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Titman, Financial Management: Principles and
Applications, 8th edition
Chapter 10: Shares valuation
Multiple choice: Choose the one alternative that best completes the
statement or answers the question.
1. P. Noel Company’s ordinary shares have just paid a $2.00 dividend. If investors believe
that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate
of 5% per year for the foreseeable future, what is the value of P. Noel shares?
A. $15.00
B. $22.22
C. $23.33
D. $40.00
Difficulty: Moderate
AACSB: 3. Analytical thinking
Learning Objective: 10.1 Identify the basic characteristics and features of ordinary shares,
and use the discounted cash flow model to value ordinary shares
Answer: C
2. The expected rate of return on a share of ordinary shares whose dividends are growing
at a constant rate (g) is which of the following?
A. (D1 + g)/Vc
B. D1/Vc + g
C. D1/g
D. D1/Vc
Copyright © 2019 Pearson Australia (a division of Pearson Australia Group Pty Lt – 9781486019649 / Titman/ Financial
Management, 8e
Answer: B
3. Green Company’s ordinary shares are currently selling at $24.00 per share. The company
recently paid dividends of $1.92 per share and projects growth at a rate of 4%. At this
rate, what is the share’s expected rate of return?
A. 4.08%
B. 8.00%
C. 12.00%
D. 8.80%
Answer: C
4. Ordinary shareholders are essentially [blank] of the firm.

A. creditors
B. managers
C. owners
D. proxies.
Answer: C
5. Magiklean Ltd’s return on equity is 17% and management retains 75% of earnings for
investment purposes. Based on this information, what will be the firm’s growth rate?
A. 4.25%
B. 22.67%
C. 44.12%
D. 12.75%
Copyright © 2019 Pearson Australia (a division of Pearson Australia Group Pty Lt – 9781486019649 / Titman/ Financial 2
Management, 8e
Learning Objective: 10.1 Identify the basic characteristics and features of ordinary shares
Answer: D
6. If a company has a return on equity of 25% and wants a growth rate of 10%, how much
of ROE should be retained?
A. 40%
B. 50%
C. 60%
D. 70%
Answer: A
7. [blank] gives minority shareholders more power to elect a member to the board of
directors.
A. Preemptive right
B. Majority voting
C. Proxy fights
D. Cumulative voting
Answer: D
8. You are evaluating the purchase of Cellars Pty Ltd ordinary shares that just paid a
dividend of $1.80. You expect the dividend to grow at a rate of 12% for the next three
years. You plan to hold the shares for three years and then sell them. You estimate that a
Management, 8e
required rate of return of 17.5% will be adequate compensation for this investment.
Calculate the present value of the expected dividends.
A. $4.91
B. $5.40
C. $9.80
D. $6.80
Answer: A
9. You are evaluating purchasing ordinary shares of Charbridge Ltd, which currently pays
no dividend and is not expected to do so for many years. Because of rapidly growing
sales and profits, you believe the shares will be worth $51.50 in three years. If your
required rate of return is 16%, what is the shares’ worth today?
A. $59.74
B. $51.25
C. $32.99
D. $0.00
Difficulty: Complex
Answer: C
10. Kim is the CEO of Fast Feet Pty Ltd. She has selected a slate of nominees for the firm’s
board of directors and given the slate to shareholders to elect the firm’s board. This is an
example of a(n) [blank].
A. agency problem
B. preemptive right
C. majority vote
D. unlimited proxy
Management, 8e
Answer: A
11. Evidence that agency costs exists [blank].

A. because they are shown in footnotes to the financial statements
B. because shares prices increase when an underperforming CEO is unexpectedly
replaced
C. because underperforming CEO’s are frequently voted out by shareholders
D. because management often pursues risky but profitable opportunities rather than
safer, less profitable opportunities
Difficulty: Basic
Answer: B
12. Evidence exists that directors [blank].

