Strayer FIN534 Week 4 Homework Assignment Chapter 7

FIN 534 Week 4 Homework
Assignment Chapter 7
1. The preemptive right is
important to shareholders because it
a. will result in higher
dividends per share.
b. is included in every corporate
charter.
c. protects the current
shareholders against a dilution of their ownership interests.
d. protects bondholders, and thus
enables the firm to issue debt with a relatively low interest rate.
e. allows managers to buy
additional shares below the current market price
2. Companies can issue different
classes of common stock. Which of the following statements concerning stock
classes is CORRECT?
a. All common stocks, regardless
of class, must have the same voting rights.
b. All firms have several classes
of common stock.
c. All common stock, regardless
of c lass, must pay the same dividend.
d. Some class or classes of
common stock are entitled to more votes per share than other classes.
e. All common stocks fall into
one of three classes: A, B, and C
3. Which of the following
statements is CORRECT?
a. Two firms with the same
expected dividend and growth rates must also have the same stock price.
b. It is appropriate to use the
constant growth model to estimate a stock’s value even if its growth rate is
never expected to become constant.
c. If a stock has a required rate
of return rs= 12%, and if its dividend is expected to grow at a constant rate
of 5%, this implies that the stock’s dividend yield is also 5%.
d. The price of a stock is the
present value of all expected future dividends, discounted at the dividend
growth rate.
e. The constant growth model
takes into consideration the capital gains investors expect to earn on a stock
4. A stock is expected to pay a
year – end dividend of $2.00, i.e., D1= $2.00. The dividend is expected to decline at a rate of 5% a
year forever (g =-5%). If the company is in
equilibrium and its expected and required rate of return is 15%, which of the
following statements is CORRECT?
a. The company’s dividend yield 5
years from now is expected to be 10%.
b. The constant growth model
cannot be used because the growth rate is negative.
c. The company’s expected capital
gains yield is 5%.
d. The company’s expected stock
price at the beginning of next year is $9.50.
e. The company’s current stock
price is $20

5. 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.
a. The stock’s dividend yield is
5%.
b. The price of the stock is
expected to decline in the future.
c. The stock’s required return
must be equal to or less than 5%.
d. The stock’s price one year
from now is expected to be 5% above the current price.
e. The expected return on the
stock is 5% a year