Which of the following statements is CORRECT? A) The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. B) 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. C) The free cash flow valuation model, V_ops =FCF₁/(WACC − g), cannot be used for firms that have negative growth rates. D) The free cash flow valuation model, V_ops = FCF₁/(WACC − g), can be used only for firms whose growth rates exceed their WACC. E) 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.

Question

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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. Choice A is incorrect because the right to approve or disapprove of a merger is typically granted to the board of directors or a majority of stockholders. Choice C is incorrect because the free cash flow valuation model can be used for firms with negative growth rates, but the resulting value may be negative. Choice D is incorrect because the free cash flow valuation model can be used for firms with growth rates that are either higher or lower than the WACC. Choice E is incorrect because some state charters may allow for different voting rights for different classes of common stock.

Which of the Following Statements Is CORRECT