A. aggressively represent the interests of shareholders
B. are quick to replace or reduce the compensation of underperforming CEOs
C. often represent the interests of the managers who nominated them for
directorships
D. are vigilant in requiring that the firm’s assets be used efficiently
Answer: C
13. Frost Corporation’s recent earnings per share were $12.90. Their dividend payout ratio is
20%. Earnings are expected to grow at an average of 6% per year and the company’s
Management, 8e
policy is to maintain the same payout ratio. If investors are requiring a 12% rate of return
on these shares, what will they be willing to pay for one share?
A. $21.50
B. $22.75
C. $43.00
D. $45.58
Answer: D
14. Shares in Softec Ltd is currently selling for $42.86. It is expected to pay a dividend of
$3.00 at the end of the year. Dividends are expected to grow at a constant rate of 3%
indefinitely. Calculate the required rate of return on FBC shares.
A. 10%
B. 33%
C. 7%
D. 4.3%
Answer: A
15. You are evaluating the purchase of Cool Toys, Inc. ordinary shares that just paid a
dividend of $1.80. You expect the dividend to grow at a rate of 12%, indefinitely. You
estimate that a required rate of return of 17.5% will be adequate compensation for this
investment. Assuming that your analysis is correct, what is the most that you would be
willing to pay for the ordinary shares if you were to purchase them today? Round to the
nearest $.01.
A. $36.65
B. $91.23
Management, 8e
C. $51.55
D. $74.82
Answer: A
16. Shares are currently sells for $63 per share, and the required return on the shares is
10%. Assuming a growth rate of 5%, calculate the share’s last dividend paid.
A. $1
B. $3
C. $5
D. $7
Answer: B
17. Acme Consolidated has a return on equity of 12%. If Acme distributes 60% of earnings as
dividends, then we would expect the common shareholders’ investment in the firm and
the value of the ordinary shares to grow by
A. 4.80%.
B. 7.20%.
C. 12%.
D. 6%.
Answer: A
Management, 8e
18. An investor is contemplating the purchase of ordinary shares at the beginning of this
year and to hold the shares for one year. The investor expects the year-end dividend to
be $2.00 and expects a year-end price for the shares of $40. If this investor’s required
rate of return is 10%, then the value of the shares to this investor is [blank].
A. $36.36
B. $38.18
C. $33.06
D. $34.88
Answer: B
19. Pixie Ltd just paid a $2.00 dividend on its ordinary shares and expects to continue
growing dividends at an average rate of 5% each year, from now to infinity. If the
required rate of return for these shares is 9% and they are currently selling for $54.50
per share, the shares [blank].
A. are selling for exactly their intrinsic value
B. there is no information to determine if the shares are overpriced or underpriced
C. are underpriced
D. are overpriced
Answer: D
20. An issue of ordinary shares currently sells for $40.00 per share, has an expected
dividend to be paid at the end of the year of $2.00 per share, and has an expected
growth rate to infinity of 5% per year. The expected rate of return on this security is
[blank].
A. 5%
B. 10.25%
C. 13.11%
Management, 8e
D. 10%
Answer: D
21. When do common shareholders have a claim on the company’s assets?

A. At any time
B. Only after the claims of debtholders and preferred shareholders have been
satisfied
C. After the claims of the preferred shareholders have been satisfied, but before the
debt holders
D. Common shareholders have no claim on the company’s assets.
Answer: B
22. KDP’s most recent dividend was $2.00 per share and is selling today in the market for
$70. The dividend is expected to grow at a rate of 7% per year for the foreseeable future.
If the market return is 10% on investments with comparable risk, should you purchase
the shares?
A. No, because the share is overpriced at $1.33.
B. No, because the share is overpriced at $3.33.
C. Yes, because the share is underpriced at $1.33.
D. Yes, because the share is underpriced at $3.33.
Answer: C
Management, 8e
23. When a company has an initial public offering [blank].
A. the previous owner of the shares will bet the money and the buyer will get the
shares
B. the proceeds of the sale will not affect the company’s balance
C. the proceeds of the sale will increase the company’s equity
D. the proceeds of the sale will become a liability payable to the shareholders
Answer: C
24. You are considering the purchase of Miller Manufacturing’s ordinary shares. The shares
are selling for $21.00 per share. The next dividend is expected to be $2.10, and you
expect the dividend to keep growing at a constant rate. If the shares are returning 15%,
calculate the growth rate of dividends.
A. 3%
B. 5%
C. 8%
D. 10%
Answer: B
25. ABC Ltd just paid a dividend of $2. ABC expects dividends to grow at 10%. The return on
shares like ABC Ltd is typically around 12%. What is the most you would pay for ABC
shares?
A. $100
B. $110
C. $120
D. $130
Management, 8e
Answer: B
26. Marjen Pty Ltd just paid a dividend of $5. Marjen shares currently sell for $73.57. The
return on shares like Marjen is around 10%. What is the implied growth rate of
dividends?
A. 1%
B. 3%
C. 5%
D. 7%
Difficulty: Complex
Answer: B
27. Which investor incurs the greatest risk?

