Question 1

Yanti Corp.preferred stock has a 5% stated dividend percentage,and a $100 par value.What is the value of the stock if your required rate of return is 6% per year?

Accepted Answer

The value of preferred stock is calculated by dividing the annual dividend by the required rate of return. The annual dividend is 5% of $100, which is $5. Therefore, the value of the stock is $5 / 0.06 = $83.33.

Question 2

CMT,Inc.has an issue of preferred stock whose par value is $500.The preferred stock pays a 4.5% dividend.If investors require a 5.5% rate of return for these shares,what price should the preferred stock sell for?

Accepted Answer

The price of preferred stock is calculated by dividing the annual dividend by the required rate of return. The annual dividend is 4.5% of $500, which is $22.50. Dividing $22.50 by 5.5% (0.055) gives a price of $409.09.

Question 3

Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid.What is the name of this feature?

Accepted Answer

The feature described is known as cumulative, which means that any unpaid preferred dividends must accumulate and be paid before any common stock dividends can be paid.

Question 4

Department 65 has an issue of preferred stock that pays a dividend of $4.00.The preferred stockholders require a rate of return on this stock of 9%.At what price should the preferred stock sell for? Round off to the nearest $0.10.

Accepted Answer

To calculate the price of the preferred stock, we can use the formula:
Price of preferred stock = Dividend / Required rate of return
Plugging in the given values, we get:
Price of preferred stock = $4.00 / 0.09
Price of preferred stock = $44.44 (rounded off to the nearest $0.10)
Therefore, the preferred stock should sell for $44.40, which is option B.

Question 5

What is the value of a preferred stock that pays a $4.50 dividend to an investor with a required rate of return of 10%?

Accepted Answer

The value of a preferred stock is calculated by dividing the annual dividend by the required rate of return. Here, $4.50 / 0.10 = $45.

Question 6

A preferred stock that pays an annual dividend of $10,has a par value of $100,and has a required return of 5% will be valued at $200.

Accepted Answer

The answer of A preferred stock that pays an annual...

Question 7

If Neal O'Danny preferred stock pays an annual dividend of $2.80,and investors require a 9% return,what is the value of O'Danny's preferred stock today?

Accepted Answer

The value of O'Danny's preferred stock today, given an annual dividend of $2.80 and a required return of 9%, is calculated using the formula for valuing preferred stock: Price = Dividend / Required Rate of Return. Thus, the value would be $2.80 / 0.09 = $31.11.

Question 8

Bell Corp.has a preferred stock that pays a dividend of $2.40.If you are willing to purchase the stock at $11,what is your required rate of return (round your answer to the nearest .1% and assume that there are no transaction costs)?

Accepted Answer

The answer of Bell Corp.has a preferred stock that pays...

Question 9

How is preferred stock affected by a decrease in the required rate of return?

Accepted Answer

The value of preferred stock is inversely related to the required rate of return. As the required rate of return decreases, the value of the preferred stock increases.

Question 10

XYZ Corp 8% preferred stock with a par value of $100 and a market price of $150 will pay an annual dividend this year of $12 per share.

Accepted Answer

The annual dividend for preferred stock is calculated based on the par value, not the market price. Therefore, the dividend is 8% of $100, which is $8 per share, not $12.

Question 11

Nuray Corp.preferred stock pays a $.50 annual dividend.What is the value of the stock if your required rate of return is 10%?

Accepted Answer

Preferred stock value can be found by dividing the annual dividend by the required rate of return. In this case, $0.50 divided by 0.10 equals $5.00. Therefore, the value of the preferred stock is $5.00.

Question 12

Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period.What is the name of this provision?

Accepted Answer

The provision described in the question is known as the "callable" provision. This provision allows the issuing company to repurchase its preferred stock from its holders at a stated price over a predefined time period. A cumulative provision refers to a dividend feature that requires any unpaid dividends from previous periods to be paid before any new dividends can be issued. A putable provision allows the holder of the preferred stock to sell it back to the issuing company at a specific price. A convertible provision allows the holder to convert their preferred stock into common stock at a specific conversion ratio.

Question 13

Keyes Corporation preferred stock pays an annual dividend of $7 per share.Which of the following statements is true for an investor with a required return of 9%?

Accepted Answer

The value of the preferred stock can be calculated using the formula: V = D / R, where V is the value of the stock, D is the annual dividend, and R is the required return. Substituting the values given, we get V = $7 / 0.09 = $77.78 per share. Therefore, option C is the correct answer. Option A is incorrect because the value of preferred stock is not equal to the dividend payment. Option B and D are incorrect because they do not use the correct formula to calculate the value of the preferred stock.

Question 14

The market price of a firm's common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings)divided by the number of shares outstanding.

Accepted Answer

The market price of a firm's common stock is determined by supply and demand, and may not necessarily reflect the equity accounts reported in its balance sheet. Factors such as financial performance, industry trends, and overall market conditions can all impact the market price of a stock.

Question 15

Casino Games Company preferred stock pays a perpetual annual dividend of 3.5% of its $100 par value.If investors' required rate of return on this stock is 11%,what is the value per share?

Accepted Answer

To find the value per share, we need to use the formula:

Value per share = Annual dividend / Required rate of return

Annual dividend = 3.5% x $100 = $3.50
Required rate of return = 11%

Value per share = $3.50 / 11% = $31.82 (rounded to two decimal places)

Therefore, the best choice is B.

Question 16

Historically,price appreciation,or capital gains yield,has accounted for a greater portion of returns on common stocks than dividend payments.

Accepted Answer

This is true. Over the long term, the stock market has tended to produce higher total returns through price appreciation rather than dividend payments. However, dividend payments can still be an important source of income for investors, particularly in times of market volatility or economic uncertainty.

Question 17

Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock.What is the name of this feature?

Accepted Answer

The feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock is known as a sinking fund. Choice A (Convertible) refers to the option for preferred stockholders to convert their shares into common stocks, while choice B (Callable) indicates the ability of the issuer to redeem the preferred shares before maturity. Choice C (Cumulative) refers to the requirement for the issuer to pay any missed dividends on preferred shares before paying common stock dividends.

Question 18

Positive Tronics Industries preferred stock has a par value of $100 and pays a dividend of $6.00 per share.It presently sells for $87 per share.What do investors require as a rate of return on this stock? Round off to the nearest .10%.

Accepted Answer

The required rate of return is calculated by dividing the annual dividend by the current price per share: $6 / $87 = 0.0689655, which rounds to 6.9%.

Question 19

Which of the following statements concerning preferred stock is most correct?

Accepted Answer

Preferred stock dividends are typically fixed, making them more like perpetuities.

Question 20

The YLD% shown in Wall Street Journal stock quotes stands for the stock's dividend yield and is calculated by dividing the amount of the dividend by the stock's opening price on the first day of the year.

Accepted Answer

The YLD% shown in Wall Street Journal stock quotes stands for the stock's current dividend yield, and is calculated by dividing the annual dividend by the current stock price.

Quiz 8: The Valuation and Characteristics of Stock