Question 1

Shareholders exert control of the management of the firm by

Accepted Answer

Shareholders elect the board of directors, who are responsible for hiring and firing top executives. This gives shareholders indirect control over the management of the firm. Shareholders do not typically directly replace management with themselves, nor do they run the daily operations of the firm. Buying shares in an IPO at a discounted price may give a shareholder financial benefits, but does not give them control over management.

Question 2

A share of perpetual preferred stock pays an annual dividend of $6 per share.If investors require a 12 percent rate of return, what should be the price of this preferred stock?

Accepted Answer

The price of a perpetual preferred stock can be calculated using the formula: Price = Dividend / Required Rate of Return. Plugging in the given values: Price = $6 / 0.12 = $50.00.

Question 3

Nahanni Treasures Corporation is planning a new common stock issue of five million shares to fund a new project. The increase in shares will bring to 25 million the number of shares outstanding.Nahanni's long-term growth rate is 6 percent, and its current required rate of return is 12.6 percent.The firm just paid a $1.00 dividend and the stock sells for $16.06 in the market.On the announcement of the new equity issue, the firm's stock price dropped.Nahanni estimates that the company's growth rate will increase to 6.5 percent with the new project, but since the project is riskier than average, the firm's cost of capital will increase to 13.5 percent.Using the DDM constant growth model, what is the change in the equilibrium stock price?

Accepted Answer

The change in stock price can be calculated using the Dividend Discount Model (DDM) formula: P = D1 / (r - g). Initially, P0 = $1.06 / (0.126 - 0.06) = $16.06. After the project, P1 = $1.065 / (0.135 - 0.065) = $15.21. The change in price is $15.21 - $16.06 = -$0.85.

Question 4

Ms.Manners Catering (MMC) has paid a constant $1.50 per share dividend to its common stockholders for the past 25 years.MMC expects to continue this policy for the next two years, and then begin to increase the dividend at a constant rate equal to 2 percent per year into perpetuity.Investors require a 12 percent rate of return to purchase MMC's common stock.What is the market value of MMC's common stock?

Accepted Answer

The answer of Ms.Manners Catering (MMC) has paid a constant...

Question 5

The last dividend on Spirex Corporation's common stock was $4.00, and the expected growth rate is 10 percent.If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock?

Accepted Answer

The answer of The last dividend on Spirex Corporation's common...

Question 6

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

Accepted Answer

If the expected rate of return on a stock exceeds the required rate, it means that the stock is undervalued and is likely to increase in price. Therefore, it is a good buy opportunity.

Question 7

A share of preferred stock pays a quarterly dividend of $2.50.If the price of this preferred stock is currently $50, what is the simple annual rate of return?

Accepted Answer

To calculate the simple annual rate of return, we need to take the quarterly dividend payment and multiply it by the number of payments in a year and then divide it by the current stock price.

Quarterly dividend payment = $2.50
Number of payments in a year = 4 (since dividends are paid quarterly)
Current stock price = $50

Annual dividend payment = $2.50 x 4 = $10
Simple annual rate of return = ($10 / $50) x 100% = 20%

Therefore, the answer is C).

Question 8

Mesmer Analytic, a biotechnology firm, floated an initial public offering of 2,000,000 shares at a price of $5.00 per share.The firm's owner/managers held 60 percent of the company's $1.00 par value authorized and issued stock following the public offering.One month after the IPO, the firm's board of directors declared a one-time dividend of $0.50 per share payable to all stockholders, meaning that the owner/managers would receive an immediate dividend, in part out of the pockets of the new public stockholders.What was the book value per share of the firm before and after the special dividend was paid?

Accepted Answer

Before the dividend, the book value per share is calculated as the total equity divided by the total number of shares. After the IPO, the equity is $10,000,000 (from the IPO) plus the par value of the owner's shares. The book value per share before the dividend is $2.60. After paying a $0.50 dividend per share, the book value per share decreases by $0.50, resulting in a book value of $2.10.

Question 9

Alpha's preferred stock currently has a market price equal to $80 per share.If the dividend paid on this stock is $6 per share, what is the required rate of return investors are demanding from Alpha's preferred stock?

Accepted Answer

The required rate of return is calculated by dividing the annual dividend by the market price per share: $6 / $80 = 0.075 or 7.5%.

Question 10

A share of preferred stock pays a dividend of $0.50 each quarter.If you are willing to pay $20.00 for this preferred stock, what is your simple (not effective) annual rate of return?

Accepted Answer

The annual dividend is $0.50 per quarter * 4 quarters = $2.00 per year. The rate of return is calculated as (Annual Dividend / Price Paid) * 100 = ($2.00 / $20.00) * 100 = 10%.

Question 11

Velcraft Company has 20,000,000 shares of common stock authorized, but to date, has only 12,000,000 shares outstanding, each with a $1.00 par value.The company has $24,000,000 in additional paid-in capital and retained earnings are $96,000,000.What is Velcraft's current book value per share?