A. Mortgage bondholder
B. Preferred shareholder
C. Ordinary shareholder
D. Debenture bondholder
Difficulty: Basic
Answer: C
28. What allows ordinary shareholders the right to cast a number of votes equal to the
number of directors being elected?
A. The majority voting provision
B. The casting feature
C. The cumulative voting provision
Management, 8e
D. The proxy method
Answer: C
29. The shareholder can cast all votes for a single candidate or split them among various
candidates through
A. proxy fights.
B. cumulative voting.
C. call provisions.
D. majority voting.
Answer: B
30. Which stock exchange does not allow non-voting ordinary shares?
A. The London Stock Exchange
B. The New York Stock Exchange
C. The Australian Securities Exchange
D. The Toronto Stock Exchange
Difficulty: Basic
Answer: C
31. You are considering the purchase of Wahoo Limited. The firm just paid a dividend of
$4.20 per share. The shares are selling for $115 per share. Security analysts agree with
top management in projecting steady growth of 12% in dividends and earnings over the
foreseeable future. Your required rate of return for shares of this type is 17.5%. If you
Management, 8e
were to purchase and hold the shares for three years, what would the expected
dividends be worth today?
A. $12.60
B. $9.21
C. $17.12
D. $11.46
Answer: D
32. A share of ordinary shares just paid a dividend of $3.25 per share. The expected long-run
growth rate for this shares is 18%. If investors require a rate of return of 24%, what
should the price of the shares be?
A. $57.51
B. $62.25
C. $71.86
D. $63.92
Answer: D
33. WSU is a young company that does not yet pay a dividend. You believe that the company
will begin to pay dividends five years from now, and that the company will then be worth
$50 per share. If your required rate of return on these risky shares is 20%, what are the
shares worth today?
A. $40
B. $10
C. $20.09
D. $0.00
Management, 8e
Answer: C
34. Ordinary shareholders are essentially creditors of the firm.

A. True
B. False
Difficulty: Basic
Answer: B
35. Ordinary shares represent a claim on residual income.

A. True
B. False
Answer: A
36. The growth rate of future earnings is determined by return on equity and the profit-
retention rate.
A. True
B. False
Answer: A
37. The shareholder’s expected rate of return consists of a dividend yield and interest.
Management, 8e
A. True
B. False
Answer: B
38. When bankruptcy occurs, the claims of the common shareholders may go unsatisfied.
A. True
B. False
Answer: A
39. Cumulative voting allows a shareholder to cast all of his or her votes for one director
rather than voting on each director separately
A. True
B. False
Answer: A
40. The expected rate of return implied by a given market price equals the required rate of
return for investors at the margin.
A. True
B. False
Management, 8e
Answer: A
41. Shares valuation is more precise than bond valuation as shares cash flows are more
certain.
A. True
B. False
Answer: B
42. The shares valuation model D1/(Rc - g) requires Rc > G.

A. True
B. False
Answer: A
Short answer: Write the word or phrase that best completes each
statement or answers the question
43. A decrease in the [blank] will cause an increase in the value of ordinary shares.
Answer: required rate of return
Management, 8e
44. List the two primary voting procedures used by corporations
Answer: majority voting and cumulative voting
45. Is the following ordinary share priced correctly? If no, what is the correct price?
Price = $26.25
Required rate of return = 13%
Dividend year 0 = $2.00
Dividend year 1 = $2.10
Answer: Growth rate = = 5%

