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Exam 7: Stock Valuation

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Question 21

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Based on analysis of the company and expected industry and economic conditions,China Imports is expected to earn $4.60 per share of common stock next year.The average price/earnings ratio for firms in the same industry is 8.Calculate the estimated value of a share of China Imports common stock.

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Question 22

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No-par preferred stock has no stated face value,but its annual dividend is stated as a percentage of the market value.

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Question 23

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________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.

Although preferred stock provides added financial leverage in much the same way as bonds,it differs from bonds in that the issuer can pass a dividend payment without suffering the consequences that result when an interest payment is missed on a bond.

Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings,they expect ________.

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

The current price of DEF Corporation stock is $26.50 per share.Earnings next year should be $2 per share and it should pay a $1 dividend.The P/E multiple is 15 times on average.What price would you expect for DEF's stock in the future?

The board of directors of Ride World,Inc.has declared $5.00 common stock dividend,payable one year from today,and accepted a plan to freeze the dividend at $5 per year indefinitely.What is the value of the Ride World's common stock if the required rate of interest is 15 percent?

Efficient-market hypothesis is the theory describing the behavior of a market in which securities are typically in equilibrium,security prices fully reflect all public information available and react swiftly to new information,and,because stocks are fairly priced,investors need not waste time looking for mispriced securities.

Equity capital can be raised through ________.

In the case of liquidation,common stockholders are paid before preferred stockholders,who in turn are paid before bondholders.

The free cash flow valuation model is based on the same principle as the P/E valuation approach; that is,the value of a share of stock is the present value of future cash flows.

The common stock book value model ignores a firm's expected earnings potential and generally lacks any true relationship to the firm's value in the marketplace.

In an inefficient market,stock prices adjust quickly to new public information.

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

ADRs are ________.

Smith,Inc.stock currently sells for $75 per share.The firm has total assets of $1,000,000 and total liabilities,including preferred stock,of $350,000.If the firm has 10,000 shares of common stock outstanding, (a)what is the book value of each share of common stock? (b)relative to book value,is the stock overvalued or undervalued in the marketplace? (c)what is the reason(s)for your answer in (b)?

Preemptive rights allow common stockholders to maintain their proportionate ownership in the corporation when when the firm sells new shares of stock.

The claims of the equityholders on a firm's assets have priority over the claims of creditors because the equityholders are the owners of the firm.

The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called a ________.