Common Stock: Characteristics, Valuation, and Issuance: Multiple Choice

Chapter 8/Common Stock: Characteristics, Valuation, and Issuance  153
Chapter 8
Common Stock: Characteristics, Valuation, and Issuance
MULTIPLE CHOICE
1. Which of the following is not a characteristic of common stock:

a. has no maturity date
b. considered a permanent form of long-term financing
c. has claims on assets prior to those of preferred stock
d. is a residual form of ownership
ANS: C OBJ: TYPE: Fact TOP: Characteristics of common stock
2. Stockholders' equity includes all of the following except:

a. Common stock at par
b. Treasury stock
c. Contributed capital in excess of par
d. Retained earnings
ANS: B OBJ: TYPE: Fact TOP: Common stock and accounting
3. The book value per share of common stock is calculated by dividing _______ by the number of
shares outstanding
a. market value of common stock
b. total assets
c. total stockholders' equity plus preferred stock
d. total common stockholders' equity
ANS: D OBJ: TYPE: Fact TOP: Common stock and accounting
4. The market value of common stock is primarily based on

a. the firm's future earnings
b. book value
c. total assets
d. retained earnings
ANS: A OBJ: TYPE: Fact TOP: Common stock and accounting
5. Common stockholders have a number of general rights, including all of the following except:
a. voting rights
b. management rights
c. asset rights
d. dividend rights
ANS: B OBJ: TYPE: Fact TOP: Stockholder rights
154  Chapter 8/Common Stock: Characteristics, Valuation, and Issuance
6. The book value of an asset represents

a. the market value
b. the discounted cash flow value
c. the historic acquisition cost of the asset
d. stockholders' acquisition value
ANS: C OBJ: TYPE: Fact TOP: Common stock and accounting
7. From an accounting standpoint, when a stock is split

a. the number of shares outstanding does not change
b. the firms' account balances are changed
c. its par value is changed
d. retained earnings will change
ANS: C OBJ: TYPE: Fact TOP: Other features of common stock
8. In a reverse stock split

a. the number of shares are decreased
b. the market value is decreased
c. retained earnings decrease
d. par value decreases
ANS: A OBJ: TYPE: Fact TOP: Other features of common stock
9. Which of the following is not an advantage of common stock financing?

a. no fixed dividend obligation
b. can lower the firm's weighted cost of capital
c. allows the firm a greater degree of flexibility in financial planning
d. involves relatively high flotation costs
ANS: D OBJ: TYPE: Fact
TOP: Advantages and disadvantages of common stock financing
10. AVIX has 6.8 million shares outstanding and the firm's charter provides for a majority voting
procedure. The company has seven directors up for reelection. What is the minimum number of
shares needed to ensure the election of one director?
a. 850,001
b. 5,950,001
c. 3,400,001
d. there is no correct answer listed
ANS: C OBJ: TYPE: Fact TOP: Stockholder voting
11. A change in the market price of an asset will occur as a result of changes in:
a. investors' required rates of return
b. investors' expected returns from the asset
c. book value of the asset
d. investors’ required rates of return and their expected returns from the asset
ANS: D OBJ: TYPE: Fact TOP: A general dividend valuation model
12. In the constant-growth dividend valuation model, the required rate of return must be _______ the
dividend growth rate in order for the formula price to be meaningful.
a. less than
b. equal to
c. greater than
d. proportional to
ANS: C OBJ: TYPE: Fact TOP: Constant growth dividend valuation model
13. In the constant-growth dividend valuation model, the required rate of return on a common stock
can be shown to be equal to the sum of the dividend yield plus:
a. Yield-to-maturity
b. Cost of capital
c. Present value yield
d. Price appreciation yield
ANS: D OBJ: TYPE: Fact TOP: Constant growth dividend valuation model
14. The valuation of common stock is considerably more complicated than the valuation of bonds or
preferred stocks because:
a. The returns can take two forms, i.e. annual cash payments and price appreciation
b. Common stock dividends are normally expected to grow and not remain constant
c. The returns from common stocks are generally larger and more certain than the returns from
bonds and preferred stocks
d. The returns can be in annual cash payments or price appreciation, and they are normally
expected to grow and not remain constant
15. Many preferred stocks are treated as _______ in determining their values.
a. Fixed assets
b. Perpetuities
c. Convertible securities
d. Constant growth securities
ANS: B OBJ: TYPE: Fact TOP: Zero-growth dividend valuation model
16. In the valuation of common stock, the simple annuity and perpetuity formulas used in the
valuation of bonds and preferred stock are not generally applicable because:
a. Investors buy common stock for much different reasons than they buy bonds or preferred
stock.
b. Returns accruing to common stock should never be capitalized (discounted) in order to
determine a price.
c. Unlike bonds and preferred stock, common-stock is a short term investment.
d. Common stock dividends are normally expected to grow over time, rather than being constant
as are payments on most bonds and most preferred stock.
17. One of the assumptions of the constant growth dividend valuation model is that
a. the investor's required rate of return is equal to the expected dividend yield.
b. the required rate of return is greater than the dividend growth rate
c. the required rate of return increases at a constant rate
d. the dividend rate (in dollars) will remain constant
ANS: B OBJ: TYPE: Fact TOP: Constant growth dividend valuation model
18. The most important factor to be considered in the valuation of a closely held firm is
a. earnings growth
b. book value of the firm
c. earnings capacity
d. the general economic outlook
ANS: C OBJ: TYPE: Fact
TOP: Entrepreneurial finance: Valuation of closely held firms
19. Stockholders' equity equals