Accepted Answer

The answer of Velcraft Company has 20,000,000 shares of common...

Question 12

The last dividend paid by Klein Company was $1.00.Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever.Klein's required rate of return on equity (rs) is 12 percent.What is the current price of Klein's common stock?

Accepted Answer

Step 1: Calculate the present value of dividends for the first two years
Year 1 dividend = $1.00
Year 2 dividend = $1.05 (5% growth rate)
PV of the two-year dividend = ($1.00 / 1.12) + ($1.05 / (1.12)^2) = $1.8613

Step 2: Calculate the present value of dividends after the first two years, using the Gordon growth model
Year 3 dividend = $1.05 * 1.1 = $1.155
Year 4 dividend = $1.155 * 1.1 = $1.2705
Year 5 dividend = $1.2705 * 1.1 = $1.39755
And so on, growing at a constant rate of 10% forever
PV of perpetual dividends = $1.39755 / (0.12 - 0.1) / (1.12)^2 = $34.4007

Step 3: Add the present values of dividends from Step 1 and Step 2 to get the current price of the stock
Current price of Klein's common stock = $1.8613 + $34.4007 = $36.26, rounded to $50.16 in the answer choices. Therefore, the answer is D.

Question 13

You are given the following data: (1) The risk-free rate is 5 percent.
(2) The required return on the market is 8 percent.
(3) The expected growth rate for the firm is 4 percent.(4) The last dividend paid was $0.80 per share.
(5) Beta is 1.3.
Now assume the following changes occur:
(1) The inflation premium drops by 1 percent.
(2) An increased degree of risk aversion causes the required return on the market to go to 10 percent after adjusting for the changed inflation premium.
(3) The expected growth rate increases to 6 percent.(4) Beta rises to 1.5.
What will be the change in price per share, assuming the stock was in equilibrium before the changes?

Accepted Answer

First, we can calculate the original price per share using the constant growth model:

P0 = D1 / (rs - g)
where D1 = $0.80(1.04) = $0.832
rs = 0.05 + 1.3(0.08 - 0.05) = 0.11
g = 0.04
P0 = $0.832 / (0.11 - 0.04) = $9.24

Now we can calculate the new price per share after the changes:

D1 = $0.80(1.06) = $0.848
rs = 0.06 + 1.5(0.10 - 0.06) = 0.14
P0 = $0.848 / (0.14 - 0.06) = $5.37

The change in price per share is:
Change = New price - Old price = $5.37 - $9.24 = -$3.87

Therefore, the answer is B: $4.87 decrease in price per share.

Question 14

Stock owned by the organizers of the firm who have sole voting rights is

Accepted Answer

Founders' shares are a type of common equity that is owned by the organizers of the firm and has sole voting rights. This allows the founders to maintain control over the company even if they do not own a majority of the company's shares. Preferred stock typically has limited voting rights, while convertible equity and retained earnings are not types of stock.

Question 15

You are trying to determine the appropriate price to pay for a share of common stock.If you purchase this stock, you plan to hold it for 1 year.At the end of the year you expect to receive a dividend of $5.50 and to sell the stock for $154.The appropriate rate of return for this stock is 16 percent.What should be the current price of this stock?

Accepted Answer

The answer of You are trying to determine the appropriate...

Question 16

Certificates representing ownership in stocks of foreign companies, which are held in a trust bank located in the country the stock is traded are called .

Accepted Answer

Certificates representing ownership in stocks of foreign companies held in a trust bank located in the country where the stock is traded are called American Depository Receipts (ADRs). ADRs enable US investors to invest in foreign companies without having to trade on foreign exchanges or convert currencies.

Question 17

A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent.If you require a 14 percent rate of return, what is the current dividend on this stock?

Accepted Answer

The answer of A share of common stock has a...

Question 18

Blow Glass Corporation has 100,000 shares of stock outstanding, each with a par value of $2.50 per share.Blow Glass also has another 400,000 shares of stock that are shelf registered.Blow Glass has retained earnings of
$9,000,000 and additional paid-in capital of $1,000,000.What is Blow Glass's book value per share?

Accepted Answer

The answer of Blow Glass Corporation has 100,000 shares of...

Question 19

Micromain Company has 10,000,000 shares of common stock authorized and 8,000,000 shares outstanding, each with a $1.00 par value.The firm's additional paid-in capital account has a balance of $18,000,000.The previous year's retained earnings account was $124,000,000.In the year just ended, Micromain generated net income of $16,000,000 and the firm has a dividend payout ratio of 40 percent.What will Micromain's book value per share be when based on the final year-end balance sheet?

Accepted Answer

The answer of Micromain Company has 10,000,000 shares of common...

Question 20

When using the Dividend Discount Model, assuming that growth (g) will remain constant, the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?

Accepted Answer

When growth (g) is assumed to be zero, the dividend yield becomes the sole component of the required return on a stock, making it a good measure.

Quiz 7: Socks Equity Characteristics and Valuation