Question 1

Murky Pharmaceuticals has issued preferred stock with a par value of $100 and a 5% dividend. The investors' required yield is 10%. What is the value of a share of Murky preferred?
A) $100
B) $75
C) $50
D) $25

Accepted Answer

The value of preferred stock is calculated by dividing the annual dividend by the required yield. The annual dividend is 5% of $100, which is $5. The required yield is 10%, so the value of the stock is $5 / 0.10 = $50.

Question 2

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?

Accepted Answer

The answer of RAH Inc. is not publicly traded, but...

Question 3

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?
A) 8.33%
B) 12.00%
C) 2.50%
D) 20.00%

Accepted Answer

The answer of Green Corp.'s preferred stock is selling for...

Question 4

Apple stock is now selling for $115 per share. The P/E ratio based on current earnings is 13.77 and the P/E ratio based on expected earnings is 12.29. The expected growth rate in Apples earnings must be
A) 1.48%.
B) 12.1%.
C) -10.3%.
D) 10.3%.

Accepted Answer

The answer of Apple stock is now selling for $115...

Question 5

UVP preferred stock pays $5.00 in annual dividends. If your required rate of return is 13%, how much will you be willing to pay for one share?
A) $38.46
B) $26.26
C) $65.46
D) $46.38

Accepted Answer

The price of a preferred stock can be calculated using the formula: Price = Dividend / Required Rate of Return. Plugging in the values given: Price = $5.00 / 0.13 = $38.46.

Question 6

Tri State Pickle Company preferred stock pays a perpetual annual dividend of 2 1/2% of its par value. Par value of TSP preferred stock is $100 per share. If investors' required rate of return on this stock is 15%, what is the value of per share?
A) $37.50
B) $15.00
C) $16.67
D) $6.00

Accepted Answer

To calculate the value of the preferred stock, we need to divide the annual dividend by the required rate of return. The annual dividend is 2.5% of $100, which is $2.50 per share. Dividing this by the required rate of return of 15% gives us a value of $16.67 per share. Therefore, the correct answer is C.

Question 7

Piercing Publishers recently issued preferred stock with a fixed annual dividend of $3.00 per share. Investors require a 5% return on similar preferred stock issues. The stock is currently selling for $65. Is the stock a good buy?
A) Yes, as it is undervalued $5.
B) Yes, as it is undervalued $10.
C) No, as it is overvalued $5.
D) No, as it is overvalued $10.

Accepted Answer

To determine if the stock is a good buy, we need to compare the required return of 5% to the dividend yield. The annual dividend is $3.00 per share, and the current price is $65 per share, so the dividend yield is:

$3.00 / $65 = 0.0462 or 4.62%

Since the required return of 5% is higher than the current dividend yield of 4.62%, the stock is overvalued by $5. Therefore, the best answer is C, No, as it is overvalued $5.

Question 8

The P/E ratio is the market price of a share of stock divided by book equity per share.

Accepted Answer

The P/E ratio is the market price of a share of stock divided by earnings per share, not book equity per share.

Question 9

Davis Gas & Electric issued preferred stock in 1985 that had a par value of $50. The stock pays a dividend of 7.875%. Assume that shares are currently selling for $62.50. What is the preferred stockholder's expected rate of return? Round to the nearest 0.01%.
A) 6.30%
B) 7.88%
C) 10.25%
D) 5.02%

Accepted Answer

The expected rate of return for preferred stock is calculated by dividing the annual dividend by the current price. The annual dividend is 7.875% of the $50 par value, which is $3.9375. Dividing $3.9375 by the current price of $62.50 gives approximately 6.30%.

Question 10

The higher the investor's required rate of return, the higher the P/E ratio will be.

Accepted Answer

A higher required rate of return typically leads to a lower P/E ratio because investors are discounting the company's earnings more heavily, which reduces the present value of those earnings and thus the price they are willing to pay for them.

Question 11

P/E ratios found in published sources or on the internet are always computed by dividing the next period's expected earnings into the current price of the stock.

Accepted Answer

P/E ratios can be computed using either the past 12 months' actual earnings (trailing P/E) or using the forecasted earnings for the next 12 months (forward P/E), not exclusively the next period's expected earnings.

Question 12

Walmart's current earnings per share of $4.60 are expected to grow only at a rate of 2% per year for the next few years. Using a P/E ratio of 15, what is a reasonable value for a share of Walmart Stock.

Accepted Answer

The answer of Walmart's current earnings per share of $4.60...

Question 13

The higher a firm's P/E ratio, the more optimistic investors' feel about the firm's growth prospects.

Accepted Answer

A higher P/E ratio indicates that investors are willing to pay more for each dollar of earnings, suggesting that they believe the firm has strong growth potential in the future.

Question 14

Which of the following statements concerning preferred stock is correct?
A) Preferred stock generally is more costly to the firm than common stock.
B) Most issues of preferred stock have a cumulative feature.
C) Preferred dividend payments are tax-deductible.
D) Preferred stock is a riskier form of capital to the firm than bonds.

Accepted Answer

Most issues of preferred stock have a cumulative feature, which means that if the company misses a dividend payment, it must make it up in the future before paying any dividends on common stock. This feature makes preferred stock less risky for investors than common stock, but it also makes it more expensive for the company to issue. Options A, C, and D are incorrect. Preferred stock may be less expensive for the firm than common stock because it does not confer voting rights, and payments on preferred dividends are not tax-deductible. Additionally, preferred stock is generally less risky for the company than bonds because bondholders have a higher claim on a company's assets in the event of bankruptcy.