Vcs = 2.10 /(.13 - .05) = $26.25
The share is priced correctly.
46. The ordinary shares of Cranberry Ltd is selling for $26.75 on the open market. A dividend
of $3.68 is expected to be distributed, and the growth rate of this company is estimated
to be 5.5%. If Richard Dean, an average investor, is considering purchasing this shares at
the market price, what is his expected rate of return?
Answer:
R = (D/V) + g
R = ($3.68/$26.75) + .055
R = 19.26%
Management, 8e
47. Tannerly Worldwide’s ordinary shares are currently selling for $48 a share. If the
expected dividend at the end of the year is $2.40 and last year’s dividend was $2.00,
what is the rate of return implicit in the current shares price?
Answer:
Rc = 2.40/48 + (2.40 - 2.00)/2.00
= .05 + .20
= 25%
48. Draper Company’s ordinary shares paid a dividend last year of $3.70. You believe that
the long-term growth in the dividends of the firm will be 8% per year. If your required
return for Draper is 14%, how much are you willing to pay for the shares?
Answer: P0 = = = $66.60
49. Determine the rate of return on a $25 ordinary share that pays a dividend of $2.50 in
year 1 and grows at a rate of 5%.
Answer: Kcs = + 5% = 10% + 5% = 15%
50. You are considering the purchase of AMDEX Company shares. You anticipate that the
company will pay dividends of $2.00 per share next year and $2.25 per share the
following year. You believe that you can sell the shares for $17.50 per share two years
Management, 8e
from now. If your required rate of return is 12%, what is the maximum price that you
would pay for a share of AMDEX Company shares?
Answer: Vc = $2.00 PVIF12%,1 + $19.75 PVIF12%,2
= ($2.00)(.893) + ($19.75)(.797)
= $17.53
51. You can purchase one share of Sumter Company ordinary shares for $80 today. You
expect the price of the ordinary shares to increase to $85 per share in one year. The
company pays an annual dividend of $3.00 per share. What is your expected rate of
return for Sumter shares?
Answer: $80.00 = +
$80.00 (1 + R) = $88.00
(1 + R) = = $1.10
R = .10
52. If a share has a much higher than normal P/E ratio, investors probably expect [blank].
A. slow growth in earnings
B. rapid growth in earnings
C. large increases in the price of the shares
D. a declining shares price
Management, 8e
Learning Objective: 10.2 Use the price–earnings (P/E) ratio to value ordinary shares
Answer: B
53. When interest rates and uncertainty decline, P/E ratios will [blank].
A. rise
B. stabilise
C. decline
D. fluctuate
Answer: A
54. The P/E ratio is calculated by dividing [blank].

A. the current shares price by shareholders’ equity
B. total assets by net profit
C. the current shares price by earnings per share
D. the current shares price by operating cash flow per share
Answer: C
55. The GAP’s most recent earnings per share were $1.75. Analysts forecast next year’s
earnings per share at $1.88. If the appropriate P/E ratio is 15, a share of GAP shares
should be valued at [blank].
A. $28.20
B. $26.25
C. $27.23
D. $8.57
Management, 8e
Answer: A
56. The retail analyst at Morgan-Sachs values shares of the GAP at $38.00 per share. They
are using the average industry ‘forward’ P/E ratio of 17. Their forecasted earnings per
share for next year is [blank].
A. $0.54.
B. $1.50.
C. $2.24
D. $4.20
Answer: C
57. Home Depot shares are currently selling for $136 per share. Next year’s dividend is
expected to be $3.31; next year’s earnings per share are expected to be $6.55. Home
Depot’s P/E ratio is [blank].
A. .048
B. 22.03
C. 20.75
D. 41.08
Answer: C
