23) Which of the following is NOT true regarding common stock? A) Dividends, unlike interest payments, are not tax deductible. B) Common stock, unlike bond principal, does not mature. C) Common stockholders are owners of the firm, whereas bondholders are creditors. D) Dividend payments, like interest payments, are fixed.
24) Consider the following four types of payments that could be made by a normal operating firm: interest, common dividends, income taxes, and preferred dividends. Compared to the other payments mentioned, where would you rank common dividend payments in terms of the order of payment if the firm is liquidating? A) first B) second C) third D) fourth
25) Assume that a firm had such serious financial problems that it was about to be liquidated after a bankruptcy. All of the firm’s assets are about to be sold in order to pay the following claims against the firm: bondholders, preferred stockholders, common stockholders, and federal income taxes. Of the claims mentioned, what priority would common stockholders have? A) first B) second C) third D) fourth
26) What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm? A) the cumulative feature B) the convertible feature C) the proportionality clause D) the preemptive right
27) Which of the following features, or benefits, belong to a firm’s common stockholders? A) limited liability B) ownership of the firm C) voting rights D) all of the above
28) Who bears the greatest risk of loss of value if a firm should fail? A) bondholders B) preferred stockholders C) common stockholders D) All of the above bear equal risk of loss.
Learning Objective 4
1) The most relevant form of growth for valuing a firm’s common stock is internal growth.
2) Because common stock represents a residual interest in the corporation, the value of common stock is equal to the total firm value less the firm’s outstanding debt.
3) An investor’s required rate of return for a common stock can be estimated by summing the stock’s dividend yield and annual growth rate, assuming the growth rate is constant over time.
4) Given the constant growth dividend valuation model, the expected percentage growth in value of a stock is equal to the capital gains yield for that stock.