Contemporary Financial Management 13th Edition Moyer Test Bank Download

Contemporary Financial Management 13th
Edition by Moyer McGuigan Rao ISBN

1285198840 9781285198842
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CHAPTER 7: COMMON STOCK: CHARACTERISTICS, VALUATION,

AND ISSUANCE
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
ANSWER: c
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
ANSWER: b
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
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
d. total common stockholders' equity
ANSWER: d
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
ANSWER: a
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
ANSWER: b
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
ANSWER: c
7. 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
ANSWER: a
8. 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
ANSWER: d
9. 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. none of these
ANSWER: c
10. 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
ANSWER: d
11. 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
ANSWER: c
12. 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
ANSWER: d
13. 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
ANSWER: d
14. Many preferred stocks are treated as in determining their values.

a. Fixed assets
b. Perpetuities
c. Convertible securities
d. Constant growth securities
ANSWER: b
15. 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.
ANSWER: d
16. 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
ANSWER: b
17. 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
ANSWER: c
18. 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
ANSWER: a
19. 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
ANSWER: c
20. 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
ANSWER: b
21. 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
ANSWER: c
22. 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
ANSWER: d
23. 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
ANSWER: c
24. 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
ANSWER: a
25. 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
ANSWER: c
26. 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
ANSWER: c
27. If competition in an industry increases, the future growth potential should

a. decrease
b. increase
c. not be affected
d. be negative
ANSWER: a
28. 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 cannot be valued
d. forever
ANSWER: d
29. 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
ANSWER: c
30. 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
ANSWER: d
31. result in what is known as treasury stock.

a. Stock dividends
b. Stock repurchases
c. Stock splits
d. Reverse stock splits
ANSWER: b
32. 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
ANSWER: d
33. 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
ANSWER: d
34. 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
ANSWER: d
35. 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
ANSWER: b
36. 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
ANSWER: d
37. 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
ANSWER: b
38. 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
ANSWER: a
39. 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
ANSWER: c
40. 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
ANSWER: c
41. 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 these are correct
ANSWER: d
42. 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
ANSWER: a
43. 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
ANSWER: d
44. 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
ANSWER: b
45. 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
ANSWER: d
46. 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.
ANSWER: a
47. 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
ANSWER: a
48. Common stock dividends normally are paid