58. McDonald’s shares currently sell for $123. Its expected earnings per share are $5.12. The
average P/E ratio for the industry is 24. If investors expected the same growth rate and
risk for McDonald’s as for an average firm in the same industry, its shares price would
[blank].
A. stay about the same
B. rise
C. fall
D. increase and then decline
Management, 8e
Answer: A
59. If the ROE on a new investment is less than the firm’s required rate of return [blank].
A. the investment increases the firm’s value
B. the investment leaves the firm’s value unchanged
C. the effect on the firm’s value is unpredictable
D. the investment reduces the firm’s value
Answer: D
60. Zorba’s is a small chain of restaurants whose shares are not publicly traded. The average
P/E ratio for similar restaurant chains is 16.5; the P/E ratio for the S&P 500 Index is 15.2.
This year’s earnings were $1.21 per share and next year’s earnings are forecasted at
$1.46 per share. A reasonable price for a share of Zorba’s shares is [blank].
A. $24
B. $20
C. $18
D. $16
Answer: A
61. Apple shares are now selling for $115 per share. The P/E ratio based on current earnings
is 13.77 and the P/E ratio based on expected earnings is 12.29. The expected growth rate
in Apples earnings must be [blank].
A. 1.48%
B. 12.1%
C. -10.3%
D. 10.3%
Management, 8e
Difficulty: Complex
Answer: B
62. The P/E ratio is the market price of a share of shares divided by book equity per share.
A. True
B. False
Answer: B
63. The higher a firm’s P/E ratio, the more optimistic investors’ feel about the firm’s growth
prospects.
A. True
B. False
Answer: A
64. P/E ratios found in published sources or on the Internet are always calculated by dividing
the next period’s expected earnings into the current price of the shares.
A. True
B. False
Answer: B
65. The higher the investor’s required rate of return, the higher the P/E ratio will be.
A. True
B. False
Management, 8e
Answer: B
66. Walmart’s current earnings per share of $4.60 are expected to grow only at a rate of 2%
per year for the next few years. Using a P/E ratio of 15, what is a reasonable value for a
share of Walmart shares?
A. True
B. False
Answer: A reasonable value for Walmart would be $4.60(1.02)(15) = $70.38 per share.
67. RAH Ltd is not publicly traded, but the P/E ratios of its four closest competitors are 15,
15.3, 15.7 and 16.5. RAH’s current earnings per share are $1.50. They are expected to
grow at 6% for the next few years. What is a reasonable price for a share of RAH shares?
Answer: An appropriate P/E ratio would be an average of the 4 competitors
(15+15.3+15.7+16.5)/4 = 15.625. A reasonable price would be $1.50(1.06)(15.625) = $24.84.
68. UVP preference shares pays $5.00 in annual dividends. If your required rate of return is
13%, how much will you be willing to pay for one share?
Management, 8e
A. $38.46
B. $26.26
C. $65.46
D. $46.38
Learning Objective: 10.3 Identify the basic characteristics and features of preference shares,
and value preference shares
Answer: A
69. Green Corp.’s preference shares are selling for $20.83. If the company pays $2.50 annual
dividends, what is the expected rate of return on its shares?
A. 8.33%
B. 12.00%
C. 2.50%
D. 20.00%
Answer: B
70. Brisbane Power issued preference shares in 1998 that had a par value of $85. The
preference shares pay a dividend of 5.75%. Investors require a rate of return of 6.50%
today on these shares. What is the value of the preference shares today? Round to the
nearest $1.
A. $100
B. $85
C. $75
D. $16
Management, 8e
Answer: C
71. Unlike bonds, preference shares [blank].

