Which of the following statements is CORRECT?
A) If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.
B) The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.
C) The preemptive right is a provision in the corporate charter that gives common stockholders 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) The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required return.

Question

Quizplus · Accepted Answer

The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. This helps protect the existing shareholders from dilution of their ownership stake. Option A is incorrect as different classes of stock may have different voting rights. Option B is incorrect as the right to approve or disapprove of a merger is typically given to the shareholders as a whole, not just those with preemptive rights. Option D and E are incorrect as the stock valuation model can be used for firms with any growth rate, positive, negative, or zero.

Which of the Following Statements Is CORRECT