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1. What is the value of a common stock if the growth rate is 8 percent, the most recent dividend was $2, and investors
require a 15 percent return on similar investments?
A. $25.78 C. $28.57
B. $27.34 D. $30.85

2. Which of the following preferred stock properties would provide the best argument favoring purchase of preferred
stock by an investor?
A. When long-term bond yields decline, the value of preferred stock can potentially rise.
B. Because preferred stock trading volume is lower than common stock trading volume, preferred stock prices are
less volatile than common stock prices.
C. The yield differential between preferred stock and bonds is smaller than would be expected on the basis of risk differentials.
D. Preferred stockholders receive preferential treatment over lower-class, common stockholders when the corporation
earns sufficient profit to pay creditors and shareholders.
3. If a company fails to meet the terms of indenture, the company is
A. bankrupt. C. profitable.
B. in default. D. in registration.

4. Which of the following is the best conclusion, given only the following information:
ZYX Corporation's earnings after taxes have declined by 3.13% from the year earlier. During the past three months, ZYX purchased from investors (retired) 7.5% of the corporation's outstanding preferred stock shares, which pay dividends at 5% of par.
A. ZYX Corporation's net income decline is largely attributable to the expense it incurred to purchase its preferred stock.
B. ZYX Corporation's preferred stock purchase should enhance earnings after taxes next year because it will earn 5% dividend income from its new preferred stock holdings.
C. ZYX Corporation's purchase of preferred stock had no effect on the firm's asset balance.
D. ZYX Corporation's purchase of preferred stock improved its capacity to pay preferred stock dividends.

5. A 20-year $1,000 bond has a coupon of 8 percent. What would be the price if the coupon is paid semiannually and comparable bonds yield 10 percent?
A. $1,000 C. $828
B. $895 D. $624

6. What is the value of a preferred stock that pays an annual dividend of $4 a share if competitive yields are 5 percent?
A. $80 C. $40
B. $60 D. $20

7. Which of the following bonds is supported by collateral?
A. Convertible bonds C. Equipment trust certificates
B. Income bonds D. Debentures

8. If a perpetual preferred stock pays a dividend of $5 a year, and yields rise
from 10 percent to 12 percent, the price of the stock will
A. rise from $50 to $60. C. rise from $41.67 to $50.
B. fall from $50 to $41.67. D. fall from $60 to $50.

9. Interest is exempt from federal income taxation on
A. equipment trust certificates.
B. zero coupon bonds.
C. federal bonds such as savings bonds.
D. state of Florida bonds.

10. A 30-year $1,000 bond has an annual coupon of 6 percent. What would be the current
yield if the bond sells for $622?
A. 9.6 percent C. 5.6 percent
B. 6 percent D. 5 percent

11. Dividends come at the expense of
A. interest. C. liabilities.
B. retained earnings. D. stock.

12. A 10-year $1,000 bond has a coupon of 9 percent. What would be the price if the coupon is paid annually and comparable bonds yield 10 percent?
A. $1,900 C. $1,000
B. $1,159 D. $938

13. An increase in investors' required return will cause the value of a common stock to
A. rise. C. remain unchanged.
B. fall. D. remain stable or rise slightly.

14. If investors require a rate of return of 8 percent, what is the value of a perpetual preferred stock that pays a fixed dividend of $2?
A. $16 C. $32
B. $25 D. $50

15. A $1,000 bond has an annual coupon of 5 percent and a price of $692. Find the number of years to maturity if comparable bonds yield 10 percent.
A. 5 years C. 20 years
B. 10 years D. 30 years

16. A common stock costs $40.50, the current dividend is $1.50, and the growth in the value of the shares and the dividend is 8 percent. What is the annual rate of return on an investment in this stock?
A. 4.5 percent C. 10 percent
B. 8 percent D. 12 percent

17. Preferred stock and bonds are similar because
A. they both have voting power.
B. interest and dividend payments are legal obligations.
C. neither interest nor dividends are tax deductible.
D. both may be subject to a call option.

18. What is the value of a $100 par preferred stock that must be retired after 10 years if it pays a dividend of $5 annually and the investor requires a 6 percent rate of return?
A. $92 C. $110
B. $100 D. $122

19. A perpetual preferred stock pays a fixed dividend of $9 and sells for $100. What is the stock's rate of return?
A. 6.5 percent C. 11 percent
B. 9 percent D. 12.5 percent

20. The value of common stock depends on the
A. price of the stock.
B. retirement date.
C. present value of cash flows.
D. coupon rate.

Solution Preview

1. (D)
Next Period Dividend = 2*1.08 = $2.16
Value of Stock = 2.16/(.15-.08) = $30.857

2. (D)

3. (B)

4. (B)

5. (C)
Rate = 10%/2 = 5%
Payment = 40
Period = 20*2 = 40 years
Use the following formula in Excel ...

Solution Summary

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