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FIN 534/3.3.. 1.Which of the following statements is CORRECT? If a company has two classes of common stock, Class A and Class B, the stocks may pa...

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Question:

FIN 534/3.3..

 

1.Which of the following statements is CORRECT?

If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.

The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm\'s common stock.

The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates.

The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required returns.

2. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Price $25 $40 Expected growth 7% 9% Expected return 10% 12% The two stocks should have the same expected dividend. The two stocks could not be in equilibrium with the numbers given in the question. A\'s expected dividend is $0.50. B\'s expected dividend is $0.75.A\'s expected dividend is $0.75 and B\'s expected dividend is $1.20.

3. Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT? The two stocks must have the same dividend per share.

If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

If one stock has a higher dividend yield, it must also have a higher dividend growth rate. The two stocks must have the same dividend growth rate. The two stocks must have the same dividend yield.

4. If a stock\'s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium. The expected return on the stock is 5% a year. The stock\'s dividend yield is 5%. The price of the stock is expected to decline in the future. The stock\'s required return must be equal to or less than 5%. The stock\'s price one year from now is expected to be 5% above the current price.

5. Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Beta 1.10 0.90 Constant growth rate 7.00% 7.00% Stock A must have a higher stock price than Stock B. Stock A must have a higher dividend yield than Stock B. Stock B\'s dividend yield equals its expected dividend growth rate. Stock B must have the higher required return. Stock B could have the higher expected return.

6. For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then the expected future return must be less than the most recent past realized return. The past realized return must be equal to the expected return during the same period. the required return must equal the realized return in all periods. the expected return must be equal to both the required future return and the past realized return. the expected future returns must be equal to the required return.

7. Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? X Y Price $25 $25 Expected dividend yield 5% 3% Required return 12% 10% Stock Y pays a higher dividend per share than Stock X. Stock X pays a higher dividend per share than Stock Y. One year from now, Stock X should have the higher price. Stock Y has a lower expected growth rate than Stock X. Stock Y has the higher expected capital gains yield.

8. An increase in a firm\'s expected growth rate would cause its required rate of return to increase. decrease. fluctuate less than before. fluctuate more than before.possibly increase, possibly decrease, or possibly remain constant.

9. The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. The stocks must sell for the same price. Stock Y must have a higher dividend yield than Stock X.

10. If markets are in equilibrium, which of the following conditions will exist? Each stock\'s expected return should equal its realized return as seen by the marginal investor.Each stock\'s expected return should equal its required return as seen by the marginal investor.All stocks should have the same expected return as seen by the marginal investor. The expected and required returns on stocks and bonds should be equal. All stocks should have the same realized return during the coming year.

 

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