a. both preferred stock and common equity
b. total claims
c. additional paid-in capital plus capital surplus
d. total liabilities and total surplus
ANS: A OBJ: TYPE: Fact TOP: Common stock and accounting
20. A common stock's book value is calculated

a. as a multiple of the stock's price / earning ratio
b. on the basis of income statement ratios
c. on the basis of balance sheet figures
d. on the value of income statement figures
21. When a stock is split 2 for 1, then the ______ figure on the firm's balance sheet is cut in half.
a. value of the common stock
b. par value
c. capital surplus
d. retained earnings
ANS: B OBJ: TYPE: Fact TOP: Other features of common stock
22. From an accounting standpoint, stock dividends involve a transfer from the
a. common stock account
b. cash account
c. retained earnings account
d. capital surplus account
ANS: C OBJ: TYPE: Fact TOP: Other features of common stock
23. Which one of the following is not a reason a firm may decide to repurchase its own stock.
a. future corporate needs
b. financial restructuring
c. investment
d. disposition of excess warrants
ANS: D OBJ: TYPE: Fact TOP: Other features of common stock
24. Dillinger, Inc. is planning to raise additional capital for expansion by selling 500,000 common
shares at $16 each. The existing stockholders' equity section of their balance sheet is shown
below. What will the retained earnings figure be immediately after the sale of the new equity?
Common stock; $1 par value; authorized, 3,000,000 shares; issued and

outstanding, 3,000,000 shares $ 3,000,000
Additional paid-in capital 6,500,000
Retained earnings 4,752,000
Total stockholders' equity $14,252,000
a. $12,252,000
b. $14,000,000
c. $4,752,000
d. $3,500,000
25. The returns investors receive from holding common stocks may be in two forms. They are
a. cash dividend payments and capital gains
b. future earnings and treasury stock
c. stock splits and stock dividends
d. cash dividends and stock dividends
ANS: A OBJ: TYPE: Fact TOP: Valuation of common stock
26. The constant growth dividend valuation model does not hold when
a. ke is greater than g
b. dividends are growing faster than 4 percent
c. g is greater than ke
d. the current dividend is known
ANS: C OBJ: TYPE: Fact TOP: Constant growth dividend valuation model
27. If the general level of interest rates in the economy moves up, then investors will require a
_______ rate of return on securities, and, in general, stock prices should _______, ceteris
paribus.
a. lower, decline
b. higher, increase
c. higher, decline
d. lower, increase
ANS: C OBJ: TYPE: Fact TOP: A general dividend valuation model
28. If competition in an industry increases, the future growth potential should

a. decrease
b. increase
c. not be affected
d. be negative
ANS: A OBJ: TYPE: Fact TOP: Nonconstant growth dividend valuation model
29. The zero growth dividend valuation model is used when a firm's future dividends are expected to
remain constant,
a. so the value of the firm should also remain constant
b. so the required rate of return should also remain constant
c. and the firm can not be valued
d. forever
ANS: D OBJ: TYPE: Fact TOP: Zero growth dividend valuation model
30. When evaluating a firm based on price/earnings multiples, the evaluator must determine the
price/earnings multiple for
a. the general market
b. the S&P 500
c. firms in the same industry
d. small capitalization firms
TOP: Determination of an appropriate price-earnings multiple
31. The rights of stockholders to share equally on a per share basis in any distributions of corporate
earnings is known as __________.
a. preemptive rights
b. voting rights
c. asset rights
d. dividend rights
ANS: D OBJ: TYPE: Fact TOP: Stockholder rights
32. __________ result in what is known as treasury stock.

a. Stock dividends
b. Stock repurchases
c. Stock splits
d. Reverse stock splits
ANS: B OBJ: TYPE: Fact TOP: Other features of common stock
33. A firm that wishes to raise additional equity capital by selling a portion of the existing owners'
stock while maintaining control of the firm should consider a __________.
a. stock split
b. stock dividend
c. share repurchase
d. separate class of nonvoting stock
ANS: D OBJ: TYPE: Fact TOP: Other features of common stock
34. A firm may use a stock repurchase __________.

