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Exam 8: Stocks, Stock Valuation, and Stock Market Equilibrium

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Question 21

Multiple Choice

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Which of the following statements is correct?

A) A tracking, or target, stock is the same as the stock of an independent stand-alone company.
B) If a company has dual-class shares, Class A and Class B, the shares may pay different dividends, but they must have the same voting rights.
C) The preemptive right is a provision in the article of incorporation that gives common shareholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.
D) The stock valuation model, P0 = D1/(rs - g) , cannot be used for firms that have negative growth rates.

E) A) and D)
F) B) and C)

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Question 22

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Which of the following statements best describes preferred stock?

A) A major disadvantage of financing with preferred stock is that preferred stockholders typically have super-normal voting rights.
B) Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common.
C) The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.
D) One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income would be tax free.

E) All of the above
F) None of the above

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Question 23

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Dual-class share differentiates different classes of common share. They are issued by companies to meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Stock X has a required return of 12% and a dividend yield of 5%, and its dividend is expected to grow at a constant rate forever. Stock Y has a required return of 10%, a dividend yield of 3%, and its dividend is expected to grow at a constant rate forever. Both stocks currently sell for $25 per share. Which of the following statements is correct?

Stocks A and B have the same price, but Stock A has the higher required rate of return. Which of the following statements is correct?

Assume that markets are semistrong efficient, but not strong-form efficient. Which of the following statements is correct?

If D1 = $1.75, g (which is constant) = 4.5%, and P0 = $46, what is the stock's expected dividend yield for the coming year?

Stock X has a required return of 10%, while Stock Y has a required return of 12%. Which of the following statements is correct?

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%) . If the company's expected and required rate of return is 15%, which of the following statements is correct?

A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.

Gary Wells Inc. plans to issue perpetual preferred stock with an annual dividend of $6.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

The preemptive right gives current shareholders the right to purchase, on a pro rata basis, any new shares sold by the firm. This right helps protect them against both dilution of control and dilution of value.

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is correct?

Clinton's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $50.00, what is its EFFECTIVE annual (not nominal) rate of return?

Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $50.00, what is its NOMINAL (not effective) annual rate of return?

When a new issue of common share is brought to market, it is the marginal investor who determines the price at which trade occurs.

You must estimate the intrinsic value of Tsetseko Technologies' stock. Tsetseko's end-of-year free cash flow (FCF) is expected to be $17.50 million, and it is expected to grow at a constant rate of 7.00% a year thereafter. The company's WACC is 10.00%. Tsetseko has $125.00 million of long-term debt plus preferred stock, and there are 15.00 million shares of common stock outstanding. What is Tsetseko's estimated intrinsic value per share of common stock?

A proxy is a document giving one party the authority to act for another party, including the power to vote. Thus, a proxy can be an important tool relating to control of the firm.

Which of the following statements best describes the efficient markets hypothesis?