A. pay large dividends
B. do not have a fixed maturity date
C. have only one type
D. are not fixed based on the general level of interest rates
Answer: B
72. Which of the following statements concerning preference shares is correct?

A. Preferred shares generally is more costly to the firm than ordinary shares.
B. Most issues of preference shares have a cumulative feature.
C. Preferred dividend payments are tax-deductible.
D. Preferred shares are a riskier form of capital to the firm than bonds.
Answer: B
73. World Wide Interlink Corp. has decided to undertake a large project. Consequently, there
is a need for additional funds. The financial manager plans to issue preference shares
with an annual dividend of $5 per share. The shares will have a par value of $30. If
investors’ required rate of return on this investment is currently 20%, what should the
preference shares’s market value be?
A. $10
B. $15
C. $20
Management, 8e
D. $25
Answer: D
74. Davis Gas & Electric issued preference shares in 1985 that had a par value of $50. The
shares pay a dividend of 7.875%. Assume that the shares are currently selling for $62.50.
What is the preferred shareholder’s expected rate of return? Round to the nearest
0.01%.
A. 6.30%
B. 7.88%
C. 10.25%
D. 5.02%
Answer: A
75. Murky Pharmaceuticals has issued preference shares with a par value of $100 and a 5%
dividend. The investors’ required yield is 10%. What is the value of a share of Murky
preferred?
A. $100
B. $75
C. $50
D. $25
Answer: C
Management, 8e
76. Edison Power and Light has an outstanding issue of cumulative preference shares with
an annual fixed dividend of $2.00 per share. It has not paid the preferred dividend for
the last three years, but intends to pay a dividend on the ordinary shares in the coming
year. Before Edison can pay a dividend on the ordinary shares
A. preferred shareholders may cast all their votes for a single director.
B. preferred shareholders must receive dividends totalling $8.00 per share.
C. preferred shareholders must receive $2.00 per share.
D. will not necessarily receive any dividend.
Answer: B
77. Which of the following provisions is unique to preferred shareholders and usually NOT
available to ordinary shareholders?
A. Cumulative dividends feature
B. Voting rights
C. Floating dividend
D. Promised yields
Answer: D
78. Piercing Publishers recently issued preference shares with a fixed annual dividend of
$3.00 per share. Investors require a 5% return on similar preference shares issues. The
share is currently selling for $65. Is the share a good buy?
A. Yes, as it is undervalued $5.
B. Yes, as it is undervalued $10.
C. No, as it is overvalued $5.
D. No, as it is overvalued $10.
Management, 8e
Answer: C
79. Sydney Pickle Company preference shares pays a perpetual annual dividend of 2 1/2% of
its par value. Par value of TSP preference shares is $100 per share. If investors’ required
rate of return on these shares is 15%, what is the value of per share?
A. $37.50
B. $15.00
C. $16.67
D. $6.00
Answer: C
80. Petrified Forest Skin Care Ltd pays an annual perpetual dividend of $1.70 per share. If
the shares are currently selling for $21.25 per share, what is the expected rate of return
on these shares?
A. 36.13%
B. 12.5%
C. 8.0%
D. 13.6%
Answer: C
81. Horizon Communications shares pays a fixed annual dividend of $3.00. Because of lower
inflation, the market’s required yield on this preference shares has gone from 12% to
10%. As a result [blank].
Management, 8e
A. Horizon’s dividend decreased by 6 cents
B. the value of Horizon’s preferred increased by $3.00
C. the value of Horizon’s preferred decreased by $5.00
D. the value of Horizon’s preferred increased by $5.00
Answer: D
82. The required rate of return on TKF preferred shares have fallen from 5.75% at the time
of issue to the present rate of 5%. The share now sells for $115. What was the original
price?
A. $75.61
B. $132.25
C. $114
D. $100
Answer: D
83. From the issuing firm’s point of view, one advantage of preference shares over bonds is
[blank].
A. preferred dividends are a deductible expense for tax purposes
B. preferred voting privileges concentrate power in the hands of managers and
major shareholders
C. a dividend payment can be skipped without triggering bankruptcy
D. bonds don’t have a maturity date, whereas preference shares do
Management, 8e
Answer: C
84. A decrease in the [blank] will increase the value of preference shares.
A. expected rate of return
B. life of the investment
C. dividend paid
D. promised yields
Answer: A
85. National Grit’s preference shares have a par value of $100, sell for $85 and pay $11 each
year in dividends. What is the required rate of return?
A. 12.9 %
B. 11%
C. 1.29%
D. 8.5%
Answer: A
86. What is the value of preference shares that pays a $2.10 dividend to an investor with a
required rate of return of 6% (round your answer to the nearest $1)?
A. $35
B. $23
C. $17
D. $21
Management, 8e
Answer: A
87. Which of the following formulas is appropriate to find the value of preference shares
with a fixed dividend?
A. Value of preference shares = Annual Preferred Shares Dividend (1+ growth
rate)/Market’s Required Yield on Preferred Shares
B. Value of preference shares = Annual Preferred Shares Dividend (1+ growth
rate)/Market’s Required Yield on Preferred Shares - growth rate
C. Value of preference shares = Annual Preferred Shares Dividend/Market’s Required
Yield on Preferred Shares
D. Value of preference shares = Annual Preferred Shares Dividend/Investor’s
Required Yield on Preferred Shares
Answer: C
88. An issue of preference shares currently sells for $52.50 per share and pays a constant
annual expected dividend of $2.25 per share. The expected return on this security is
[blank].
A. 4.29%
B. 0.04%
C. 8.33%
D. 13.33%
Answer: A
89. Expected cash flow for a preference shares primarily consists of [blank].
Management, 8e
A. dividend payments
B. changes in the price of the shares
C. interest payments
D. dividend and interest payments
Answer: A
90. Preferred shares is similar to ordinary shares in that [blank].

A. it has no fixed maturity date
B. the nonpayment of dividends can bring on bankruptcy
C. dividends are limited in amount
D. both carry voting rights
Answer: A
91. Profitable companies often prefer to issue debt rather than preference shares because
[blank].
A. debt creates less risk for the company
B. interest payments are fixed but preferred shareholders expect dividends to grow
C. preference shares dilute the voting rights of common shareholders but bonds do
not
D. interest on debt is deductible for tax purposes, but preferred dividends are not
Answer: D
Management, 8e
92. In the event of bankruptcy, preferred shareholders and ordinary shareholders have the
same claim on the firm’s assets.
A. True
B. False
Answer: B
93. A company may issue multiple classes of preference shares.

