Solved > 41. A firm has common stock with a:2027500 …

41. A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm’s common stock equity is

(a) 5 percent.

(b) 8 percent.

(c) 10 percent.

(d) 13 percent.

42. A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows:

Year

Dividend

1

$2.00

2

2.14

3

2.29

4

2.45

5

2.62

The cost of the firm’s common stock equity is

(a) 4.1 percent.

(b) 5.1 percent.

(c) 12.1 percent.

(d) 15.4 percent.

43. Using the capital asset pricing model, the cost of common stock equity is the return required by investors as compensation for

(a) the specific risk of the firm.

(b) the firm’s diversifiable risk.

(c) price volatility of the stock.

(d) the firm’s nondiversifiable risk.

44. A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:

Year

Dividend

1

$4.00

2

4.28

3

4.58

4

4.90

5

5.24

The cost of this new issue of common stock is

(a) 5.8 percent.

(b) 7.7 percent.

(c) 10.8 percent.

(d) 12.8 percent.

45. Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

(a) less than the cost of new common stock equity.

(b) equal to the cost of new common stock equity.

(c) greater than the cost of new common stock equity.

(d) not related to the cost of new common stock equity.

46. In comparing the constant growth model and the capital asset pricing model (CAPM) to calculate the cost of common stock equity,

(a) the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the beta.

(b) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the market price as a reflection of the expected risk-return preference of investors.

(c) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses dividend expectations as a reflection of risk.

(d) the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk.

47. In calculating the cost of common stock equity

(a) the use of the capital asset pricing model (CAPM) is often preferred, because the data required are more readily available.

(b) the use of the CAPM is preferred, because it more directly calculates risk.

(c) the use of the constant growth valuation model is often preferred, because the data required are more readily available.

(d) the use of the constant growth valuation model is often preferred, because it has a stronger theoretical foundation.

48. Given that the cost of common stock is 18 percent, dividends are $1.50 per share, and the price of the stock is $12.50 per share, what is the annual growth rate of dividends?

(a) 4 percent.

(b) 5 percent.

(c) 6 percent.

(d) 8 percent.

49. Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is

(a) new common stock, retained earnings, preferred stock, long-term debt.

(b) common stock, preferred stock, long-term debt, short-term debt.

(c) preferred stock, retained earnings, common stock, new common stock.

(d) long-term debt, preferred stock, retained earnings, new common stock.

50. Generally the least expensive source of long-term capital is

(a) retained earnings.

(b) preferred stock.

(c) long-term debt.

(d) short-term debt.

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