Exam3 SP08

Exam3 SP08 - Exam3SP08 Multiple Choice Identify the choice...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Exam3SP08 Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Which of the following statements is most correct? a. Preferred stockholders have priority over common stockholders in the event of bankruptcy. . b. A big advantage of preferred stock is that preferred stock dividends are tax deductible for the issuing corporation. c. Most preferred stock is owned by individuals, not corporations. d. All of these statements are correct. ____ 2. Ceejay Corporation's stock is currently selling at an equilibrium price of $30 per share. The firm has been experiencing a 6 percent annual growth rate. Last year's earnings per share, E 0 , were $4.00 and the dividend payout ratio is 40 percent. The risk-free rate is 8 percent, and the market risk premium is 5 percent. If market risk (beta) increases by 50 percent, and all other factors remain constant, what will be the new stock price? (Use 4 decimal places in your calculations.) a. $16.59 b. $18.25 c. $21.39 d. $22.69 e. $53.48 ____ 3. A stock that currently trades for $40 per share is expected to pay a year-end dividend of $2 per share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2, the risk-free rate is 5 percent, and the market risk premium is 5 percent. What is the stock's expected price seven years from today? a. $ 56.26 b. $ 58.01 c. $ 83.05 d. $ 60.15 e. $551.00 ____ 4. Rogers Robotics currently (2003) does not pay a dividend. However, the company is expected to pay a $1.00 dividend two years from today (2005). The dividend is then expected to grow at a rate of 20 percent a year for the following three years. After the dividend is paid in 2008, it is expected to grow forever at a constant rate of 7 percent. Currently, the risk-free rate is 6 percent, market risk premium (r M - r RF ) is 5 percent, and the stock's beta is 1.4. What should be the price of the stock today? a. $22.91 b. $21.20 c. $30.82 d. $28.80 e. $20.16 ____ 5. Which of the following statements is most correct? a. Since the money is readily available, the cost of retained earnings is usually a lot cheaper than the cost of debt financing. b. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are tax deductible. c. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible. d. All of these statements are correct.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
____ 6. Wyden Brothers has no retained earnings. The company uses the CAPM to calculate the cost of equity capital. The company's capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company's WACC? a. A reduction in the market risk premium. b. An increase in the flotation costs associated with issuing new common stock. c. An increase in the company's beta. d. An increase in expected inflation. e. An increase in the flotation costs associated with issuing preferred stock.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 10

Exam3 SP08 - Exam3SP08 Multiple Choice Identify the choice...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online