a. as part of a financial restructuring
b. to dispose of excess cash
c. to reduce overhead
d. as part of a financial restructuring and to dispose of excess cash
ANS: D OBJ: TYPE: Fact TOP: Stock repurchases
35. A firm may use a stock repurchase for all of the following reasons except
a. to dispose of excess cash
b. to increase retained earnings
c. as part of a financial restructuring
d. to reduce takeover risk
ANS: B OBJ: TYPE: Fact TOP: Stock repurchases
36. In the constant growth dividend valuation model, the required rate of return on a common stock is
equal to the sum of the __________.
a. capital gains yield and cost of capital
b. present value yield and dividend yield
c. cost of capital and dividend yield
d. capital gains yield and dividend yield
37. In the constant growth dividend valuation model, it is assumed that the __________.
a. dividend growth rate exceeds the required rate of return
b. firm's future dividend payments are expected to grow at a constant rate forever
c. dividend cannot be forecast for any future time
d. firm is experiencing a period of poor performance, after which normal growth is expected
ANS: B OBJ: TYPE: Fact TOP: Constant growth dividend valuation model
38. An arrangement whereby an investment banker agrees to purchase an entire new issue of
securities is called
a. competitive bidding
b. syndication
c. a negotiated bid
d. underwriting
ANS: D OBJ: TYPE: Fact TOP: Public cash offerings
39. The difference between the selling price to the public of a new issue and the net the issuing firm
actually receives is known as the
a. negotiating spread
b. underwriting spread
c. bid spread
d. SEC cost
ANS: B OBJ: TYPE: Fact TOP: Direct issuance costs
40. A _______ is a group of underwriters who agree to underwrite a new issue in order to spread the
risk.
a. purchasing syndicate
b. cartel
c. bidding group
d. financial institution
ANS: A OBJ: TYPE: Fact TOP: Public cash offerings
41. All of the following are advantages of private security placements (over a public offering) except
a. reduced flotation costs
b. greater flexibility
c. lower interest rates
d. save time
ANS: C OBJ: TYPE: Fact TOP: Private placements
42. A firm may sell its common stock directly to its existing stockholders through a
a. private placement
b. cash offering
c. rights offering
d. direct placement
ANS: C OBJ: TYPE: Fact TOP: Rights offerings and standby underwriters
43. Direct issuance costs are

a. higher for common stock than for preferred stock issues
b. dependent on the quality of the issue
c. dependent on the size of the issue
d. all of the above are correct
ANS: D OBJ: TYPE: Fact TOP: Direct issuance costs
44. In marketing a new security issue, the investment banker assumes the risk of not being able to sell
the security at a favorable price in each of the following cases except:
a. a best efforts offering
b. a negotiated underwriting
c. a competitively bid underwriting
d. assumes the risk in all of the above
ANS: A OBJ: TYPE: Fact TOP: Public cash offerings
45. An investment banker is generally thought to be qualified to advise a corporation on a variety of

matters, including all the following except:
a. long range financial planning
b. the marketing of securities
c. the timing of securities
d. the firm's new product marketing decisions
ANS: D OBJ: TYPE: Fact
TOP: The security offering process: Role of the investment banker
46. In addition to direct costs, there are other costs associated with new security offerings. These
other costs include all of the following except:
a. the cost of incentives such as the "Green Shoe" option
b. the cost of overpricing
c. the cost of stock price declines
d. the cost of management time
ANS: B OBJ: TYPE: Fact TOP: Other issuance costs
47. A procedure that allows a firm to file a master registration statement with the SEC and then sell
an offering of common stock in small increments is known as ________.
a. A Green Shoe option
b. an IPO
c. rule 215
d. a shelf registration
ANS: D OBJ: TYPE: Fact TOP: Shelf registration
48. Which of the following are reasons why large multinational corporations may sell equity in
international markets rather than selling stock only in the country in which they are domiciled?
a. Global equity offerings result in higher price per share.
b. The existence of a 12-hour per day trading schedule
c. Higher positive returns around the time of the announcement to sell in global markets
d. Private placements are not an option.
ANS: A OBJ: TYPE: Fact TOP: International issues: global equity markets
49. From the following stock quotation, what is AT&T's dividend yield?
ATT 1.20 4.3 19 1667 29.50 29 29 -.25
a. 1.2%
b. 12%
c. 4.3%
d. 19%
ANS: C OBJ: TYPE: Fact TOP: Understanding stock quotations
50. The P/E ratio indicates

a. how much investors are willing to pay for $1 of current earnings
b. the current yield
c. the current price
d. how risky the stock is
ANS: A OBJ: TYPE: Fact TOP: Understanding stock quotations
51. Common stock dividends normally are paid

a. monthly
b. quarterly
c. semi-annually
d. annually
ANS: B OBJ: TYPE: Fact TOP: Understanding stock quotations
52. In stock quotations, the last column, showing the net change, indicates the net change in
a. a share's price during the day
b. the dividend yield
c. the closing price from the previous day's close
d. a share's high price during the day
ANS: C OBJ: TYPE: Fact TOP: Understanding stock quotations
53. What is the value of a share of stock of HOV Inc. to an investor who requires a 12 percent rate of
return if HOV's current dividend is $1.20? Assume earnings and dividends are expected to grow
at a compound annual rate of 7 percent.
a. $24.00
b. $18.34
c. $25.68
d. $19.62
ANS: C
Solution:
P0 = $1.20(1 + 0.07) / (0.12 - 0.07) = $25.68
OBJ: TYPE: E. Prob. TOP: Constant growth dividend valuation
54. The current price of Zebar is $32.00 and the current dividend is $.60. What is an investor's
required rate of return on Zebar if dividends are expected to grow perpetually at a compound
annual rate of 8 percent?
a. 9.88%
b. 11.38%
c. 18.75%
d. 10.03%
ANS: D
Solution:
ke = $0.60(1.08)/$32 + 0.08 = 10.03%

55. Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been
growing at a compound annual rate of 6 percent and are expected to continue growing at that rate.
What is the value of a share of stock of Fast Wheels to an investor who requires a 14 percent rate
of return?
a. $9.00
b. $5.14
c. $9.54
d. $8.16
ANS: A
Solution: ke = $0.72/(0.14 - 0.06) = $9.00
56. What is the current value of the common stock of the Limited if you know the current dividend
yield is 6.14%, the PE is 16, and the annual dividend is $1.35?
a. $21.60
b. $21.99
c. $8.29
d. $98.24
ANS: B
Solution: Price = dividend/current yield = $1.35/0.0614 = $21.99
OBJ: TYPE: E. Prob. TOP: Understanding stock quotations
57. Bell South pays a quarterly dividend of $0.70, has a PE ratio of 14 and closed yesterday at
$48.25. What is the dividend yield?
a. 5.45%
b. 1.45%
c. 5.8%
d. 7.25%
ANS: C
Solution: .70(4)/48.25 = .058 or 5.8%
58. If the common stock of Comdisco pays an annual dividend of $0.28, has a PE ratio of 11 and
closed at 25, what are the current earnings per share?
a. $3.08
b. $2.27
c. $7.00
d. $1.12
ANS: B
Solution: EPS = P/PE = $25/11 = $2.27

59. The quote for the common stock of ALLTEL showed a daily "Hi" of 40.50, and a "Lo" of 40 and
a "Close" of 40.40. If the "Net Chg" was +0.50, then the previous close was ________.
a. 39.90
b. 40.90
c. 40.40
d. 39.88
ANS: A
Solution: 40.40 - 0.50 = 39.90
60. If American Brands pays an annual dividend of $1.54, has a PE of 13, and its last closing price
was 40, then its dividend yield must be:
a. 11.85%
b. 3.85%
c. 15.40%
d. 3.25%
ANS: B
Solution: $1.54/$40 = 0.0385 or 3.85%
61. Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and
earnings have been growing at a compound annual rate of 8 percent and are expected to continue
growing at that rate. What is an investor's required rate of return on Zero-Sum if the current price
is $12?
a. 12.3%
b. 12.0%
c. 10.0%
d. 10.3
ANS: B
Solution: ke = $0.48/$12 + 0.08 = 12%
62. Assume Zero-Sum Enterprise pays an annual dividend of $1.40 per share and that neither
earnings nor dividends are expected to grow in the future. What is the value of Zero-Sum's stock
to an investor who requires a 14 percent rate of return?
a. $14.00
b. $10.00
c. $20.00
d. 0
ANS: B
Solution: P0 = $1.40/0.14 = $10
OBJ: TYPE: E. Prob. TOP: Zero growth dividend valuation

63. Over the past 7 years the dividends of Sunshine Mining have grown from $0.24 to the current
level of $.53. What is the approximate annual compound growth rate of Sunshine's dividends?
a. 20.8%
b. 12.0%
c. 9.5%
d. 10.0%
ANS: B
Solution:
$0.53/$0.24 = 2.2083 or approximately 12% from Table I
OBJ: TYPE: E. Prob. TOP: Growth rate calculation
64. Assume that the dividend( $3.25) on Central Power Company's common stock issue is paid
annually at the end of the year. This dividend is not expected to increase for the foreseeable
future. Determine the value of this stock to an investor who requires a 12 percent rate of return.
a. $3.25
b. $39
c. $12
d. $27.08
ANS: D
Solution:
P0 = $3.25/0.12 = $27.08
OBJ: TYPE: E. Prob. TOP: Zero-growth valuation
65. During the past 8 years, Wellington Company's common stock dividends have grown from $2.00
to $3.19. Estimate the compound annual dividend growth rate over the 8 year period.
a. 59.5%
b. 6%
c. 12%
d. 19%
ANS: B
Solution:
$2.00 = $3.19(PVIFg,8)
(PVIFg,8) = $2.00/$3.19 = .627
g = 6%, from Table II
OBJ: TYPE: E. Prob. TOP: Growth rate calculation

66. Wilshire Company's earnings and common stock dividends have been growing at an annual rate
of 4 percent over the past several years. The firm currently (t = 0) pays an annual dividend of
$4.00. Assuming that Wilshire's common stock dividends continue growing at the past rate for the
foreseeable future, determine the value of the company's common stock to an investor who
requires a 13 percent rate of return on these securities.
a. $44.44
b. $36.81
c. $46.22
d. $48.62
ANS: C
Solution:
P0 = $4.16/(0.13 - 0.04) = $46.22
OBJ: TYPE: E. Prob. TOP: Constant growth rate valuation
67. What is the rate of return to an investor in the stock of Bajo, Inc. if the current dividend of $0.80
is not expected to change in the foreseeable future? The current price of Bajo is $13.25.
a. 6.04%
b. 8.0%
c. 24.15%
d. 11.06%
ANS: A
Solution:
D/P0 = .80 = .0604 or 6.04%
13.25
OBJ: TYPE: E. Prob. TOP: Zero growth rate valuation
68. The stock of Music City is selling for $37.50 and pays a current annual dividend of $1.10. What
is the implied growth rate of dividends for this firm (assume dividends are expected to grow at a
constant rate) if an investor's required rate of return is 14 percent?
a. 11.07%
b. 14.0%
c. 11.4%
d. 10.75%
ANS: D
Solution:
$37.50 = $1.10(1 + g)/ (0.14 - g)
g = 10.75%

