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Exam 8: The Valuation and Characteristics of Stock

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Question 21

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Preferred stock is similar to a bond in the following way

A) preferred stock always contains a maturity date.
B) both investments provide a stated income stream.
C) both contain a growth factor similar to common stock.
D) both provide interest payments.

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Question 22

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Common stockholders demand a return on the price paid for their common stock,but since retained earnings on the balance sheet are merely "on paper" they do not require a return on earnings that have been retained.

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Question 23

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In terms of risk,preferred stock is safer than common stock because it has a prior claim on assets and income.

Using the dividend valuation method,an analyst determines the value of Company A's stock to be $10 and the value of Company B's stock to be $14.Based on this information,which of the following statements is most accurate?

Preferred stock differs from common stock in that

Bensen Co.paid a dividend of $5.25 on its common stock yesterday.The company's dividends are expected to grow at a constant rate of 8.5% indefinitely.If the required rate of return on this stock is 15.5%,compute the current value per share of Bensen Co.stock.

Public perception and reputation do not affect stock prices,which are strictly a function of dividends and required returns.

Cumulative voting is advantageous to minority shareholders because it may allow them to elect a member of the board of directors.

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?

Two approaches that allow for the retirement of preferred stock are call provisions and sinking fund provisions.

If a firm does not have enough money to pay any common stock dividends,it is technically in default to the common shareholders.

Whistle 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) ?

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.

The stock valuation model D₁/(r_cs - g)requires the stock to grow at a rate greater than the required return; otherwise,the stock is worthless.

Preferred stock is less risky than common stock,but more risky than debt.

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

Waterfront Solutions,Inc.paid a dividend of $5.00 per share on its common stock yesterday.Dividends are expected to grow at a constant rate of 4% for the next two years,at which point the stock is expected to sell for $56.00.If investors require a rate of return on Waterfront's common stock of 18%,what should the stock sell for today?

Cumulative preferred stock

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

Bondholders and preferred stockholders can be viewed as creditors,whereas the common stockholders are the true owners of the firm.