Question 1

The corporate valuation model cannot be used unless a company pays dividends.

Accepted Answer

False

Question 2

Which of the following statements is CORRECT?

Accepted Answer

C

Question 3

Classified stock differentiates different classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Accepted Answer

True

Question 4

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Accepted Answer

The answer of The constant growth DCF model used to...

Question 5

The corporate valuation model cannot be used unless a company doesn't pay dividends.

Accepted Answer

The answer of The corporate valuation model cannot be used...

Question 6

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Accepted Answer

The answer of Founders' shares are a type of classified...

Question 7

If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Accepted Answer

The answer of If a firm's stockholders are given the...

Question 8

An increase in a firm's expected growth rate would cause its required rate of return to

Accepted Answer

The answer of An increase in a firm's expected growth...

Question 9

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

The answer of The total return on a share of...

Question 10

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

The answer of When a new issue of stock is...

Question 11

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Accepted Answer

The answer of Projected free cash flows should be discounted...

Question 12

The preemptive right is important to shareholders because it

Accepted Answer

The answer of The preemptive right is important to shareholders...

Question 13

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Accepted Answer

The answer of According to the basic DCF stock valuation...

Question 14

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Accepted Answer

The answer of The cash flows associated with common stock...

Question 15

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Accepted Answer

The answer of According to the nonconstant growth model discussed...

Question 16

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.

Accepted Answer

The answer of A proxy is a document giving one...

Question 17

From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.

Accepted Answer

The answer of From an investor's perspective, a firm's preferred...

Question 18

Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Accepted Answer

The answer of Preferred stock is a hybrid--a sort of...

Question 19

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

Accepted Answer

The answer of If in the opinion of a given...

Question 20

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

Accepted Answer

The answer of The preemptive right gives current stockholders the...

Quiz 9: Stocks and Their Valuation