69. If the stock of Sun Computers is selling for $34 and the current dividend is $0.48, what is the
implied constant growth rate of dividends to an investor who requires a 14% rate of return?
a. 12.54%
b. 12.41%
c. 14.00%
d. 15.41%
ANS: B
Solution:
34 = .48(1+g)/(.14-g)
g = 12.41%
70. Phillips Industries common stock currently sells for $50 and is expected to pay a dividend of
$3.00 next year. Determine the implied growth rate for Phillips Industries dividends assuming
that an investor's required rate of return on this stock is 14%.
a. 6%
b. 8%
c. 14%
d. 20%
ANS: B
Solution:
0.l4 = $3.00/$50 + g
g = 0.08 or 8%
71. CPU Company currently (t = 0) pays a dividend of $2.50 per share on its common stock.
Dividends are expected to increase at the rate of $.25 per share for the next several years.
Determine the current value of CPU's common stock to an investor who expects to be able to sell
the stock for $35 per share after 3 years, given that the investor requires a 14 percent rate of
return on this security.
a. $24
b. $30.54
c. $19.64
d. $68.75
ANS: B
Solution:
P0 = $2.75(0.877) + $3.00(0.769) + $3.25(0.675) + $35(0.675) = $30.54
OBJ: TYPE: C. Prob. TOP: Non-constant growth rate valuation

72. What is the current value of Bandag Inc. to an investor who has a required rate of return of 12
percent? The current dividend is $1.00 and the dividends are expected to grow 8 percent per year
for 3 years. At the end of 3 years the investor expects to sell the security for $76.
a. $79.51
b. $56.90
c. $51.13
d. $76.00
ANS: B
Solution:
$1(1.08) = $1.08(0.893) = $0.964

$1.08(1.08) = $1.166(0.797) = $0.930
$1.166(1.08) = $1.26(0.712) = $0.897
$76(0.712) = $54.11
Total = $56.90
73. What is the current value of a share of HiGro common stock that does not pay a current dividend?
Earnings are growing at a 20 percent per year rate for the next 10 years. Assume the investor has
a required rate of return of 15 percent and expects to sell the security in 5 years. Current earnings
are $1.50 per share.
a. $56.87
b. $62.21
c. $25.00
d. There is insufficient information to solve this problem.
ANS: D
Solution:
None of the answers are correct. There is insufficient information in the problem.
OBJ: TYPE: C. Prob.

TOP: Non-constant growth rate valuation - with zero dividend
74. What is the current value of a share of Augat common stock if its current dividend is $1.50 and
dividends are expected to grow at the annual compound growth rate of 20 percent into the
foreseeable future? Assume the investor has a required rate of return of 15 percent, and expects to
sell the security in 5 years.
a. $56.87
b. $30.00
c. $25.00
d. The constant growth rate model cannot be used because the growth rate is greater than the
required rate of return.
ANS: D
Solution:
The constant growth rate model cannot be used because the growth rate is greater than required rate of
return.
OBJ: TYPE: C. Prob. TOP: Constant growth rate valuation

75. What is the current value of a share of Chyrox if its current dividend is $1.50 and dividends are
expected to grow at an annual rate of 20 percent for the next 5 years? Assume the investor has a
required rate of return of 15 percent and expects to sell the security in 5 years for $72.
a. $44.31
b. $35.78
c. $39.63
d. $72.00
ANS: A
Solution:
$1.50(1.20) = 1.80(0.87) = $ 1.57

$1.80(1.20) = 2.16(0.756) = 1.63
$2.16(1.20) = 2.59(0.658) = 1.70
$2.59(1.20) = 3.11(0.572) = 1.78
$3.11(1.20) = 3.73(0.497) = 1.85
$72(0.497) = 35.78
Total = $44.31
76. The earnings and dividends of MicroSun Computer Co. are expected to grow at an annual rate of
15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year.
MicroSun currently pays a dividend of $0.50 per share. What is the value of MicroSun stock to an
investor who requires a 14 percent rate of return?
a. $9.31
b. $15.73
c. $11.35
d. $2.04
ANS: C
Solution:
Year
1 $0.50(1.15) = 0.575(.877) = $0.504
2 $0.575(1.15) = 0.661(.769)= .509
3 $0.661(1.15) = 0.760(.675)= .513
4 $0.760(1.15) = 0.874(.592)= .518
= $2.04
P4 = $0.944/(0.14 - 0.08) = $15.73(0.592)= 9.31
Total = $11.35

