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i.   If the expected rate of return on a stock exceeds the required rate,

 a. The stock is experiencing supernormal growth.

b. The stock should be sold.

c. The company is probably not trying to maximize price per share.

d. The stock is a good buy.

e. Dividends are not being declared.

 

ii    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.

 

 

[ii].   Which of the following statements is most correct.

 

a. The stock valuation model, P0 = D1/(rs - g), can be used for firms which have negative growth rates.

b. If a stock has a required rate of return rs = 12 percent, and its dividend grows at a constant rate of 5 percent, this implies that the stock’s dividend yield is 5 percent.

c. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

d. Statements a and c are correct.

e. All of the statements above are correct.

 

[iii].  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.

 

 

[iv].   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.

 

[v].    Which of the following statements is most correct?

 

a. One of the advantages of financing with stock is that a greater proportion of stock in the capital structure can reduce the risk of a takeover bid.

b. A firm with classified stock can pay different dividends to each class of shares.

c. One of the advantages of financing with stock is that a firm’s debt ratio will decrease.

d. Both statements b and c are correct.

e. All of the statements above are correct.

 

[vi].   A stock expects to pay a year-end dividend of $2.00 a share (i.e., D1 = $2.00; assume that last year’s dividend has already been paid).  The dividend is expected to fall 5 percent a year, forever (i.e., g = -5%). The company’s expected and required rate of return is 15 percent.  Which of the following statements is most correct?

 

a. The company’s stock price is $10.

b. The company’s expected dividend yield 5 years from now will be 20 percent.

c. The company’s stock price 5 years from now is expected to be $7.74.

d. Both answers b and c are correct.

e. All of the above answers are correct.

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