Resolved Question:

For BusinessTutor: Questions 23 — 28

Question 23

1. The preemptive right is important to shareholders

because it

Answer

allows managers to buy additional shares below the current market price.

will result in higher dividends per share.

is included in every corporate charter.

protects the current shareholders against a dilution of their ownership interests.

protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.

2 points

Question 24

1. Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Answer

The two stocks must have the same dividend per share.

If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

If one stock has a higher dividend yield, it must also have a higher dividend growth rate.

The two stocks must have the same dividend growth rate.

The two stocks must have the same dividend yield.

2 points

Question 25

1. The expected return on Natter Corporation’s stock is 14%. The stock’s dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

its required return, this suggests that the investor thinks

Answer

the stock is experiencing supernormal growth.

1. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

The two stocks should have the same expected dividend.

The two stocks could not be in equilibrium with the numbers given in the question.

A’s expected dividend is $0.50.

B’s expected dividend is $0.75.

A’s expected dividend is $0.75 and B’s expected dividend is $1.20.

2 points

Question 28

1. Which of the following statements is CORRECT?

Answer

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.

The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.

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.

The stock valuation model, P0

= D1/(rs — g), cannot be used for firms that have negative growth rates.

The stock valuation model, P0

= D1/(rs — g), can be used only for firms whose growth rates exceed their required returns.