Ch9 Test Bank Answers Stock Valuation

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 9 Stock Valuation

1) Equity securities are certificates of ownership of a corporation.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

2) Brokers are exposed to inventory risk since they facilitate transactions on behalf of their clients while dealers are subject to capital risk because they must finance their inventories of securities.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

3) Dealers are subject to capital risk, because they hold inventories of securities and must finance those inventories.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

4) More than half of U.S. households have some investment in the stock market.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

5) A large number of investors in equities actually own securities through pension or retirement funds.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

6) Companies raise capital in secondary markets by issuing new securities.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

7) The existence of active secondary market for debt or equity securities makes raising new capital less expensive for firms.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

8) The function of secondary markets is to provide investors with marketability for the securities they own at a fair price.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

9) Secondary market transactions in the United States mostly take place over the counter and not in exchanges.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

10) In terms of the total stock value of the firms listed, the NYSE is the largest stock exchange in the world and NASDAQ is the second largest.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

11) Direct search markets provide the best price information because buyers and sellers seek each other out directly.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

12) Direct search is the least efficient type of secondary market because securities are not bought and sold frequent enough to warrant profit for brokers.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

13) For a commission fee that is less than the cost of direct search, brokers give investors an incentive to make use of the information by hiring them.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

14) A broker market eliminates the need for time-consuming searching for a fair deal by buying and selling immediately from its inventory of securities.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

15) NASDAQ is the best-known example of a direct market.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

16) In an auction market, buyers and sellers confront each other directly and bargain over price.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

17) The New York Stock Exchange is the best-known example of an auction market in the United States.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

18) The common shareholders of a company have unlimited liability.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

19) Preferred shareholders are not guaranteed any dividend payments and have the lowest-priority claim on the firm's assets in the event of bankruptcy.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

20) Preferred dividend payments are contractual obligations of the firm to pay dividends to preferred shareholders, similar to the interest payments paid to bondholders.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

21) The market considers preferred stock to be a debt security because the dividend payment is a fixed contractual obligation and has credit ratings like bonds.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

22) Common and preferred stock are valued using a different formula than that used for bonds.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

23) Based on the general dividend valuation model, the price of a share of stock is the present value of all expected future dividends.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

24) For a company that has no growth, dividends stay constant over time.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

25) A fast-growing company will pay constant dividends over time.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

26) The constant-growth stock has dividends growing at a constant rate over time.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

27) The constant-growth dividend model tells us that the current price of a share of stock is the next period dividend divided by the difference between the discount rate and the dividend growth rate.

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

28) Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions.

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

29) The value of a supernormal growth stock is the present value of the mixed growth dividend payments and the present value of the constant-growth dividend payments.

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

30) Failure to pay a preferred dividend signals to the market that the firm is in serious financial trouble.

Learning Objective: LO 6

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

31) Preferred stock with no fixed maturity can be valued as a perpetuity.

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

32) The bond valuation model can be used to value preferred stocks with no fixed maturity.

Learning Objective: LO 7

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

33) A preferred stock with a definite maturity date is similar to a bond with a fixed maturity date. Thus, a preferred stock can be valued in a similar fashion to a bond.

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

34) ________ of U.S. households have an investment in the stock market.

A) 30%

B) 40%

C) 50%

D) More than 50%

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

35) Which of the following statement(s) is (are) true about secondary markets?

A) In secondary markets, outstanding shares of stock are bought and sold among investors.

B) Most secondary market transactions directly affect the capital of the firm that issues the securities.

C) An active secondary market causes firms to sell their debt or equity issues at a higher transaction cost of funds.

D) In secondary markets, firms sell new shares of stock to investors to raise money.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

36) Which of the following statements is true about secondary markets in the United States?

A) In terms of total stock value of the firms listed, the NASDAQ is the largest stock exchange in the world and the NYSE is the second largest.

B) NASDAQ is an OTC (over the counter) market.