Question 15

Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on this stock. What is the value of the preferred stock today? Round to the nearest $1.
A) $100
B) $85
C) $75
D) $16

Accepted Answer

To calculate the value of the preferred stock, we need to use the formula V = D/R, where V is the value of the stock, D is the dividend and R is the required rate of return. In this case, D = $85 x 5.75% = $4.89. So, V = $4.89/6.50% = $75.23. Rounded to the nearest dollar, the value of the preferred stock today is $75, which is option C.

Question 16

Which of the following provisions is unique to preferred stockholders and usually NOT available to common stockholders?
A) Cumulative dividends feature
B) Voting rights
C) Fixed dividend
D) Both A and C

Accepted Answer

Cumulative dividends are a unique feature of preferred stockholders, which allows them to receive their unpaid dividends in subsequent years, while common stockholders do not have this feature. Fixed dividend is also unique to preferred stockholders and is not available to common stockholders. However, voting rights may or may not be available to preferred stockholders, depending on the terms and conditions of the stock issue.

Question 17

Petrified Forest Skin Care, Inc. pays an annual perpetual dividend of $1.70 per share. If the stock is currently selling for $21.25 per share, what is the expected rate of return on this stock.
A) 36.13%
B) 12.5%
C) 8.0%
D) 13.6%

Accepted Answer

The expected rate of return can be calculated using the formula: Dividend / Price. So, $1.70 / $21.25 = 0.08 or 8.0%.

Question 18

Which of the following statements is true?
A) Preferred stockholders are entitled to dividends before common stockholders can receive dividends.
B) Preferred stock, like common stock, usually has no maturity; i.e., the corporation does not pay back the investment.
C) The market value of preferred stock, like bonds, will usually fluctuate in value primarily as the result of market rates of interest.
D) All of the above.

Accepted Answer

All the statements provided are true regarding preferred stock. A) Preferred stockholders indeed have priority over common stockholders for dividend payments. B) Preferred stock typically does not have a maturity date, similar to common stock, meaning the investment is not repaid by the corporation at a specific time. C) The market value of preferred stock fluctuates similarly to bonds, primarily due to changes in market interest rates.

Question 19

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?
A) $10
B) $15
C) $20
D) $25

Accepted Answer

The answer of World Wide Interlink Corp. has decided to...

Question 20

Edison Power and Light has an outstanding issue of cumulative preferred stock with an annual fixed dividend of $2.00 per share. It has not paid the preferred dividend for the last 3 years, but intends to pay a dividend on the common stock in the coming year. Before Edison can pay a dividend on the common stock
A) preferred shareholders may cast all their votes for a single director.
B) preferred shareholders must receive dividends totaling $8.00 per share.
C) preferred shareholders must receive $2.00 per share.
D) will not necessarily receive any dividend.

Accepted Answer

Preferred shareholders must receive dividends totaling $8.00 per share because the dividends are cumulative and have not been paid for the last 3 years. This means they are entitled to the $2.00 annual dividend for each of those years plus the current year's dividend before any dividend can be paid on the common stock.

Quiz 10: Stock Valuation

Murky Pharmaceuticals has issued preferred stock with a par value of $100 and a 5% dividend. The investors' required yield is 10%. What is the value of a share of Murky preferred?

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?

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?

Apple stock is now selling for $115 per share. The P/E ratio based on current earnings is 13.77 and the P/E ratio based on expected earnings is 12.29. The expected growth rate in Apples earnings must be

UVP preferred stock pays $5.00 in annual dividends. If your required rate of return is 13%, how much will you be willing to pay for one share?

Tri State Pickle Company preferred stock pays a perpetual annual dividend of 2 1/2% of its par value. Par value of TSP preferred stock is $100 per share. If investors' required rate of return on this stock is 15%, what is the value of per share?

Piercing Publishers recently issued preferred stock with a fixed annual dividend of $3.00 per share. Investors require a 5% return on similar preferred stock issues. The stock is currently selling for $65. Is the stock a good buy?

The P/E ratio is the market price of a share of stock divided by book equity per share.

Davis Gas & Electric issued preferred stock in 1985 that had a par value of $50. The stock pays a dividend of 7.875%. Assume that shares are currently selling for $62.50. What is the preferred stockholder's expected rate of return? Round to the nearest 0.01%.

The higher the investor's required rate of return, the higher the P/E ratio will be.

P/E ratios found in published sources or on the internet are always computed by dividing the next period's expected earnings into the current price of the stock.

Walmart's current earnings per share of $4.60 are expected to grow only at a rate of 2% per year for the next few years. Using a P/E ratio of 15, what is a reasonable value for a share of Walmart Stock.

The higher a firm's P/E ratio, the more optimistic investors' feel about the firm's growth prospects.

Which of the following statements concerning preferred stock is correct?

Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on this stock. What is the value of the preferred stock today? Round to the nearest $1.

Which of the following provisions is unique to preferred stockholders and usually NOT available to common stockholders?

Petrified Forest Skin Care, Inc. pays an annual perpetual dividend of $1.70 per share. If the stock is currently selling for $21.25 per share, what is the expected rate of return on this stock.

Which of the following statements is true?