Objective type questions on preferred stock.

1. Which of the following statements is CORRECT?

A. A major disadvantage of financing with preferred stock is that preferred stockholders typically have super-normal voting rights.

B. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and as a result, the expected after-tax yield on preferred is lower than the after-tax expected return on the common stock.

C. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.

D. One of the disadvantages to a corporation owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income would be tax free.

E. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.

2. Stock X has a required return of 10%, while Stock Y has a required return of 12%. Which of the following statements is CORRECT?

A. Stock Y must have a higher dividend yield than Stock X.

B. 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.

C. 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.

D. The stocks must sell for the same price.

E. 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.

3. A stock is expected to pay a year-end dividend of $2.00 a share (D1 = $2.00). The dividend is expected to fall at a rate of 5% a year forever (g = -5%). The company's expected and required rate of return is 15%. Which of the following statements is CORRECT?

A. The company's current stock price is $20.

B. The company's dividend yield 5 years from now is expected to be 10%.

C. The company's stock price next year is expected to be $9.50.

D. The company's expected capital gains yield is 5%.

E. The constant growth model cannot be used because the growth rate is negative.

4. If two constant growth stocks have the same required rate of return and the same price, which of the following statements is CORRECT?

A. The two stocks must have the same dividend per share.

B. The two stocks have the same dividend yield.

C. The two stocks have the same dividend growth rate.

D. The stock with the higher dividend yield will have the lower dividend growth rate.

E. The stock with the higher dividend yield will have the higher dividend growth rate.

5. If markets are in equilibrium, which of the following will occur?

A. Each stock's expected return should equal its realized return as seen by the marginal investor.

B. Each stock's expected return should equal its required return as seen by the marginal investor.

C. All stocks should have the same expected return as seen by the marginal investor.

D. All stocks should have the same realized return during the coming year.

E. The expected and required returns on stocks and bonds should be equal.