock is currently sold for $20. The company is expected to have a 4% dividend growth annually and the expected dividend in year I(D,, is $1. What is the stock's (a) cost of equity ( r, ), (b) dividend yield, (c) capital gains yield? Other Cash Flow Patterns 18. You own 1 share each of stocks A and B. You plan to hold both stocks for 2 years and then sell each stock for $100. Stock A is expected to pay a dividend of $2 a year for the next 2 years, while stock B will pay a dividend of $1 this year and $3 next year. Assuming a required rate of return of 8%, what is the difference in price today of the 2 tocks
