FIN 2130 EXAM 2 CH. 8 QUESTIONS AND ANSWERS
18) Preferred stock valuation usually treats the preferred stock as a
A) capital asset.
B) perpetuity.
C) common stock.
D) long-term bond. - Answers - B) perpetuity.
19) Preferred stock is similar to a bond in the following way:
A) Preferred stock always contains a maturity date.
B) Both investments provide a stated income stream.
C) Both contain a growth factor similar to common stock.
D) Both provide interest payments - Answers - B) Both investments provide a stated
income stream.
20) Cumulative preferred stock
A) requires dividends in arrears to be carried over into the next period.
B) has a right to vote cumulatively.
C) has a claim to dividends before bonds.
D) has a higher required return than common stock. - Answers - A) requires dividends in
arrears to be carried over into the next period.
21) How is preferred stock similar to bonds?
A) Dividend payments to preferred shareholders (much like bond interest payments to
bondholders) are tax deductible.
B) Investors can sue the firm if preferred dividend payments are not paid (much like
bondholders can sue for non-payment of interest payments).
C) Preferred stockholders receive a dividend payment (much like interest payments to
bondholders) that is usually fixed.
D) Preferred stock is not like bonds in any way. - Answers - C) Preferred stockholders
receive a dividend payment (much like interest payments to bondholders) that is usually
fixed
22) 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?
A) participating
B) cumulative
C) provisional
D) convertible - Answers - B) cumulative
23) 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?
A) cumulative
, B) putable
C) callable
D) convertible - Answers - C) callable
24) 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?
A) convertible
B) callable
C) cumulative
D) sinking fund - Answers - D) sinking fund
25) Preferred stock differs from common stock in that
A) preferred stock usually has a maturity date.
B) preferred stock investors have a higher required return than common stock investors.
C) preferred stock dividends are fixed.
D) common stock investors have a required return and preferred stock investors do not.
- Answers - C) preferred stock dividends are fixed.
26) How is preferred stock similar to common stock?
A) Preferred dividend payments usually have unlimited growth potential.
B) Investors cannot sue a corporation for the non-payment of dividends.
C) Both preferred and common stockholders have voting control of a firm.
D) Preferred stock dividends and common stock dividends are fixed. - Answers - B)
Investors cannot sue a corporation for the non-payment of dividends.
5) 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%?
A) The value of the preferred stock is $7 because the dividend is fixed at $7 each year .
B) The value of the preferred stock is $63.00 per share.
C) The value of the preferred stock is $77.78 per share.
D) The value of the preferred stock is $6.30 per share because of the 9% required
return. - Answers - C) The value of the preferred stock is $77.78 per share.
6) Which of the following statements concerning preferred stock is MOST correct?
A) Preferred stock is valued the same as zero coupon bonds because the cash flow
patterns are similar.
B) If a corporation issues 4% preferred stock with a par value of $100, the dividend will
increase by 4% per year.
C) Preferred stock dividends are typically the same each year, allowing a preferred
stock to be valued as a perpetuity.
D) Preferred stock dividends are calculated as a percentage of common stock
dividends, although the preferred stock dividends must be paid first. - Answers - C)
Preferred stock dividends are typically the same each year, allowing a preferred stock to
be valued as a perpetuity.
18) Preferred stock valuation usually treats the preferred stock as a
A) capital asset.
B) perpetuity.
C) common stock.
D) long-term bond. - Answers - B) perpetuity.
19) Preferred stock is similar to a bond in the following way:
A) Preferred stock always contains a maturity date.
B) Both investments provide a stated income stream.
C) Both contain a growth factor similar to common stock.
D) Both provide interest payments - Answers - B) Both investments provide a stated
income stream.
20) Cumulative preferred stock
A) requires dividends in arrears to be carried over into the next period.
B) has a right to vote cumulatively.
C) has a claim to dividends before bonds.
D) has a higher required return than common stock. - Answers - A) requires dividends in
arrears to be carried over into the next period.
21) How is preferred stock similar to bonds?
A) Dividend payments to preferred shareholders (much like bond interest payments to
bondholders) are tax deductible.
B) Investors can sue the firm if preferred dividend payments are not paid (much like
bondholders can sue for non-payment of interest payments).
C) Preferred stockholders receive a dividend payment (much like interest payments to
bondholders) that is usually fixed.
D) Preferred stock is not like bonds in any way. - Answers - C) Preferred stockholders
receive a dividend payment (much like interest payments to bondholders) that is usually
fixed
22) 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?
A) participating
B) cumulative
C) provisional
D) convertible - Answers - B) cumulative
23) 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?
A) cumulative
, B) putable
C) callable
D) convertible - Answers - C) callable
24) 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?
A) convertible
B) callable
C) cumulative
D) sinking fund - Answers - D) sinking fund
25) Preferred stock differs from common stock in that
A) preferred stock usually has a maturity date.
B) preferred stock investors have a higher required return than common stock investors.
C) preferred stock dividends are fixed.
D) common stock investors have a required return and preferred stock investors do not.
- Answers - C) preferred stock dividends are fixed.
26) How is preferred stock similar to common stock?
A) Preferred dividend payments usually have unlimited growth potential.
B) Investors cannot sue a corporation for the non-payment of dividends.
C) Both preferred and common stockholders have voting control of a firm.
D) Preferred stock dividends and common stock dividends are fixed. - Answers - B)
Investors cannot sue a corporation for the non-payment of dividends.
5) 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%?
A) The value of the preferred stock is $7 because the dividend is fixed at $7 each year .
B) The value of the preferred stock is $63.00 per share.
C) The value of the preferred stock is $77.78 per share.
D) The value of the preferred stock is $6.30 per share because of the 9% required
return. - Answers - C) The value of the preferred stock is $77.78 per share.
6) Which of the following statements concerning preferred stock is MOST correct?
A) Preferred stock is valued the same as zero coupon bonds because the cash flow
patterns are similar.
B) If a corporation issues 4% preferred stock with a par value of $100, the dividend will
increase by 4% per year.
C) Preferred stock dividends are typically the same each year, allowing a preferred
stock to be valued as a perpetuity.
D) Preferred stock dividends are calculated as a percentage of common stock
dividends, although the preferred stock dividends must be paid first. - Answers - C)
Preferred stock dividends are typically the same each year, allowing a preferred stock to
be valued as a perpetuity.
