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Exam 7: Stock Valuation

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Question 81

Multiple Choice

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A firm has the balance sheet accounts, common stock, and paid-in capital in excess of par, with values of $40,000 and $500,000, respectively. The firm has 40,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for

A) $11.50/share.
B) $12.50/share.
C) $13.50/share.
D) $15.50/share.

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Question 82

Multiple Choice

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The advantages of issuing preferred stock from the common stockholder's perspective include all of the following EXCEPT

A) seniority of preferred stockholder's claim over common stockholders.
B) flexibility.
C) use in mergers.
D) increased leverage.

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Question 83

Multiple Choice

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All of the following are characteristics of preferred stock EXCEPT

Firms occasionally repurchase stock in order to alter capital structure or to increase the returns to the owners.

Aunt Tilly's Fur Company has been experiencing several years of financial difficulty and, thus, has considered maintaining its dividend payment at $2.50 indefinitely. What is the value of its common stock if the required rate of return is 8.5 percent?

Unlike equity holders, creditors are owners of the firm.

The liquidation value per share of common stock is the amount per share of common stock that would be received if all of the firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

You are planning to purchase the stock of Ted's Sheds Inc. and you expect it to pay a dividend of $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You expect to sell the stock for $100 in 3 years. If your required return for purchasing the stock is 12 percent, how much would you pay for the stock today?

Holders of equity have claims on both income and assets that are secondary to the claims of creditors.

Jia's Kitchen Stuff has recently sold 1,000 shares of $6.75 preferred stock. What is the value of the stock assuming 10 percent required rate of return?

The number of outstanding shares of common stock is always greater than or equal to the number of authorized shares of common stock.

________ is a guide to the firm's value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.

Which of the following is false?

In an efficient market, securities are typically in equilibrium, which means that they are fairly priced and that their expected returns equal their required returns.

Angel capitalists or angels are wealthy individual investors who do not operate as a business but invest in early-stage companies in exchange for a portion of equity.

Regarding the tax treatment of payments to securities holders, it is true that ________, while ________.

Which of the following terms typically applies to common stock but not to preferred stock?

A violation of preferred stock restrictive covenants usually permits preferred shareholders to

Economically rational buyers and sellers use their assessment of an asset's risk and return to determine its value. Relative to this concept, which of the following is true?

BFG has current assets of $800,000, which can be liquidated at 90 percent of book value. Total liabilities, including preferred stock, equal $270,000. The firm has 15,000 shares of common stock outstanding. What is the liquidation value per share of common stock?