Chapter 8 The Valuation and Characteristics of Stock

8) What is the value of a preferred stock that pays a $5.55 dividend to an investor with a required rate of return of 10%?

A) $22.22

B) $27.83

C) $45

D) $55.50

9) How is preferred stock affected by a decrease in the required rate of return?

A) The value of a share of preferred stock increases.

B) The dividend increases.

C) The dividend decreases.

D) The dividend yield increases.

10) Bacon Signs Company preferred stock pays a perpetual annual dividend of 4.5% of its $100 par value. If investors' required rate of return on this stock is 12%, what is the value per share?

A) $37.50

B) $31.82

C) $8.50

D) $45.00

11) LTM, Inc. has an issue of preferred stock whose par value is $1,000. The preferred stock pays a 4.5% dividend. If investors require a 5.5% rate of return for these shares, what price should the preferred stock sell for?

A) $611.11

B) $508.33

C) $409.09

D) $818.18

12) Studio 55, Inc. has an issue of preferred stock that pays a dividend of $4.00. The preferred stockholders require a rate of return on this stock of 9%. At what price should the preferred stock sell for? Round off to the nearest $0.10.

A) $36.00

B) $44.40

C) $62.50

D) $88.80

13) Lithium Lakes Industries preferred stock has a par value of $100 and pays a dividend of $6.00 per share. It presently sells for $87 per share. What do investors require as a rate of return on this stock? Round off to the nearest .10%.

A) 14.5%

B) 9.3%

C) 6.9%

D) 6.0%

14) Glacier Inc. preferred stock has a 5% stated dividend percentage, and a $100 par value. What is the value of the stock if your required rate of return is 6% per year?

A) $83.33

B) $94.05

C) $100.00

D) $30.00

15) If Neal O'Danny preferred stock pays an annual dividend of $2.80, and investors require a 9% return, what is the value of O'Danny's preferred stock today?

Learning Objective 3

1) The market price of a firm's common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings) divided by the number of shares outstanding.

2) Historically, price appreciation, or capital gains yield, has accounted for a greater portion of returns on common stocks than dividend payments.