Question 1

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?

Accepted Answer

The price of the preferred stock can be calculated using the dividend discount model for preferred stocks, which is Dividend / Required Rate of Return. Here, the dividend is 4.5% of the $1,000 par value, which is $45. The required rate of return is 5.5%. So, the price = $45 / 0.055 = $818.18.

Question 2

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?

Accepted Answer

The value of a preferred stock is calculated by dividing the annual dividend by the required rate of return. The annual dividend is 4.5% of $100, which is $4.50. Dividing $4.50 by the required rate of return of 12% (0.12) gives a value of $37.50 per share.

Question 3

Which of the following statements concerning preferred stock is MOST correct?

Accepted Answer

Preferred stock dividends are typically fixed, which means they can be considered as a perpetuity. A perpetuity is a stream of equal cash flows that continue indefinitely. Because the dividend of preferred stock is typically fixed, preferred stock can be valued as a perpetuity. Choice A is incorrect because preferred stock is not valued the same as zero coupon bonds as zero coupon bonds have no coupon payments, while preferred stock has fixed dividend payments. Choice B is incorrect because the dividend payment is fixed, and it does not increase with time. Choice D is incorrect because the preferred stock dividend is a fixed amount, and it is not based on common stock dividends. Additionally, preferred stock dividends must be paid first, but they are not calculated as a percentage of common stock dividends.

Question 4

ABC Corp.5% preferred stock with a par value of $100 and a market price of $125 will pay an annual dividend this year of $12 per share.

Accepted Answer

The annual dividend for a 5% preferred stock with a par value of $100 is $5 per share (5% of $100), not $12.

Question 5

Stimpson Inc.preferred stock pays a $.50 annual dividend.What is the value of the stock if your required rate of return is 10%?

Accepted Answer

To calculate the value of the preferred stock, divide the annual dividend by the required rate of return. 
Value = Annual Dividend / Required Rate of Return
Value = $0.50 / 0.10
Value = $5.00

Question 6

Preferred stock differs from common stock in that

Accepted Answer

Preferred stock dividends are fixed while common stock dividends are not guaranteed and can fluctuate based on company performance. Additionally, preferred stock usually does not have a maturity date and may have a lower required return than common stock due to the fixed dividend payments.

Question 7

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

Accepted Answer

Preferred stock is valued based on its expected dividends and the required rate of return. A decrease in the required rate of return would make the stock more attractive to buyers, thus increasing demand and driving its value up. As a result, the value of a share of preferred stock increases. The dividend and dividend yield would remain the same, as they are fixed and do not change with the required rate of return.

Question 8

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.

Accepted Answer

The answer of Studio 55,Inc.has an issue of preferred stock...

Question 9

How is preferred stock similar to bonds?

Accepted Answer

Preferred stock and bonds both offer fixed dividend or interest payments to their respective holders.

Question 10

The YTD% shown in Wall Street Journal stock quotes stands for the stock's dividend yield and is calculated by dividing the amount of the dividend by the stock's opening price on the first day of the year.

Accepted Answer

The YTD% shown in Wall Street Journal stock quotes stands for the stock's year-to-date percentage change in price, not its dividend yield. It is calculated by dividing the difference between the current price and the price at the beginning of the year by the price at the beginning of the year, and then multiplying by 100.

Question 11

Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid.What is the name of this feature?

Accepted Answer

The feature described is known as cumulative. This means that any missed preferred dividends must accumulate and be paid before any common stock dividends can be paid. Participating refers to preferred stocks that can receive additional dividend payments if certain conditions are met. Provisional is not a common term used in regards to preferred stock features. Convertible refers to preferred stocks that can be converted into a predetermined number of common shares.

Question 12

A preferred stock that pays an annual dividend of $10,has a par value of $100,and has a required return of 5% will be valued at $200.

Accepted Answer

The value of a preferred stock is calculated as the present value of its future dividends. In this case, the annual dividend is $10, the required return is 5%, and the par value is $100. Using the formula for the present value of a perpetuity, we can calculate the value of the preferred stock as follows:Value = Dividend / Required ReturnValue = $10 / 0.05Value = $200Therefore, the value of the preferred stock is $200.

Question 13

Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period.What is the name of this provision?

Accepted Answer

The provision described is known as a callable provision. It allows the company to repurchase its preferred stock from holders at a stated price within a given time period. The other options (cumulative, putable, convertible) refer to different provisions in preferred stocks. Cumulative means that if the company misses a dividend payment, it accumulates and must be paid out at a later date. Putable means that the holder has the option to sell the stock back to the company at a specified price. Convertible means that the preferred stock can be converted into common stock at a predetermined conversion rate.

Question 14

What provisions are available to protect a preferred stockholder?

Accepted Answer

The answer of What provisions are available to protect a...

Question 15

Public perception and reputation do not affect stock prices,which are strictly a function of dividends and required returns.

Accepted Answer

Public perception and reputation can have a significant impact on stock prices. Investor sentiment, media coverage, and public opinion can all influence how investors perceive a company's future prospects, which in turn affects stock prices. This is why companies often work hard to manage their reputation and maintain positive relationships with customers and the public.

Question 16

Whistle Corp.has a preferred stock that pays a dividend of $2.40.If you are willing to purchase the stock at $11,what is your required rate of return? (Round your answer to the nearest .1% and assume that there are no transaction costs.)

Accepted Answer

The required rate of return is calculated by dividing the dividend by the purchase price and then converting it to a percentage. So, $2.40 / $11 = 0.218 or 21.8%.

Question 17

Maynard Inc.preferred stock pays an annual dividend of $7 per share.Which of the following statements is true for an investor with a required return of 9%?

Accepted Answer

To calculate the value of the preferred stock with a required return of 9%, we can use the following formula: 
Value of Preferred Stock = Dividend / Required Return 
Substituting the given values, we get: 
Value of Preferred Stock = $7 / 0.09 = $77.78 per share.
Therefore, choice C is the correct option.

Question 18

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%?

Accepted Answer

The value of a preferred stock is calculated by dividing the dividend by the required rate of return. Here, $5.55 / 0.10 = $55.50.

Question 19

How is preferred stock similar to common stock?

Accepted Answer

Preferred and common stockholders cannot sue a corporation for the non-payment of dividends because dividends are paid at the discretion of the corporation's board of directors.

Question 20

Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock.What is the name of this feature?

Accepted Answer

The feature described is the sinking fund, where the firm sets aside money periodically to retire its preferred stock. Convertible refers to the option for preferred stockholders to convert their shares into common stock. Callable refers to the company's option to redeem the preferred stock before maturity. Cumulative means that any missed dividend payments accumulate and must be paid before common shareholders receive dividends.

Quiz 8: The Valuation and Characteristics of Stock