A. True
B. False
Answer: A
94. The cumulative dividend feature is necessary to protect the rights of preference
shareholders.
A. True
B. False
Answer: A
95. Typical preference shares are valued as a perpetual annuity.

A. True
B. False
Management, 8e
Answer: A
96. In order to determine the value of a share of preference shares, the discount rate used is
the annual dividend percent.
A. True
B. False
Answer: B
97. The value of preference shares is affected by changes in interest rates.

A. True
B. False
Answer: A
98. Miller/Hershey’s preference shares are selling at $54 on the market and pay an annual
dividend of $4.20 per share.
a. What is the expected rate of return on the shares?

b. If an investor’s required rate of return is 9%, what is the value of the shares for that
investor?
Management, 8e
c. Considering the investor’s required rate of return, does this share seem to be a
desirable investment?
Answer:
a. R = D/V
R = $4.20/54
R = 7.78%
b. V = D/R
V = $4.20/.09
V = $46.66
c. No, it is not a desirable investment.
99. Determine the rate of return on a preference share that costs $50 and pays a dividend
of $6 per share.
Answer:
K = Div = 6 = 12%
Vg 50
100. Discuss two reasons why preference shares would be viewed as less risky than
ordinary shares to investors.
Answer: Preferred shareholders are paid before ordinary shareholders in the event of
bankruptcy. Ordinary shareholders, as the residual owners of a corporation, would receive
Management, 8e
any monies remaining after bondholder and preference shares claims are satisfied.
Preferred dividends are paid before ordinary share dividends in the normal course of
business. In the event that a preferred dividend is not paid, it accumulates and dividends in
arrears must be paid before any ordinary shares dividends can be declared. Common
shareholders take the risk that they will not receive dividends. The magnitude of the cash
flows from preferred shares is also known where it is not known for ordinary shares.
Because cash flows are more certain, preference shares would be considered less risky to
the investor.
Management, 8e
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Intracranial Hemorrhage
917
Appearances of old,
921
Clots, characters of, and changes in,
920
Definition of apoplexy,
917
918
Etiology,
957
Age,
927-929
Alcohol,
929
933
Apoplectic constitution, characteristics of,
930
931
Bright's disease,
930
Exciting causes,
931
Heart disease,
930
,
931
Heredity and sex,
929
Intellectual pursuits,
931
Narcotic poisons,
933
Obstruction to circulation,
931
932
Season,
931
Situation of,
918-921
923
924
Traumatism,
932
Miliary aneurisms, causes, seat, and characters of,
921
922
Pathology of hemorrhagic apoplexy,
925-927
Symptoms,
933
Consciousness, loss of, onset and degrees of,
933
temporary loss of, significance and causes of,
942
943
Eyes, state of,
939
941
Facial expression,
935
Headache and paræsthesia as premonitory signs,
946
Hemiplegia,
940
Mental disturbances and aberrations of special senses,
945
Muscular relaxation,
935
939
Paralysis,
938
Pulse, state of,
939
944
Respiration,
935
Retinal hemorrhages,
944
Sensibility, state of,
942
Speech,
939
Sphincters, state of,
941
Swallowing,
935
Temperature,
935-938
Tongue, state of,
939
Vertigo, significance of,
745
Vomiting,
935
Vessels, cerebral, state of, in,
922
Occlusion of the Cerebral Arteries
946
Diagnosis between hemorrhage, embolism, and thrombosis,
971
,
972
from apoplectiform attacks of intracranial syphilis,
967
from comatose form of pernicious intermittent fever,
966
from diabetic coma and sunstroke,
966
from epilepsy,
965
from hysteria,
966
968
from injuries to the head,

