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Exam 10: Stock Valuation

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Question 21

Multiple Choice

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Expected cash flow for a preferred stock primarily consists of

A) dividend payments.
B) changes in the price of the stock.
C) interest payments.
D) both A and B.

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Question 22

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Which investor incurs the greatest risk?

A) Mortgage bondholder
B) Preferred stockholder
C) Common stockholder
D) Debenture bondholder

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Question 23

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World Wide Interlink Corp.has decided to undertake a large project.Consequently,there is a need for additional funds.The financial manager plans to issue preferred stock with an annual dividend of $5 per share.The stock will have a par value of $30.If investors' required rate of return on this investment is currently 20%,what should the preferred stock's market value be?

Large,established technology companies such as Apple,Dell,Intel and Microsoft all trade on the NYSE.

Walmart's current earnings per share of $5.02 are expected to grow at a rate of 17% per year for the next few years.Using a P/E ratio of 13.46,what is a reasonable value for a share of Walmart Stock.

You are considering the purchase of Miller Manufacturing,Inc.'s common stock.The stock is selling for $21.00 per share.The next dividend is expected to be $2.10,and you expect the dividend to keep growing at a constant rate.If the stock is returning 15%,calculate the growth rate of dividends.

Which of the following formulas is appropriate to find the value of preferred stock with a fixed dividend?

Marjen,Inc.just paid a dividend of $5.Marjen stock currently sells for $73.57.The return on stocks like Marjen,Inc.is around 10%.What is the implied growth rate of dividends.

You are evaluating the purchase of Charbridge,Inc.common stock which currently pays no dividend and is not expected to do so for many years.Because of rapidly growing sales and profits,you believe the stock will be worth $51.50 in 3 years.If your required rate of return is 16%,what is the stock worth today?

Which of the following statements concerning preferred stock is correct?

A company may issue multiple classes of preferred stock.

Discuss two reasons why preferred stock would be viewed as less risky than common stock to investors.

You can purchase one share of Sumter Company common stock for $80 today.You expect the price of the common stock to increase to $85 per share in one year.The company pays an annual dividend of $3.00 per share.What is your expected rate of return for Sumter stock?

A decrease in the ________ will cause an increase in common stock value.

Tannerly Worldwide's common stock is currently selling for $48 a share.If the expected dividend at the end of the year is $2.40 and last year's dividend was $2.00,what is the rate of return implicit in the current stock price?

Distinguish between primary stock market transactions and secondary stock market transaction.

Common stockholders expect greater returns than bondholders because

Green Corp.'s preferred stock is selling for $20.83.If the company pays $2.50 annual dividends,what is the expected rate of return on its stock?

RAH Inc.is not publicly traded,but the P/E ratios of it's 4 closest competitors are 15,15.3,15.7,and 16.5.RAH's current earnings per share are $1.50.They are expected to grow at 6% for the next few years.What is a reasonable price for a share of RAH stock?

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following?