C) Firms listed on the NASDAQ tend to be, on average, larger in size, and their shares trade more frequently than those traded on NYSE.

D) In the United States, most secondary market transactions are done over the counter.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

37) Which of the following statements is NOT true about secondary markets?

A) In terms of total stock value of the firms listed, the NASDAQ is the largest stock exchange in the world and the NYSE is the second largest.

B) The role of NYSE, NASDAQ, and other stock exchange is to bring together buyers and sellers.

C) Firms listed on the NYSE tend to be larger in size and their shares trade more frequently than those traded on NASDAQ.

D) In the United States, most secondary market transactions are done on one of the many stock exchanges.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

38) In comparison to the NYSE:

A) NASDAQ has fewer companies listed.

B) total share volume is lower on the NASDAQ.

C) firms listed on the NASDAQ tend to be smaller.

D) NASDAQ firms exceed NYSE listed firms in total market capitalization.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

39) Direct search markets are characterized by:

A) complete price information.

B) extensive broker and dealer participation.

C) private placement transactions and sale of common stock of small private companies.

D) a high level of efficiency.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

40) The least efficient of all the different types of secondary markets is the:

A) auction market.

B) direct search market.

C) dealer market.

D) broker market.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

41) Which of the following statements is NOT true about broker markets?

A) Brokers charge commission fees for their services of bringing together buyers and sellers.

B) Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves.

C) Investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search.

D) Brokers can guarantee an order because they have an inventory of securities.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

42) In a broker market:

A) the commission charged by brokers is a higher cost to buyers and sellers than the cost of direct search.

B) buyers and sellers are brought together generally without payment of a commission.

C) brokers provide the greatest benefit when direct search costs are low.

D) brokers build a pool of price information through their extensive contacts.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

43) Which of the following statements is true about dealer markets?

A) NYSE is the best-known example of a dealer market.

B) A dealer market involves time-consuming search for a fair deal.

C) The advantage of a dealer over a brokered market is that brokers cannot guarantee that an order will be executed promptly, while dealers can promise execution due to their holding of inventory of securities.

D) Buying and selling in dealer markets take quite some time to execute.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

44) Which of the following is (are) the characterization of dealer market?

A) It is time-consuming to search for a fair deal.

B) The dealer does not hold an inventory of securities.

C) The presence of a dealer market does not affect market efficiency because search costs are still high.

D) It improved market efficiency because dealers provide continuous bid and ask prices for securities.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

45) Which of the following statements is NOT true about auction markets?

A) In an auction market, buyers and sellers confront each other directly and bargain over price.

B) The participants can only communicate orally in auction markets.

C) The New York Stock Exchange is the best-known example of an auction market.

D) The auctioneer in an auction market is the specialist, who is designated by the exchange to represent orders placed by public customers.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

46) Which of the following statements is NOT true about common stock?

A) Common stockholders have the right to vote on the election of the board of directors of their company.

B) Common stock is considered to have no fixed maturity.

C) Owners of common stock are guaranteed dividend payments by the firm.

D) Common stockholders have limited liability toward the obligations of the corporation.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

47) Which of the following statements is true about common stock?

A) Common stock is considered to have a fixed maturity.

B) Owners of common stock are guaranteed dividend payment by the firm.

C) Owners of common stock have the last claim on the firm's assets in the event of bankruptcy.

D) Common stockholders have unlimited liability toward the obligations of the corporation.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

48) Which of the following is NOT a widely-known stock market index?

A) The Dow Jones Industrial Average

B) The OTQ Composite Index

C) The New York Stock Exchange Index

D) The Standard and Poor's 500 Index

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

49) Which of the following statements is NOT true about preferred stock?

A) Preferred stock represents ownership in the firm.

B) Preferred stockholders are not guaranteed dividend payments by the firm.

C) Preferred stock dividends are paid by the issuer with after-tax dollars.

D) Preferred stockholders have no voting privileges relative to common stock owners.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

50) Which of the following statements is NOT true about preferred stock?

