Question 1

The preemptive right is important to shareholders because it

a. The preemptive right is not important to shareholders.

b. Protects the current shareholders against dilution of ownership interests.

c. Will result in higher dividends per share.

d. Allows management to sell additional shares below the current market price.

e. Is included in every corporate charter.

Question 2

Which of the following statements is most correct?

a. If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but the two classes must have the same voting rights.

b. An IPO occurs whenever a company buys back its stock on the open market.

c. The preemptive right is a provision in the corporate charter which gives common stockholders the right to purchase (on a pro rata basis) new issues of common stock.

d. Statements a and b are correct.

e. Statements a and c are correct.

Question 3

Which of the following statements is most correct?

a. The constant growth model takes into consideration the capital gains earned on a stock.

b. It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant.

c. Two firms with the same dividend and growth rate must also have the same stock price.

d. Statements a and c are correct.

e. All of the statements above are correct.

Question 4

A stock's dividend is expected to grow at a constant rate of 5 percent a year. Which of the following statements is most correct?

a. The expected return on the stock is 5 percent a year.

b. The stock's dividend yield is 5 percent.

c. The stock's price one year from now is expected to be 5 percent higher.

d. Statements a and c are correct.

e. All of the statements above are correct.

Question 5

Which of the following statements is most correct?

a. One of the advantages to the firm associated with financing using preferred stock rather than common stock is that control of the firm is not diluted.

b. Preferred stock provides steadier and more reliable income to investors than common stock.

c. One of the advantages to the firm of financing with preferred stock is that 70 percent of the dividends paid out are tax deductible.

d. Statements a and c are correct.

e. Statements a and b are correct.

Question 6

NOPREM Inc. is a firm whose shareholders don't possess the preemptive right. The firm currently has 1,000 shares of stock outstanding; the price is $100 per share. The firm plans to issue an additional 1,000 shares at $90.00 per share. Since the shares will be offered to the public at large, what is the amount per share that old shareholders will lose if they are excluded from purchasing new shares?

a. $ 0

b. $ 5.00

c. $ 2.50

d. $10.00

e. $90.00

Question 7

Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?

a. $131.74

b. $118.35

c. $ 75.29

d. $164.19

e. $107.53

Question 8

A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

a. $71.86

b. $62.25

c. $44.92

d. $57.50

e. $64.00

Question 9

Albright Motors is expected to pay a year-end dividend of $3.00 a share (D1 = $3.00). The stock currently sells for $30 a share. The required (and expected) rate of return on the stock is 16 percent. If the dividend is expected to grow at a constant rate, g, what is g?

a. 7.00%

b. 13.00%

c. 10.05%

d. 5.33%

e. 6.00%

Question 10

A share of common stock has just paid a dividend of $3.00. If the expected long-run growth rate for this stock is 5 percent, and if investors require an 11 percent rate of return, what is the price of the stock?

a. $50.50

b. $50.00

c. $52.50

d. $53.00

Question 11

Waters Corporation has a stock price of $20 a share. The stock's year-end dividend is expected to be $2 a share (D1 = $2.00). The stock's required rate of return is 15 percent and the stock's dividend is expected to grow at the same constant rate forever. What is the expected price of the stock seven years from now?

a. $63

b. $27

c. $23

d. $39

e. $53

f. $28

Question 12

The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return on equity (rs) is 12 percent. What is the current price of Klein's common stock?

a. $50.16

b. $42.25

c. $33.33

d. $58.75

e. $21.00

Question 13

Johnston Corporation is growing at a constant rate of 6 percent per year. It has both common stock and non-participating preferred stock outstanding. The cost of preferred stock (rps) is 8 percent. The par value of the preferred stock is $120, and the stock has a stated dividend of 10 percent of par. What is the market value of the preferred stock?

a. $200

b. $125

c. $175

d. $150

e. $120

Question 14

A share of preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the nominal annual rate of return?

a. 23%

b. 18%

c. 12%

d. 28%

e. 20%