Hrm 531 Week 5 Knowledge Check
CHAPTER 9: STOCKS AND THEIR VALUATION
1. A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.
a. True
b. False
ANSWER: True
2. The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.
a. True
b. False
ANSWER: True
3. If a firm’s stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would …show more content…
The corporate valuation model cannot be used unless a company pays dividends.
a. True
b. False
ANSWER: False
14. Projected free cash flows should be discounted at the firm’s weighted average cost of capital to find the firm’s total corporate value.
a. True
b. False
ANSWER: True
15. Preferred stock is a hybrid—a sort of cross between a common stock and a bond—in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.
a. True
b. False
ANSWER: False
RATIONALE: Preferred dividends don’t normally grow, and they are not guaranteed.
16. From an investor’s perspective, a firm’s preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer’s standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.
a. True
b. False
ANSWER: True
17. If a stock’s expected return as seen by the marginal investor exceeds this investor’s required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required …show more content…
These two stocks should have the same price.
b. These two stocks must have the same dividend yield.
c. These two stocks should have the same expected return.
d. These two stocks must have the same expected capital gains yield.
e. These two stocks must have the same expected year-end dividend.
ANSWER: b
RATIONALE: The following calculations show that answer b is correct. The others are all wrong.
A
B
Expected return
10%
12%
Expected growth 7%
9%
Dividend yield 3%
3%
28. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
A
B
Price
$25
$40
Expected growth
7%
9%
Expected return
10%
12%
a. The two stocks should have the same expected dividend.
b. The two stocks could not be in equilibrium with the numbers given in the question.
c. A’s expected dividend is $0.50.
d. B’s expected dividend is $0.75.
e. A’s expected dividend is $0.75 and B’s expected dividend is $1.20.
ANSWER: e
RATIONALE: The following calculations show that answer e is correct. The others are all wrong.
A
B
Price
$25
$40
Expected growth
7%
9%
Expected return
10%
1. A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.
a. True
b. False
ANSWER: True
2. The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.
a. True
b. False
ANSWER: True
3. If a firm’s stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would …show more content…
The corporate valuation model cannot be used unless a company pays dividends.
a. True
b. False
ANSWER: False
14. Projected free cash flows should be discounted at the firm’s weighted average cost of capital to find the firm’s total corporate value.
a. True
b. False
ANSWER: True
15. Preferred stock is a hybrid—a sort of cross between a common stock and a bond—in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.
a. True
b. False
ANSWER: False
RATIONALE: Preferred dividends don’t normally grow, and they are not guaranteed.
16. From an investor’s perspective, a firm’s preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer’s standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.
a. True
b. False
ANSWER: True
17. If a stock’s expected return as seen by the marginal investor exceeds this investor’s required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required …show more content…
These two stocks should have the same price.
b. These two stocks must have the same dividend yield.
c. These two stocks should have the same expected return.
d. These two stocks must have the same expected capital gains yield.
e. These two stocks must have the same expected year-end dividend.
ANSWER: b
RATIONALE: The following calculations show that answer b is correct. The others are all wrong.
A
B
Expected return
10%
12%
Expected growth 7%
9%
Dividend yield 3%
3%
28. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
A
B
Price
$25
$40
Expected growth
7%
9%
Expected return
10%
12%
a. The two stocks should have the same expected dividend.
b. The two stocks could not be in equilibrium with the numbers given in the question.
c. A’s expected dividend is $0.50.
d. B’s expected dividend is $0.75.
e. A’s expected dividend is $0.75 and B’s expected dividend is $1.20.
ANSWER: e
RATIONALE: The following calculations show that answer e is correct. The others are all wrong.
A
B
Price
$25
$40
Expected growth
7%
9%
Expected return
10%