A) Preferred dividend payments are paid by the issuer with after-tax dollars.

B) Preferred dividends are tax deductible just like the interest payments on bonds.

C) Preferred stock holders have no voting privileges relative to common stock owners.

D) Preferred stocks are generally viewed as perpetuities because they have no fixed maturity.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

51) Owners of preferred stock:

A) have the same voting rights as common shareholders.

B) usually receive variable dividend payments.

C) are given priority treatment over creditors' claims against the firm's assets in the event of bankruptcy or liquidation.

D) have no voting rights.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

52) Preferred stock is sometimes treated like a debt security because:

A) legally preferred stock is a debt security.

B) preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings.

C) preferred dividends are deductible from corporate taxable income just like interest payments on bonds.

D) preferred stockholders receive a residual value and not a stated value.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

53) Which of the following statements is true?

A) Preferred stockholders are considered to be the true owners of public corporations.

B) Dividends paid to preferred stockholders are not fixed.

C) Preferred stockholders usually do not have voting rights.

D) Preferred stock can never be converted to common stock.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

54) Applying the valuation procedure to common stocks is more difficult than applying it to bonds because:

A) the size and timing of the dividend cash flows are more certain than the coupon payments for bonds.

B) common stocks have a final maturity date.

C) the rate of return on common stock is directly observable.

D) common stocks make perpetual dividend payments.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

55) Assume that you are considering the purchase of a stock which will pay dividends of $4.50 during the next year. Further assume that you will be able to sell the stock for $85.00 one year from today and that your required rate of return is 15 percent. How much would you be willing to pay for the stock today? (Round to the nearest $0.01.)

A) $89.50

B) $65.37

C) $94.10

D) $77.83

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

56) Which of the following statements is NOT true about the general dividend valuation model?

A) The model does not assume any specific pattern for future dividends, such as a constant growth rate.

B) It makes a specific assumption about when the share of stock is going to be sold in the future.

C) The model calls for forecasting an infinite number of dividends for a stock.

D) The price of a share of stock is the present value of all expected future dividends.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

57) Which of the following statements is true about the general dividend valuation model?

A) It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.

B) It implies that the value of a firm's common stock can be determined only if the expected future dividends are infinite.

C) It implies that the value of a growth stock can be determined by forecasting the future price of the stock.

D) The model cannot be used to calculate the value of a common stock unless the dividends exceed the firm's expected growth rate.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

58) Which of the following statements is true about growth stocks?

A) These are stocks of firms that grow their sales at below-average rates and are expected to do so for a length of time.

B) These are stocks of firms that grow their earnings at above-average rates and are expected to do so for a length of time.

C) They generally pay dividends during their fast growth phase.

D) These are stocks of firms that grow their earnings at average rates and are expected to do so for a length of time.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

59) Which of the following are the three simplifying assumptions that cover most stock growth patterns?

A) Dividends remain constant over time, dividends grow at a constant rate, and dividends are not growing.

B) Dividends have a zero-growth rate, dividends grow at a varying rate, and dividends are not growing.

C) Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern.

D) Dividends have a zero-growth rate, dividends grow at a varying rate, and dividends are growing.

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

60) Which of the following statements is NOT true about zero-growth stocks?

A) The dividend payment pattern remains constant over time.

B) The cash flow pattern resembles a perpetuity with a constant cash flow.

C) The dividend pattern grows over time.

D) There is no growth in dividends over time.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

61) Which of the following statements is NOT true about constant-growth stocks?

A) The cash dividend remains constant over time.

B) Mature companies with a history of stable growth show this pattern.

C) The dividends grow at a constant rate from one period to the next forever.

D) Far distant-dividends have a very small present value and add little to the stock's price.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

62) The constant-growth dividend model will provide invalid solutions when:

A) the growth rate of the stock exceeds the required rate of return for the stock.