77. During the past 8 years, UTX Company common stock dividends have grown from $2.70 to
$5.00 per share (currently). Determine the value of UTX common stock to an investor who
requires a 16% rate of return, assuming that dividends continue growing for the foreseeable future
at the same rate as over the past 8 years.
a. $62.50
b. $31.25
c. $67.50
d. $46.96
ANS: C
Solution:
PV0 = FVn (PVIFg,n) $2.70 = $5.00 (PVIFg, 8)
g = 0.08 (8%) from Table II
P0 = $5.40/(0.16 - 0.08) = $67.50
78. Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2.
Determine the implied growth rate for Lawton assuming that an investor's required rate of return
is 12% and that the stock can be evaluated using a constant growth valuation model.
a. 6.74%
b. 17.26%
c. 6.40%
d. 3.80%
ANS: C
Solution:
0.12 = $2(1 + g)/$38 + g
g = 0.064, or 6.4%
79. Helix common stock currently sells for $30 and its current dividend is $1.50. If the required rate
of return on Helix stock is 15%, what is the implied growth rate of its earnings and dividends?
a. 13.5%
b. 9.5%
c. 10.0%
d. 30.0%
ANS: B
Solution:
0.15 = $1.50(1+g) + g so g = 0.095
$30

80. Over the past 5 years, NBA's common stock earnings per share have grown from $0.62 to $0.91.
If an investor is NBA stock is assumed to have a required rate of return of 14%, what is the
current value of NBA if its current dividend is 0.12? Assume EPS will continue to grow at a
constant rate.
a. $2.16
b. $1.62
c. $4.94
d. $2.00
ANS: A
Solution:
$0.91 = $0.62(FVIFg,5) FVIF = $0.91/$0.62 = 1.468
so g = 8%
P0 = $0.12(1.08)/(0.14 - 0.08) = $2.16
81. Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a
rate of 8% annually. If investors in Morton require a 13% rate of return, what is the current
dividend?
a. $2.70
b. $2.50
c. $4.00
d. $3.25
ANS: B
Solution:
D0(1.08)
$54 =
0.13 - 0.08
D0 = $2.50
82. Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9
percent annually. If investors in Pace require a return of 14%, what is the expected dividend next
year?
a. $1.33
b. $2.40
c. $1.45
d. $1.60
ANS: C
Solution:
D0(1.09) so D0 = 1.33
$29 =
0.14 - 0.09 and D1= 1.33(1.09) =$1.45

83. The common stock of Kyocera currently sells for $88.50 and its current (D 0) dividend is $1.10.
Determine the implied growth rate for Kyocera assuming that an investor's required rate of return
is 14% and that earnings and dividends are expected to grow at a constant rate.
a. 13.9%
b. 12.3%
c. 13.8%
d. 12.6%
ANS: D
Solution:
$1.10(1+g) so g = 0.126 or 12.6%

$89 =
0.14 - g
84. Heleveton, Inc. currently pays a dividend of $1.20 per share. Dividends are expected to increase
at the rate of $0.10 per share for the next eight years. Determine the current value of Heleveton's
common stock to an investor who expects to be able to sell the stock for $28 after 5 years.
Assume that the investor requires a 12 percent rate of return on the security.
a. $66
b. $28
c. $21.20
d. $15.88
ANS: C
Solution:
P0 = $1.30(.893)+$1.40(.797)+$1.50(.712) $1.60(.636)+ $29.70(.567)
= $1.1609+$1.1158+$1.068+$1.0176+$16.3399
= $21.20
OBJ: TYPE: C. Prob. TOP: Stock valuation
85. Over the past 10 years the dividends of Allegro have grown from $0.45 to $1.82 per share.
Determine the value of Allegro's common stock to an investor who requires a 20% rate of return,
assuming that dividends continue growing at the same rate as they grew over the past 10 years.
a. $36.40
b. $41.86
c. $43.68
d. $20.93
ANS: B
Solution:
P0 = FV(PVIFg,n)
$.45 = $1.82(PVIFg,10)
(PVIFg,10) = 0.247
g = 15% from Table II
P0 = $1.82(1.15)/(0.20 - 0.15) = $41.86
OBJ: TYPE: C. Prob. TOP: Constant growth valuation

86. Zimmer's common stock sells for $37 and its dividend is expected to grow at a rate of 8 percent
annually. What is the expected dividend (D1) given that an investor requires a return of 16
percent?
a. $2.74
b. $3.20
c. $5.92
d. $2.96
ANS: D
Solution: $37 = D1/(0.16 - 0.08)
D1 = $2.96
87. The earnings of Mylanta Company are expected to grow at an annual rate of 14% over the next 5
years and then slow to a constant rate of 10% per year. Mylanta currently pays a dividend of
$0.36 per share. What is the value of Mylanta's stock to an investor who requires a 16% rate of
return?
a. $7.97
b. $7.76
c. $14.42
d. $11.11
ANS: B
Solution:
Year
1 $.36(1.14) = $.410(.862) = $.352
2 .41(1.14) = .468(.743) = .348
3 .467(1.14) = .533(.641) = .342
4 533(1.14) = .608(.552) = 336
5 .608(1.14) = .693(.476) = .330
P5 = $.693(1.10) / (0.16 - 0.10) = $12.71(0.476) = 6.050
Total $7.758
OBJ: TYPE: C. Prob. TOP: Nonconstant growth valuation
88. During the past 10 years, Saturn's common stock dividends have grown from $0.24 to $0.62. If
the past growth of dividends is expected to continue at the same rate in the future, what is the
current value of Saturn's common stock to an investor who requires an 18% rate of return?
a. $7.75
b. $3.79
c. $8.53
d. $10.42
ANS: C
Solution: FV = P0(FVIFg,n)
$.62 = $.24(FVIFg,10)
(FVIFg,10) = 2.5833
g = 9.95 (or approx. 10%)
P0 = $.62(1.10) / (0.18 - 0.10) = $8.53

