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Preferred Stock and Common Stock

29) All of the following features may be characteristic of preferred stock EXCEPT A) callable.B) no maturity date.C) tax-deductible dividends.

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D) convertible. Answer: c If a firm has class A and class B common stock outstanding, it means that A) each class receives a different dividend. B) the par value of each class is different. C) the dividend paid to one of the classes is tax deductible by the corporation. D) one of the classes is probably non-voting stock. Answer: D 33)

Julian is considering purchasing the stock of Pepsi Cola because he really loves the taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to pay a $2 dividend in one year and he expects dividends to growth at 5 percent indefinitely? Julian requires a 12 percent return to make this investment. A) $28. 57 B) $29. 33 C) $31. 43 D) $43. 14 Answer: A Nico Custom Cycles’ common stock currently pays no dividends. The company plans to begin paying dividends beginning 3 years from today. The first dividend will be $3. 0 and dividends will grow at 5 percent per year thereafter. Given a required return of 15 percent, what would you pay for the stock today? A) $25. 33 B) $18. 73 C) $29. 86 D) $20. 72 Jia’s Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Jia’s Fashions common stock sell for today if her required return is 10. 5%? A) $54. 90 B) $60. 80 C) $66. 60 D) $69. 30 Answer: C

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