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1.
Incorrect
If the expected rate of return on a stock exceeds the required rate,
Your answer:
The stock is experiencing nonconstant growth.
The correct answer:
The stock is a good buy.
Incorrect. An investor would be willing to pay the current market price for a security if
the expected rate of return implied by a given market price equals the required rate of
return. Therefore, if the expected rate exceeds the required rate, the stock is a good buy.
2.
Incorrect
The preemptive right is important to shareholders because it
Your answer:
enables a firm to sell additional shares below the current market price.
The correct answer:
Entitles the common shareholders to maintain a proportionate share
of ownership in the firm.
Incorrect. A preemptive right entitles shareholders to maintain a proportionate share of
ownership in the firm and does not dilute their ownership base.
3.
Incorrect
The required rate of return on the common stock of New Net Corporation is
14 percent. The stock's dividend is $1.50 and is expected to grow at a constant rate of 9
percent during the year. The projected price of the stock at the end of the year is $45.
What is the value of the stock today?
Your answer:
$50.90.
The correct answer:
$40.90.
Incorrect. V
cs
= [$1.50(1.09)]/1.14 + 45/1.14 = 1.43 + 39.47 = $40.90.
4.
Incorrect
A share of preferred stock pays an annual dividend of $6 per share. If
investors require a 12 percent rate of return, what is the value of this preferred stock?
Your answer:
$53.75
The correct answer:
$50.00
Incorrect. V
ps
= D/k
ps
= $6/0.12 = $50.
5.
Incorrect
The Smith Company is undertaking a large project and needs additional
funds. The company plans to issue preferred stock with an annual dividend of $6 per
share and a par value of $30. If the required rate of return is 15 percent, what should be
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 Spring '09
 Maloney
 Economics

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