89. HiGlo's common stock sells for $23.50 and its earnings are expected to grow at a rate of 12%
annually. What is the current dividend (Do) for an investor who requires a 15% return?
a. $0.71
b. $0.63
c. $0.34
d. $0.31
ANS: B
Solution:
Do(1.12)
23.50 = Do = $0.63
.15 - .12
OBJ: TYPE: C. Prob. TOP: Constant growth valuation model
90. During the past 7 years, Lippo's earnings have grown from$0.78 to $1.95 per share. If the past
growth rates are expected to continue into the future, what is the current value of Lippo's common
stock to an investor who requires a 16% rate of return?
a. $97.50
b. $13.93
c. $111.15
d. $48.50
ANS: C
Solution:
.78/1.95 = .4 = PVIF i = 14% from Table II
1.95(1.14)
Po = = $111.15
.16 - .14
OBJ: TYPE: C. Prob. TOP: Constant growth valuation model
91. Quantum, Inc. has 5.4 million shares outstanding and the firm's charter provides for cumulative
voting. The company has a twelve-member board of directors, all of whom are up for reelection.
What is the minimum number of shares needed to ensure the election of one director?
a. 450,001
b. 415,386
c. 431,251
d. 425,421
ANS: B
Solution:
Number of shares = 1x(5,400,000) + 1 = 415,386
12 + 1
OBJ: TYPE: E. Prob. TOP: Stockholder voting rights

92. AVIX has 6.8 million shares outstanding and the firm's charter provides for cumulative voting.
The company has a seven member-board of directors, all of whom are up for reelection. What is
the minimum number of shares needed to ensure the election of two directors?
a. 850,001
b. 5,950,001
c. 3,400,001
d. 1,700,001
ANS: D
Solution:
# shares = 2 x 6,800,000 + 1 = 1,700,001
7+1
OBJ: TYPE: E. Prob. TOP: Stockholding voting
93. What is the estimated price of Once in a Blue Moon stock that has the following dividends? The
return on similar investments is 18%.
YEAR DIVIDENDS
2003 $2.50
2002 $2.48
2001 $2.36
2000 $2.32
a. $17
b. $13
c. $22
d. $50
ANS: A
Dividend growth rate is 3% (rounded)
Expected dividend (D1) is $2.58.
$2.58 = $17.17
.18-.03

model
94. Listed below are some of the responsiblities of investment bankers. Which of the following is
NOT one of them?
a. They can purchase securites
b. They market securities
c. They directly influence the objectives and direction of the company.
d. They arrange private loans and leases
95. The zero growth method is used to value

a. common stock
b. required rate of return
c. bonds
d. preferred stock
ANS: D OBJ: TYPE: Fact TOP: Zero-growth dividend valuation model
96. All of the following are ways that securites are offered to the public in a public offering EXCEPT:
a. Securities are sold through competitive bidding
b. Securities are sold through negotiated underwriting to a purchasing syndicate
c. Securities are sold through excess-market pricing
d. Securities are sold on a best efforts basis
97. Which of the follwoing statements is/are correct about the follwoing stock quotation:
+12.5 26 17.50 Dove Assoc. DOA .20 1.0 6 306 20.25 +.50
I. The second and third colums show the price range of the stock during the previous 52 weeks.
II. The highest price that was paid for this stock over a 52-week time period was $20.25.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
ANS: A OBJ: TYPE: Fact TOP: Understanding stock quotations
98. In a liquidation of a firm due to bankruptcy, which of the following usually gets paid last?
a. bondholders
b. perferred stockholders
c. common stockholders
d. employees wages
ANS: C OBJ: TYPE: Fact TOP: Stockholder rights
99. The returns from most common stocks are

a. positively correlated with each other
b. negatively correlated with each other
c. uncorrelated with each other
d. correlated to future forecasted earnings
ANS: A OBJ: TYPE: Fact
TOP: Investment diversification and portfolio risk analysis
ESSAY
1. List the various rights of common stockholders.