a. monthly
b. quarterly
c. semi-annually
d. annually
ANSWER: b
49. 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
ANSWER: c
50. 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
ANSWER: c
RATIONALE: Solution: P0 = $1.20(1 + 0.07)/(0.12 - 0.07) = $25.68
51. 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%
ANSWER: d
RATIONALE: Solution: ke = $0.60(1.08)/$32 + 0.08 = 10.03%
52. 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
ANSWER: a
RATIONALE: Solution: ke = $0.72/(0.14 – 0.06) = $9.00
53. What is the current value of the common stock of Clump Dump Kitty Litter, 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
ANSWER: b
RATIONALE: Solution: Price = dividend/current yield = $1.35/0.0614 = $21.99
54. Bellbottom Gongs, Inc. 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%
ANSWER: c
RATIONALE: Solution: .70(4)/48.25 = .058 or 5.8%
55. 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
ANSWER: b
RATIONALE: Solution: EPS = P/PE = $25/11 = $2.27
56. If Night Owl Lamps 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%
ANSWER: b
RATIONALE Solution: $1.54/$40 = 0.0385 or 3.85%
57. 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
ANSWER: b
RATIONALE: Solution: ke = $0.48/$12 + 0.08 = 12%
58. 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
ANSWER: b
RATIONALE: Solution: P0 = $1.40/0.14 = $10
59. 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%
ANSWER: b
RATIONALE: Solution: $0.53/$0.24 = 2.2083 or approximately 12% from Table I
60. 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
ANSWER: d
RATIONALE: Solution: P0 = $3.25/0.12 = $27.08
61. During the past 8 years, Beef Wellington Cattle 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%
ANSWER: b
RATIONALE: Solution: $2.00 = $3.19(PVIFg,8)
(PVIFg,8) = $2.00/$3.19 = .627
g = 6%, from Table II
62. Moonshine Company, a producer of fine liqueurs, has 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 Moonshine'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
ANSWER: c
RATIONALE: Solution: P0 = $4.16/(0.13 – 0.04) = $46.22
63. 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%
ANSWER: a
.80
RATIONALE: Solution: D/P0 = = .0604 or 6.04%
13.25
64. The stock of Melody 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%
ANSWER: d
RATIONALE: Solution: $37.50 = $1.10(1 + g)/(0.14- g)
g = 10.75%
65. 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%
ANSWER: b
RATIONALE: Solution: 34 = .48(1 + g)/(.14 - g)
g = 12.4 1%
66. 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%
ANSWER: b
RATIONALE: Solution: 0.14 = $3.00/$50 + g
g = 0.08 or 8%
67. 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
ANSWER: b
RATIONALE: Solution: P0 = $2.75(0.877) + $3.00(0.769) + $3.25(0.675) + $35(0.675) = $30.54
68. What is the current value of Frocks & Socks Clothiers, 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
ANSWER: b
RATIONALE: 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
69. 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.
ANSWER: d
RATIONALE: Solution: None of these are correct. There is insufficient information in the problem.
70. 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.
ANSWER: d
RATIONALE: Solution: The constant growth rate model cannot be used because the growth rate is greater
than required rate of return.
71. 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
ANSWER: a
$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
72. The earnings and dividends of Nebula 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. Nebula currently pays a
dividend of $0.50 per share. What is the value of Nebula stock to an investor who requires a 14 percent rate of
return?
a. $9.31
b. $15.73
c. $11.35
d. $2.04
ANSWER: c
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
73. 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
ANSWER: c
RATIONALE: 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
74. 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%
ANSWER: c
RATIONALE: Solution: 0.12 = $2(1 + g)/$38 + g
g = 0.064, or 6.4%
75. 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%
ANSWER: b
$1.50(1 + g)
RATIONALE: Solution: 0.15 = +g so g = 0.095
$30
76. Over the past 5 years, Dippity Doo-Dah Party Dips’ common stock earnings per share have grown from $0.62
to $0.91. If an investor in Dippity’s stock is assumed to have a required rate of return of 14%, what is the
current value of Dippity 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
ANSWER: a
RATIONALE : Solution: $0.91 = $0.62(FV1Fg,s)
FVIF = $0.91/$0.62 = 1.468
so g = 8%
p0 = $0.12(1.08)/(0.14 – 0.08) = $2.16
77. High Brow Cow Farms, producers of the finest dairy products, has common stock that sells for $54.
Dividends are expected to continue to grow at a rate of 8% annually. If investors in High Brow require a 13%
rate of return, what is the current dividend?
a. $2.70
b. $2.50
c. $4.00
d. $3.25
ANSWER: b
D0(1.08)
$54 =
0.13 − 0.08
D0(1.08)
78. Keeping Pace Enterprises, makers of track and field equipment, has common stock that 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
ANSWER: c
D0(1.09) so D0 = 1.33
$29 =
0.14 – 0.19 and D1 = 1.33(1.09) = $1.45
79. The common stock of Kute & Kuddly Kids Clothes, Inc. currently sells for $88.50 and its current (D0)
dividend is $1.10. Determine the implied growth rate for Kute 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%
ANSWER: d
$1.10(1 + g) so g = 0.126 or 12.6%

$89 =
0.14 − g
80. Helluva stock 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 Helluva 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
ANSWER: c
RATIONALE: 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
81. 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
ANSWER: b
RATIONALE: 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
82. 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
ANSWER: d
RATIONALE: Solution: $37 = D1/(0.16 – 0.08)
D1 = $2.96
83. The earnings of Foggy Futures Weather Forecasting 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. Foggy currently pays a dividend of
$0.36 per share. What is the value of Foggy’s stock to an investor who requires a 16% rate of return?
a. $7.97
b. $7.76
c. $14.42
d. $11.11
ANSWER: b
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
84. 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
ANSWER: c
RATIONALE: 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
85. 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 (D0) for an investor who requires a 15% return?
a. $0.71
b. $0.63
c. $0.34
d. $0.31
ANSWER: b
D0(1.12)
23.50 = D0 = $0.63
.15 − .12
86. During the past 7 years, Burger Flippin’ Corp.’s earnings have grown from $0.75 to $1.95 per share. If the
past growth rates are expected to continue into the future, what is the current value of Flippin’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
ANSWER: c
RATIONALE: Solution: .78/1.95 = .4 = PVIF
i = 14% from Table II
1.95(1.14)
P0 = = $111.15
.16 − .14
87. 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
ANSWER: b
1 x (5,400,000)
Number of shares = + 1 = 415,386
12 + 1
88. AVTX has 6.8 million shares outstanding and the firm's chatter 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
ANSWER: d
2 x 6,800,000
RATIONALE: Solution: # shares = + 1 = 1,700,000
7 +1
89. What is the estimated price of Once in a Blue Moon stock that has the following dividends? The return on
similar investments is I8%. (Round the growth rate to the nearest whole percent)
YEAR DIVIDENDS
2014 $2.50
2013 $2.48
2012 $2.36
2011 $2.32
a. $17
b. $13
c. $22
d. $50
ANSWER: a
RATIONALE: Find the dividend growth rate using a calculator
N=3
PV = –2.32
FV = 2.50
Solve for I = 2.52% rounded to the nearest whole percent - Dividend growth rate is 3%
To find the expected dividend = 2.50(1.03) = 2.58
Expected dividend (D1) is $2.58.
$2.58
= $17.17
.18 − .03
90. Listed below are some of the responsibilities of investment bankers. Which of the following is NOT one of
them?
a. They can purchase securities
b. They market securities
c. They directly influence the objectives and direction of the company.
d. They arrange private loans and leases
ANSWER: c
91. The zero growth method is used to value