966
from meningitis of the vertex,
967
from narcotic poisoning,
964
from uræmia,
965
localization of lesions in,
969
Etiology,
950
Age, influence of,
951
Heart and arteries, disease of,
951
Heart-weakness and hæmic dyscrasia,
951
Morbid anatomy,
946
Cerebral substance, changes in, produced by emboli and

thrombi,
949
Emboli and thrombi, seat of,
947-949
source of,
947
Regions of brain usually involved in softening,
949
,
950
Prognosis,
972-974
Symptoms,
952
Aphasia,
956-960
Arthropathies,
962
Atrophy, muscular,
962
Chorea, post-paralytic,
960
Mental condition,
956
957
Motor paralysis, duration and course,
954
Reflexes, increased, rigidity and contracture,
962
963
Sensation, state of,
955
Temperature,
960
,
961
Urine, state of,
961
Word-blindness,
959
Treatment,
974
of cerebral embolism,
977
of attack,
977
Prophylaxis,
977
of cerebral hemorrhage,
974
975
Artificial respiration,
976
Bleeding and purgatives,
976
Cleanliness, necessity of,
977
Prophylaxis,
974
Surgical measures,
977
of cerebral thrombosis,
977
of paralysis and later symptoms,
978
Electricity, use of,
978
Iodide of potassium and phosphorus, use,
978
Massage, use,
978
Silver, gold, and strychnia, use,
978
Re-education of faculty of speech,
979
Softening of the Brain
918
949
989
Thrombosis of the Cerebral Veins and Sinuses
982
Diagnosis,
987
Localization of the thrombus,
988
Etiology,
983
Age,
983
Anæmia, simple, as a cause,
984
Carbuncles and erysipelas as a cause,
985
Ear, diseases of,
985
of marantic form,
983
984
Special diseases most likely to result from,
983
Prognosis,
988
Symptoms,
986
dependent on disturbances of cerebral function,
986
dependent on congestion and compression of other

structures,
986
987
Treatment,
988
Ammonia, use of,
989
Prophylactic,
989
Surgical measures,
989
Iodide of potassium, use of, after intracranial hemorrhage and

apoplexy,
978
in acute spinal meningitis,
752
in Bell's palsy,
1207

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Financial Management Principles and

Applications Australia 8th Edition

Chapter 10: Shares valuation

4. Ordinary shareholders are essentially [blank] of the firm.

11. Evidence that agency costs exists [blank].

12. Evidence exists that directors [blank].

21. When do common shareholders have a claim on the company’s assets?

27. Which investor incurs the greatest risk?

34. Ordinary shareholders are essentially creditors of the firm.

35. Ordinary shares represent a claim on residual income.

42. The shares valuation model D1/(Rc - g) requires Rc > G.

Answer: Growth rate = = 5%

Answer: Kcs = + 5% = 10% + 5% = 15%

54. The P/E ratio is calculated by dividing [blank].

71. Unlike bonds, preference shares [blank].

72. Which of the following statements concerning preference shares is correct?

90. Preferred shares is similar to ordinary shares in that [blank].

93. A company may issue multiple classes of preference shares.

95. Typical preference shares are valued as a perpetual annuity.

97. The value of preference shares is affected by changes in interest rates.

a. What is the expected rate of return on the shares?

Clots, characters of, and changes in,

Apoplectic constitution, characteristics of,

Heredity and sex,

Miliary aneurisms, causes, seat, and characters of,

Pathology of hemorrhagic apoplexy,

temporary loss of, significance and causes of,

Eyes, state of,

Headache and paræsthesia as premonitory signs,

Mental disturbances and aberrations of special senses,

Pulse, state of,

Sensibility, state of,

Sphincters, state of,

Vertigo, significance of,

Vessels, cerebral, state of, in,

Occlusion of the Cerebral Arteries

Diagnosis between hemorrhage, embolism, and thrombosis,

from apoplectiform attacks of intracranial syphilis,

from comatose form of pernicious intermittent fever,

from diabetic coma and sunstroke,

from injuries to the head,

from meningitis of the vertex,

from narcotic poisoning,

localization of lesions in,

Age, influence of,

Heart-weakness and hæmic dyscrasia,

Cerebral substance, changes in, produced by emboli and

Emboli and thrombi, seat of,

Regions of brain usually involved in softening,

Motor paralysis, duration and course,

Reflexes, increased, rigidity and contracture,

Sensation, state of,

Urine, state of,

Bleeding and purgatives,

Cleanliness, necessity of,

of paralysis and later symptoms,

Electricity, use of,

Iodide of potassium and phosphorus, use,

Silver, gold, and strychnia, use,

Re-education of faculty of speech,

Thrombosis of the Cerebral Veins and Sinuses

Localization of the thrombus,

Anæmia, simple, as a cause,