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Test_Bank - Stock valuation1

# Test_Bank - Stock valuation1 - CHAPTER 7 STOCKS AND THEIR...

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CHAPTER 7 STOCKS AND THEIR VALUATION (Difficulty: E = Easy, M = Medium, and T = Tough) Multiple Choice: Conceptual Easy: Required return Answer: d Diff: E 1 . If the expected rate of return on a stock exceeds the required rate, a. The stock is experiencing supernormal growth. b. The stock should be sold. c. The company is probably not trying to maximize price per share. d. The stock is a good buy. e. Dividends are not being declared. Constant growth model Answer: a Diff: E 2 . Which of the following statements is most correct? a. The constant growth model takes into consideration the capital gains earned on a stock. b. It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant. c. Two firms with the same dividend and growth rate must also have the same stock price. d. Statements a and c are correct. e. All of the statements above are correct. Constant growth model Answer: a Diff: E 3 . Which of the following statements is most correct. a. The stock valuation model, P 0 = D 1 /(r s - g), can be used for firms which have negative growth rates. b. If a stock has a required rate of return r s = 12 percent, and its dividend grows at a constant rate of 5 percent, this implies that the stock’s dividend yield is 5 percent. c. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. d. Statements a and c are correct. e. All of the statements above are correct. Miscellaneous issues Answer: c Diff: E 4 . Which of the following statements is most correct? a. If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but the two classes must have the same voting rights. b. An IPO occurs whenever a company buys back its stock on the open market. Chapter 7 - Page 1

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c. The preemptive right is a provision in the corporate charter which gives common stockholders the right to purchase (on a pro rata basis) new issues of common stock. d. Statements a and b are correct. e. Statements a and c are correct. Preferred stock concepts Answer: e Diff: E 5 . Which of the following statements is most correct? a. One of the advantages to the firm associated with financing using preferred stock rather than common stock is that control of the firm is not diluted. b. Preferred stock provides steadier and more reliable income to investors than common stock. c. One of the advantages to the firm of financing with preferred stock is that 70 percent of the dividends paid out are tax deductible. d. Statements a and c are correct. e. Statements a and b are correct. Common stock concepts Answer: d Diff: E 6 . Which of the following statements is most correct? a. One of the advantages of financing with stock is that a greater proportion of stock in the capital structure can reduce the risk of a takeover bid.
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