ANS:
1. Dividend rights - they share equally on a per-share basis in any distribution of corporate
earnings.
2. Asset rights - in liquidation, they have the right to assets that remain after senior obligations have
been satisfied.
3. Preemptive rights - they have the right to share proportionately in any new stock sold.
4. Voting rights - they have the right to vote on stockholder maters such as the selection of the board
of directors.
OBJ: TYPE: Fact TOP: Stockholder rights
2. What are the advantages and disadvantages of common stock financing?
ANS:
Advantages:
1. There is no fixed-dividend obligation.
2. Common stock is less risky to the firm than fixed-income securities.
3. Are not restricted by restrictive covenants.
4. Common stock can lower the firm’s weighted cost of capital.
Disadvantages:
1. From the investor’s perspective, common stock is riskier than preferred stock or debt and may
have a higher required rate of return.
2. It frequently results in an initial dilution of per-share earnings.
3. It involves relatively high issuance costs (flotation costs) when sold to the public.
OBJ: TYPE: Fact TOP: Advantages and disadvantages of common stock financing
3. List the responsiblities of the investment bankers.
ANS:
Investment bankers are an important source of financial market expertise and an important part of the
security offering process.
They are involved in:
1. Long-range financial planning
2. The timing of security issues
3. The purchase of securities
4. The marketing of securities
5. The arrangement of private loans and leases
6. The negotiation of mergers
OBJ: TYPE: Fact TOP: The security offering process: Role of the investment banker
4. What are some of the costs associated with new security offerings?
ANS:
1. There are direct costs called an underwriting spread or underwriting discount.
2. There is a cost of management time in preparing the offering.
3. There is the cost of underpricing which occurs because the new security is priced below the
current or correct market price. This is due to the riskiness of the new security.
4. The cost of stock price declines for stock offerings by firms whose shares are already outstanding.
5. The cost of other incentives provided to the investment banker. This includes the overallotment
or “Green Shoe” option. The option gives the investment banker the right to buy up to 15% of
the new offering at a price equal to the offerin price. This option normally lasts for 30 days.
OBJ: TYPE: Fact TOP: The security offering process: Role of the investment banker

Common Stock: Characteristics, Valuation, and Issuance: Multiple Choice

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Common Stock: Characteristics, Valuation, and Issuance: Multiple Choice

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Chapter 8/Common Stock: Characteristics, Valuation, and Issuance  153

1. Which of the following is not a characteristic of common stock:

2. Stockholders' equity includes all of the following except:

4. The market value of common stock is primarily based on

6. The book value of an asset represents

7. From an accounting standpoint, when a stock is split

8. In a reverse stock split

9. Which of the following is not an advantage of common stock financing?

19. Stockholders' equity equals

20. A common stock's book value is calculated

Common stock; $1 par value; authorized, 3,000,000 shares; issued and

28. If competition in an industry increases, the future growth potential should

32. __________ result in what is known as treasury stock.

34. A firm may use a stock repurchase __________.

43. Direct issuance costs are

45. An investment banker is generally thought to be qualified to advise a corporation on a variety of

ATT 1.20 4.3 19 1667 29.50 29 29 -.25

50. The P/E ratio indicates

51. Common stock dividends normally are paid

OBJ: TYPE: E. Prob. TOP: Constant growth dividend valuation

OBJ: TYPE: E. Prob. TOP: Constant growth dividend valuation

OBJ: TYPE: E. Prob. TOP: Constant growth dividend valuation

OBJ: TYPE: E. Prob. TOP: Understanding stock quotations

OBJ: TYPE: E. Prob. TOP: Understanding stock quotations

OBJ: TYPE: E. Prob. TOP: Understanding stock quotations

OBJ: TYPE: E. Prob. TOP: Understanding stock quotations

OBJ: TYPE: E. Prob. TOP: Understanding stock quotations

OBJ: TYPE: E. Prob. TOP: Constant growth dividend valuation

OBJ: TYPE: E. Prob. TOP: Zero growth dividend valuation

OBJ: TYPE: E. Prob. TOP: Growth rate calculation

OBJ: TYPE: E. Prob. TOP: Zero-growth valuation

OBJ: TYPE: E. Prob. TOP: Growth rate calculation

OBJ: TYPE: E. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: E. Prob. TOP: Zero growth rate valuation

OBJ: TYPE: E. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: E. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: E. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: C. Prob. TOP: Non-constant growth rate valuation

$1(1.08) = $1.08(0.893) = $0.964

OBJ: TYPE: C. Prob. TOP: Non-constant growth rate valuation

OBJ: TYPE: C. Prob.

OBJ: TYPE: C. Prob. TOP: Constant growth rate valuation

$1.50(1.20) = 1.80(0.87) = $ 1.57

OBJ: TYPE: C. Prob. TOP: Non-constant growth rate valuation

OBJ: TYPE: C. Prob. TOP: Non-constant growth rate valuation

OBJ: TYPE: C. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: C. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: C. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: C. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: C. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: C. Prob. TOP: Constant growth rate valuation

$1.10(1+g) so g = 0.126 or 12.6%

OBJ: TYPE: C. Prob. TOP: Constant growth rate valuation

OBJ: TYPE: C. Prob. TOP: Stock valuation

OBJ: TYPE: C. Prob. TOP: Constant growth valuation

OBJ: TYPE: C. Prob. TOP: Constant growth valuation

OBJ: TYPE: C. Prob. TOP: Nonconstant growth valuation

OBJ: TYPE: C. Prob. TOP: Constant growth valuation

OBJ: TYPE: C. Prob. TOP: Constant growth valuation model

OBJ: TYPE: C. Prob. TOP: Constant growth valuation model

OBJ: TYPE: E. Prob. TOP: Stockholder voting rights

OBJ: TYPE: E. Prob. TOP: Stockholding voting

OBJ: TYPE: E. Prob. TOP: Constant growth dividend valuation