B) the growth rate of the stock is less than the required rate of return for the stock.

C) the growth rate of the stock is equal to the risk-free rate.

D) the growth rate of the stock is less than the risk-free rate.

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

63) Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $10.76

B) $11.88

C) $11.50

D) $9.80

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

64) Next year, Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $13.50

B) $9.72

C) $12.50

D) $11.63

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

65) Kleine Toymakers is introducing a new line of robotic toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Kleine plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of return is 15 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $13.24

B) $12.00

C) $6.57

D) $10.24

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

66) Givens, Inc., is a fast-growing technology company that paid a $1.25 dividend last week. The company's expected dividend growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $1.25

B) $6.46

C) $8.37

D) $7.23

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

67) Jacob Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent? ( Do not round intermediate calculations. Round final answer to two decimal places.)

A) $4.85

B) $5.37

C) $5.50

D) $6.14

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

68) Xinhua Manufacturing Company has been generating stable revenues that are not expected to grow at least for the next 12 months. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? (Round the final answer to two decimal places.)

A) $39.00

B) $3.69

C) $27.08

D) $21.23

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

69) Zephyr Electricals is a company with no growth potential. Its last dividend payment was $4.50, and it expects no change in future dividends. What is the current price of the company's stock given a discount rate of 9 percent?

A) $40.50

B) $50.00

C) $45.00

D) $500.00

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

70) Metasteel Limited Co. has a stable track record with sales that are not expected to grow in the future . Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price? (Round the answer to two decimal places.)

A) $103.50

B) $13.50

C) $39.30

D) $31.94

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

71) Ambassador Corp. sells household cleaners producing a revenue stream that has remained unchanged in the last few years. The firm does not expect any future change in its earnings or dividends.. The stock is currently selling at $46.88. If the required rate of return is 16 percent, what is the dividend paid by this company? (Round the answer to two decimal places.)

A) $2.93

B) $4.65

C) $6.89

D) $7.50

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

72) A communications company pays annual dividends of $8.50 with no possibility of it changing in the future. If the firm's stock is currently selling at $60.71, what is the required rate of return? (Round to nearest whole number.)

A) 14%

B) 16%

C) 13%

D) 15%

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

73) You are interested in investing in a company that expects to have the same growth rate of 6 percent forever. The firm paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this stock? (Round to the nearest dollar.)

A) $58

B) $61

C) $23

D) $24

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

74) Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a constant dividend growth rate of 8 percent forever. If the appropriate discount rate is 14 percent, what is the current price of this stock? (Round to the nearest dollar.)

A) $74

B) $32

C) $80

D) $60

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

75) Ryder Supplies has its stock currently selling at $63.25. The company is expected to grow at a constant rate of 7 percent. If the appropriate discount rate is 17 percent, what is the expected dividend, a year from now? (Round the answer to two decimal places.)

A) $4.43

B) $3.25

C) $10.75

D) $6.33

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

76) Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Do not round intermediate calculations. Round final answer to the nearest percent.)

A) 13%

B) 16%

C) 20%

D) 21%

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

77) A company's earnings and dividends are growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $58.31

B) $46.29

C) $51.02

D) $42.83

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

78) Which of the following is the most typical example of a zero-growth dividend stock?

A) The common stock of a firm in the biotechnology industry.

B) The preferred stock of a utility company.

C) The common stock of a firm in the health care industry.

D) The common stock of a firm in the information technology industry.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

79) The constant growth dividend model would be useful to determine the value of all but which of the following firms?

