Contemporary Corporate Finance International Edition 12th Edition Mcguigan Test Bank

Contemporary Corporate Finance
International Edition 12th Edition

McGuigan Test Bank
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finance-international-edition-12th-edition-mcguigan-test-bank/
Chapter 7: 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 PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
LOC: Understand stocks and bonds 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 PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
LOC: Understand stocks and bonds 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 PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
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 PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
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
LOC: Understand stocks and bonds TOP: Stockholder rights
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
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
LOC: Understand stocks and bonds 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
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
LOC: Understand stocks and bonds
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. none of the above
LOC: Understand stocks and bonds TOP: Stockholder voting rights
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
LOC: Understand stocks and bonds 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
LOC: Understand stocks and bonds TOP: Constant growth dividend valuation
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
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
LOC: Understand stocks and bonds 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
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
TOP: Entrepreneurial issues: 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
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
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
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
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
ANS: C PTS: 1 OBJ: TYPE: Fact NAT: Analytic skills
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
LOC: Understand stocks and bonds 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
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
LOC: Understand stocks and bonds 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
LOC: Understand stocks and bonds 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
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
32. ____ result in what is known as treasury stock.

a. Stock dividends
b. Stock repurchases
c. Stock splits
d. Reverse stock splits
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
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
LOC: Understand stocks and bonds 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
LOC: Understand stocks and bonds 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
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
LOC: Understand stocks and bonds 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
LOC: Understand stocks and bonds 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
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
LOC: Understand stocks and bonds 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
LOC: Understand stocks and bonds 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
LOC: Understand stocks and bonds 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
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
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
LOC: Understand stocks and bonds 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
LOC: Understand stocks and bonds 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.
LOC: Understand stocks and bonds TOP: International issues: global equity markets
49. From the following stock quotation, what is BLT's dividend yield?
BLT 1.20 4.3 19 1667 29.50 29 29 -.25

a. 1.2%
b. 12%
c. 4.3%
d. 19%
LOC: Understand stocks and bonds 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
51. Common stock dividends normally are paid

a. monthly
b. quarterly
c. semi-annually
d. annually
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
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
PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

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 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
ANS: B
Solution:
Price = dividend/current yield = $1.35/0.0614 = $21.99

57. 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%
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 Tellall Corp. 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 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%
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

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

LOC: Understand stocks and bonds 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

65. 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%
ANS: B
Solution:
$2.00 = $3.19(PVIFg,8)
(PVIFg,8) = $2.00/$3.19 = .627
g = 6%, from Table II

LOC: Understand stocks and bonds TOP: Growth rate calculation
66. 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
ANS: C
Solution:
P0 = $4.16/(0.13 - 0.04) = $46.22

LOC: Understand stocks and bonds 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

68. 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%
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
PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

72. 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
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.

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.

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 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
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, 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
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. 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
ANS: B
Solution:
D0(1.08)
$54 =
0.13 - 0.08
D0 = $2.50

82. 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
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 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%
ANS: D
Solution:
$1.10(1+g) so g = 0.126 or 12.6%

$89 =
0.14 - g

84. 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
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

LOC: Understand stocks and bonds 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

LOC: Understand stocks and bonds 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 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
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

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

LOC: Understand stocks and bonds TOP: Constant growth valuation model
90. During the past 7 years, Burger Flippin’ Corp.’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 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
ANS: C
Solution:
.78/1.95 = .4 = PVIF i = 14% from Table II
1.95(1.14)
Po = = $111.15
.16 - .14

LOC: Understand stocks and bonds 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 = 1  (5,400,000) + 1 = 415,386
12 + 1

LOC: Understand stocks and bonds 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  6,800,000 + 1 = 1,700,001
7+1

LOC: Understand stocks and bonds 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%. (Round the growth rate to the nearest whole percent)
YEAR DIVIDENDS
2010 $2.50
2009 $2.48
2008 $2.36
2007 $2.32
a. $17
b. $13
c. $22
d. $50
ANS: A
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.

94. 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
95. The zero growth method is used to value

a. common stock
b. required rate of return
c. bonds
d. preferred stock
96. 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
97. Which of the following statements is/are correct about the following stock quotation:
+12.5 26 17.50 Dove Assoc. DOA .20 1.0 6 306 20.25

+.50
I. The second and third columns 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
98. 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
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
TOP: Investment diversification and portfolio risk analysis
100. 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
2006 $1.12
2007 $1.15
2008 $1.18
2009 $1.21
2010 $1.24
a. 10.11%
b. 12.02%
c. 8.15%
d. 9.74%
ANS: A
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

101. 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
ANS: C
Solution using a calculator:
D1 .65(1.14) = .74
D2 .74(1.14) = .84
DL .82(1.08) =
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
102. 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
LOC: Understand stocks and bonds TOP: Characteristics of common stock
103. 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
LOC: Understand stocks and bonds TOP: How Securities Are Sold: Direct Issuance Costs
104. 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
LOC: Understand stocks and bonds TOP: How Securities Are Sold: Shelf Registration
105. King of the Roost Chicken Farms has issued the following dividends. What would be the growth rate
in dividends (rounded)?
YEARS DIVIDENDS
2010 $3.00
2009 $2.50
2008 $1.75
2007 $1.54
a. 15%
b. 25%
c. 12%
d. 21%
ANS: B
Solution using a financial calculator:
N=3
PV = -1.54
FV = 3.00
Solve for I = 24,89%

LOC: Understand stocks and bonds TOP: Constant growth dividend valuation model
106. 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
LOC: Understand stocks and bonds TOP: Valuation of Closely Held Firms
107. 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.
ANS: B
Solution:
Find the RRR:
RRR = 1.75 + (1.7 X 5.25) = 10.68%
Now, find the stock’s future value:

D1 .60 X 1.15 = .69
D2 .69 X 1.15 = .79
D3 .79 X 1.15 = .91
DL .91 X 1.04 = = $14.22
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 = 14.22
PV = $.62 PV = .64 PV = .67 PV = 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

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.
PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

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.

TOP: Advantages and disadvantages of common stock financing
3. List the responsibilities of 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

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 offering price. This
option normally lasts for 30 days.

5. Why do closely held firms need to have an outside appraiser to determine their value? What are the
reasons for valuation?
ANS:
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

TOP: Entrepreneurial issues: Valuation of closely held firms
6. When Google went public the firm sold its stock in an unusual way. What was that method and how
did it impact future sales of IPOs?
ANS:
When Google sold its IPO, the company sold two classes of stock. Public shares (Class A) would
have one vote each (as is traditional for common stock) but the shares held by the founders and CEO
of the company (Class B ) would have 10 votes each. This way the firm would not need to worry
about quarterly earnings pressures. In addition, the IPO stock that was sold went through a Dutch
auction process. In this process, the last price accepted in the bidding process would peg the price per
share of all of the stock at that price regardless of the bidding range. This process is common with
fixed income securities but is relatively rare for equity issues.

LOC: Understand stocks and bonds TOP: Financial Challenge: Google Goes Public
7. What are the disadvantages of owning minority interest in a closely held corporation and how can this
be overcome?
ANS:
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%.

TOP: Valuation of Closely Held Firms: Minority Interest Discount

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Contemporary Corporate Finance International Edition 12th Edition Mcguigan Test Bank

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Contemporary Corporate Finance

International Edition 12th Edition

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

BLT 1.20 4.3 19 1667 29.50 29 29 -.25

50. The P/E ratio indicates

51. Common stock dividends normally are paid

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

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

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

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

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

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

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

Find the dividend growth rate using a calculator