a. common stock
b. required rate of return
c. bonds
d. preferred stock
ANSWER d
92. All of the following are ways that securities 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
ANSWER: c
93. In a liquidation of a firm due to bankruptcy, which of the following usually gets paid last?
a. bondholders
b. preferred stockholders
c. common stockholders
d. employees wages
ANSWER: c
94. 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
ANSWER: a
95. By-Your-Leave Travel Agency has reported the dividends listed below. What return could be expected? The
price of the stock is $18. (Round the growth rate to the nearest whole percent)
Years Dividends
2010 $1.12
2011 $1.15
2012 $1.18
2013 $1.21
2014 $1.24
a. 10.11%
b. 12.02%
c. 8.15%
d. 9.74%
ANSWER: a
RATIONALE: Finding the growth rate by calculator:
N=4
PV = –1.12
FV = 1.24
Solve for I= 2.57 Rounded to 3%
Find the next dividend D1:

1.24(1.03) = 1.28
1.28
+ .03 = 10.11%
18
96. Chill Pill Pharmaceuticals is expecting a growth rate of 14% for the next two years due to its new drug.
Thereafter it should level to an 8% growth rate. The last dividend paid was $.65 per share. What price should
the stock sell for if investors require 12% return.
a. $18.14
b. $22.75
c. $19.47
d. $20.16
ANSWER: c
RATIONALE: Solution using a calculator:
D1 = .65(1.14) = .74
D2 = .74(1.14) = .84
.91
DL = .82(1.08) = = 22.75
.12 − .08
Find the PV of the Dividends and Price using a calculator:
N = 1 I = 12 FV = .74 Solve for PV = .66
N = 2 I = 12 FV = .84 Solve for PV = .67
N = 2 I = 12 FV = 22.75 Solve for PV = 18.14
.66 + .67 + 18.14 = $19.47
97. Common stockholders’ claim on assets is considered after which of the following:
a. Board of Directors’ pay
b. Preferred Stockholders
c. Both a and b
d. Neither a nor b
ANSWER: b
98. If Crafty Creatures Cage Maker stock sells for $18 per share and the firm nets $12 per share, the difference
is called the:
a. Underwriting Spread
b. Profit
c. SEC charge
d. Refund
ANSWER: a
99. An option for selling securities reserved for larger firms (MVE > $150,000,000) whereby the firm files a
master registration statement and then can small increments of the stock over the next two years by filing a
short form statement is called:
a. SEC Registration
b. Red Herring
c. Shelf Registration
d. Commission Registration
ANSWER: c
100. King of the Roost Chicken Farms has issued the following dividends. What would be the growth rate in
dividends (rounded)?
YEARS DIVIDENDS
2014 $3.00
2013 $2.50
2012 $1.75
2011 $1.54
a. 15%
b. 25%
c. 12%
d. 21%
ANSWER: b
RATIONALE: Solution using a financial calculator:
N=3
PV = –1.54
FV = 3.00
Solve for I = 24.89%
101. In valuing a company that sells products and services, is the most important factor in the valuation of
closely held firms.
a. management effectiveness
b. profit
c. cash on hand
d. earnings capacity
ANSWER: d
102. Haulin’ It Towing Company is selling a stock for $16. The stock just paid a dividend of $.60 and this
dividend is expected to grow by 15% per year for three years. After that it will grow at a constant rate of 4%.
The stock’s beta is 1.7, the risk-free rate of interest is 1.75% and the market risk premium is 5.25%. Should
you buy the stock? (Round to dollars and cents or two decimal points)
a. No, the stock is not a good value since it is only worth about $8.
b. No, the stock is not a good value since it is only worth about $12.
c. Yes, the stock is a good value since it should sell for about $25.
d. Yes, the stock is a good value since it should sell for about $18.
ANSWER: b
Find the RRR:
RRR = 1.75 + (1.7 × 5.25) = 10.68%
Now, find the stock’s future value:

D1 = .60 × 1.15 = .69
D2 = .69 × 1.15 = .79
D3 = .79 × 1.15 = .91
.95
DL = .91 × 1.04 = = $14.22
.1068 − .04
Third, find the stock’s present value:

N=1 N=2 N=3 N=3
I = 10.68 I = 10.68 I = 10.68 I = 10.68
FV = .69 FV = .79 FV = .91 FV =
PV = $.62 PV = .64 PV = .67 PV 14.22
= 10.49
.62 + .64 + .67 + 10.12 = $12.42 Actual value of the stock.
$16 > $12.42 = Based on the information given the stock is overvalued and should not be
bought
103. List the various rights of common stockholders.
ANSWER: 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.
104. What are the advantages and disadvantages of common stock financing?
ANSWER: 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.
105. List the responsibilities of investment bankers.
ANSWER: 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
106. What are some of the costs associated with new security offerings?
ANSWER: 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 offering price. This option normally lasts for 30 days.
107. Why do closely held firms need to have an outside appraiser to determine their value? What are the reasons
for valuation?
ANSWER: In general a corporation’s value is determined by the marketability of its stock and its price as
listed on an exchange. An active market for closely held firms normally does not exist. This
necessitates using an independent appraiser to determine its value. A firm needs to know its
current value for:
1. mergers and acquisitions, divestitures and liquidation
2. initial public offerings
3. estate and gift tax returns
4. leveraged buyouts
5. recapitalizations
6. employee stock ownership plans
7. divorce settlements
8. estate valuation
9. litigation
108. What are the disadvantages of owning minority interest in a closely held corporation and how can this be
overcome?
ANSWER: A minority interest investment in a closely held corporation has an investment that:
1. lacks control
2. may lack marketability
3. generally receives little, if any, dividend
Minority interest shares should be discounted. A discount is applied to the per-share value which
ranges form 6% to more than 50%.
109. When Facebook launched its IPO, the sale of the stock did not go as planned. In fact, class action lawsuits
have been filed. What is the accusation against Facebook?
ANSWER: The lawsuits cite improprieties on the part of the company executives and its investment bankers.
The lawsuits cited the failure to disclose publicly lower growth forecasts for the company in the
weeks leading up to the IPO and the selective leaking of these forecasts to favored clients of
Morgan Stanley.
110. All of the following statements about common stock are correct EXCEPT:
a. common stock is a variable income security.
b. common stock prices fluctuate more than bonds.
c. common stock is callable.
d. common stockholders have preemptive rights
ANSWER: c
111. Of the following common stock rights, which allows common stockholders to buy more shares of common
stock in order to retain their pro-rata share of ownership in the company?
a. asset rights
b. preemptive rights
c. dividend rights
d. voting rights
ANSWER: b
112. Stock splits are:

a. a sign that the company is in need of more financial capital
b. a sign that the company's stock price is too low.
c. a sign that the company wants to get its stock price to a more desirable trading level.
d. a sign that the company cannot pay its stock dividend.
ANSWER: c
113. If a company offers more than one class of stock, corporate governance experts feel that:
a. that this is more democratic since some shares are more expensive than others.
b. that this is preferable in order to provide a special class of nonvoting stock to executives.
c. super-voting power allows for the election of directors that benefit a specific class of stock.
d. decisions made by the dual class system is more advantageous for the average investor.
ANSWER: c
114. Which of the following statements about common stock voting is/are correct?
I. Majority voting typically prohibits a group of stockholders with a minority viewpoint from having any
representation on the board.
II. Cumulative voting allows each share of stock to represent as many votes as there are directors to be
elected.
a. Only statement I is correct
b. Only statement II is correct
c. Both statement I and statement II are correct
d. Neither statement I nor statement II is correct.
ANSWER: c
115. All of the following are reasons that companies hold treasury stock EXCEPT:
a. to comply with SEC regulations that a certain amount of company shares must be kept by the company.
b. disposition of excess cash
c. financial restructuring
d. future corporate needs
ANSWER: a

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Contemporary Financial Management 13th

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CHAPTER 7: COMMON STOCK: CHARACTERISTICS, VALUATION,

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

d. total common stockholders' equity

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

6. The book value of an asset represents

7. In a reverse stock split

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

14. Many preferred stocks are treated as in determining their values.

18. Stockholders’ equity equals

19. A common stock’s book value is calculated

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

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

31. result in what is known as treasury stock.

33. A firm may use a stock repurchase .

41. Direct issuance costs are

47. The P/E ratio indicates

48. Common stock dividends normally are paid

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

91. The zero growth method is used to value

94. The returns from most common stocks are

Find the next dividend D1:

Now, find the stock’s future value:

Third, find the stock’s present value:

103. List the various rights of common stockholders.

105. List the responsibilities of investment bankers.

112. Stock splits are:

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