A) A firm whose earnings and dividends are declining at a fairly steady rate

B) A firm whose sales, profits, and dividends are growing at an annual average compound rate of 5 percent

C) A firm whose earnings and dividends are growing at a fairly steady rate

D) A firm whose expected sales, profits, and dividends are fluctuating

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

80) Starskeep, Inc., is a fast-growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return for such stocks is 20 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $15.63

B) $4.70

C) $30.30

D) $22.68

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

81) BioSci, Inc., a biotech firm, has forecast the following growth rates for the next three years: 30 percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate of 7 percent forever. The company paid a dividend of $2.00 last week. If the required rate of return is 16 percent, what is the market value of this stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $51.03

B) $36.86

C) $56.12

D) $46.37

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

82) Grant, Inc., is a high growth stock and expects to grow at a rate of 25 percent for the next four years. It will then settle to a constant growth rate of 10 percent. The first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $85.94

B) $97.19

C) $50.59

D) $65.68

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

83) Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects 7 percent growth in dividends. If the required rate of return is 15 percent, what is the current market price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $69.41

B) $93.63

C) $57.54

D) $80.29

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

84) Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of 35 percent for the next four years. After four years, the firm will grow at a constant rate of 6 percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is 20 percent, what is the stock worth today? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $14.64

B) $32.18

C) $36.43

D) $21.82

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

85) Suppose a firm's expected dividends for the next three years are as follows: D1 = $1.10, D2 = $1.20, and D3 = $1.30. After three years, the firm's dividends are expected to grow at 5 percent per year. What should the current price of the firm's stock (P0) be today if investors require a rate of return of 12 percent on the stock? (Do not round intermediate calculations. Round final answer to the nearest $0.01.)

A) $61.30

B) $10.10

C) $16.74

D) $24.12

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

86) Which of the following statements is true?

A) In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.

B) From a practical perspective, the growth rate in the constant growth dividend model must be greater than the sum of the long-term rate of inflation and the long-term real growth rate of the economy.

C) In order for the constant growth dividend model to properly value a firm's common stock, g must be greater than R.

D) The constant growth dividend model can be used effectively to value the common shares of a mixed growth stock.

Learning Objective: LO 5, 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

87) Ajax Company has issued perpetual preferred stock with a par of $100 and a dividend of 5.5 percent. If the required rate of return is 7.75 percent, what is the preferred stock's current market price? (Round to two decimal places.)

A) $12.90

B) $70.97

C) $53.27

D) $62.14

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

88) The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent? (Round to two decimal places.)

A) $23.06

B) $65.88

C) $37.57

D) $43.25

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

89) The preferred stock of Acme International is selling currently at $110.35. What is the dividend paid by this stock if your required rate of return is 9.75 percent? (Round to two decimal places.)

A) $9.75

B) $11.32

C) $10.76

D) $8.53

Learning Objective: LO 7

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

90) Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly dividend paid by the firm? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $8.76

B) $10.50

C) $2.19

D) $2.63

Learning Objective: LO 7

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

91) The Columbia Consumer Products Co. has issued perpetual preferred stock with a $100 par value. The firm pays a quarterly dividend of $2.60 on this stock. What is the current price of this preferred stock given a required rate of return of 12.5 percent?

A) $47.25

B) $80.00

C) $20.80

D) $83.20

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

92) Which of the following statements about preferred stock is FALSE?

A) Preferred stock has a higher-priority claim on the firm's assets than the common stock.

B) Failure to pay dividends on preferred stocks will result in a default.

C) Preferred stock has a lower-priority claim on the firm's assets than the firm's creditors in the event of default.

D) Preferred stock typically pays a fixed dividend.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

93) Durango Water Works has an outstanding issue of preferred stock that has a par (maturity value) of $75.00. The stock, which pays a quarterly dividend of $1.10, will be retired by the firm in 20 years. If the preferred stock is currently selling for $68.00, what is the preferred stock's yield-to-maturity? (Round to the nearest 0.01%.)

A) 6.72%

B) 5.64%

C) 4.28%

D) 7.73%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

94) Discuss the significance of an active secondary market to both issuers of securities and to investors.

Learning Objective: LO 1

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

95) How do the secondary markets for securities differ across the four types of markets?

Learning Objective: LO 1

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

96) Differentiate the characteristics of common and preferred stocks.

Learning Objective: LO 1

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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