Chapter 8: Stock Valuation
Multiple Choice

1.  

Why is preferred stock is called a hybrid security?
preferred stock has a fixed maturity date.
preferred dividends are a tax-deductible expense for the firm.
preferred dividends vary depending upon the earnings of the firm.
preferred stock has characteristics of both common stock and bonds.

2.  

What right do common stockholders have as a result of the preemptive right characteristic of common stock?
a residual claim on firm income.
to maintain a proportionate share of ownership in the firm.
to elect a board of directors.
to be involved in a proxy fight.

3.  

What two types of return do stockholders receive from their investment in common stock?
expected and required rates of return.
dividend income and capital gains.
growth rates and required rates of return.
stock options and stock dividends.

4.  

What is the market value of a share of preferred stock paying an annual dividend of 8 percent of the $100 par value when investors require a 12 percent return?
$66.67.
$76.75.
$100.
$166.67.

5.  

Assume that Harley-Davidson has a return on equity of 10.5 percent. If the company distributes 40 percent of its earnings as dividends, what is Harley-Davidson's expected rate of growth from internal financing, also known as the sustainable rate of growth?
4.30 percent.
6.30 percent.
12.00 percent.
6.00 percent.

6.  

A share of common stock currently sells for $50.00 per share, has an expected dividend to be paid at the end of the year of $2.50 per share, and an expected growth rate of 5 percent per year. An investor's required rate of return for this particular stock is 8 percent per year. What can you determine about the price of the stock?
overvalued and offering an expected return higher than the required return.
undervalued and offering a higher expected return than the required return.
overvalued and offering an expected return lower than the required return.
undervalued and offering an expected return lower than the required return.

7.  

Assume that an investor is considering the purchase of a share of Harley-Davidson common stock. The investor expects to sell the stock at the end of one year for $35.00. The investor also expects to receive a dividend of $3.00 at the end of the year. The company just paid a dividend of $2.50. If the required rate of return on this stock is 12%, what is the most the investor would be willing to pay for it now?
$28.57.
$33.05.
$33.93.
$30.80.

8.  

Assume that Harley-Davidson has preferred stock that is selling for $20.83. If the company pays a $2.50 annual dividend, what is the expected rate of return on its stock?
8.33%.
12.00%.
2.50%.
20.00%.

9.  

Assume that a company's preferred stock is selling for $15 and it pays a yearly dividend of $3. What is the expected rate of return on this stock at its current market price?
25.0%
14.2%
20.0%
9.3%

10.  

What is the value of a preferred stock with a dividend rate of 20 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 14 percent.
$135.75
$142.85
$150.50
$162.85

11.  

You own a share of Harley-Davidson's preferred stock, which currently sells for $38.50 per share and pays annual dividends of $3.25 per share. What is your expected return?
6.5%
7.44%
8.44%
9%

12.  

A company is to pay a $1.85 dividend on each share of its common stock next year. The market price of the common stick is projected to be $42.50 by year-end. If the investor's required rate of return is 11 percent, what is the current value of the stock?
$25.46
$30.00
$35.76
$39.96.


© 2000-2001 by Prentice-Hall, Inc.
A Pearson Company
Distance Learning at Prentice Hall
Legal Notice