Chapter 7 Stock Valuation (with Questions Answers)

Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)
Chapter 7 Stock Valuation

7.1 Differences between debt and equity

1) Unlike creditors, equityholders are owners of the firm.
Answer: TRUE
Diff: 1
Topic: Voice in Management
Learning Obj.: LG 1
Learning Outcome: F-14
AACSB: Analytical Thinking

2) Unlike equityholders, creditors are owners of the firm.
Answer: FALSE
Diff: 1
Topic: Voice in Management
Learning Obj.: LG 1
Learning Outcome: F-14
AACSB: Analytical Thinking

3) Holders of equity have claims on both income and assets that are secondary to the claims of
creditors.
Answer: TRUE
Diff: 1
Topic: Claims on Income and Assets
Learning Obj.: LG 1
Learning Outcome: F-14
AACSB: Analytical Thinking

4) The tax deductibility of interest lowers the cost of debt financing.
Answer: TRUE
Diff: 1
Topic: Tax Treatment
Learning Obj.: LG 1
Learning Outcome: F-14
AACSB: Analytical Thinking

5) Interest paid to bondholders is tax deductible.
Answer: TRUE
Diff: 1
Topic: Tax Treatment
Learning Obj.: LG 1
Learning Outcome: F-09
AACSB: Analytical Thinking



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,6) Dividends paid to stockholders are tax deductible.
Answer: FALSE
Diff: 1
Topic: Tax Treatment
Learning Obj.: LG 1
Learning Outcome: F-09
AACSB: Analytical Thinking

7) Which of the following is an advantage for a firm to issue common stock over long-term debt?
A) the cost of equity financing being less than the cost of debt financing
B) the primary claim of equityholders on income and assets in the event of liquidation
C) no maturity date on which the par value of the issue must be repaid
D) the tax deductibility of dividends which lowers the cost of equity financing
Answer: C
Diff: 1
Topic: Differences Between Debt And Equity
Learning Obj.: LG 1
Learning Outcome: F-09
AACSB: Analytical Thinking

8) Which of the following is a difference between common stock and bonds?
A) Bondholders have a voice in management; common stockholders do not.
B) Bondholders have a senior claim on assets and income relative to stockholders.
C) Stocks have a stated maturity but bonds do not.
D) Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not.
Answer: B
Diff: 1
Topic: Differences Between Debt And Equity
Learning Obj.: LG 1
Learning Outcome: F-09
AACSB: Analytical Thinking

9) Holders of equity capital ________.
A) own the firm
B) receive interest payments
C) receive guaranteed income
D) have loaned money to the firm
Answer: A
Diff: 1
Topic: Voice in Management
Learning Obj.: LG 1
Learning Outcome: F-15
AACSB: Analytical Thinking




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,10) Because equityholders are the last to receive any distribution of assets as a result of
bankruptcy proceedings, they expect ________.
A) fixed dividend payments
B) greater returns from their investment than the return that bondholders expect
C) all profits to be paid out in dividends
D) warrants to be attached to the stock issue
Answer: B
Diff: 1
Topic: Claims on Income and Assets
Learning Obj.: LG 1
Learning Outcome: F-09
AACSB: Analytical Thinking

11) If bankruptcy were to occur, ________ would have the first claim on assets.
A) preferred stockholders
B) unsecured creditors
C) equity stockholders
D) secured creditors
Answer: D
Diff: 1
Topic: Claims on Income and Assets
Learning Obj.: LG 1
Learning Outcome: F-15
AACSB: Analytical Thinking

7.2 Common and preferred stock

1) The market value of common stock is related to its par value because both are sensitive to the
reactions of investors to new information.
Answer: FALSE
Diff: 1
Topic: Common Stock
Learning Obj.: LG 2
Learning Outcome: F-09
AACSB: Analytical Thinking

2) Common stockholders are often referred to as residual claimants.
Answer: TRUE
Diff: 1
Topic: Common Stock
Learning Obj.: LG 2
Learning Outcome: F-09
AACSB: Analytical Thinking




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, 3) Common stock can be either privately owned by private investors or publicly owned by public
investors.
Answer: TRUE
Diff: 1
Topic: Common Stock
Learning Obj.: LG 2
Learning Outcome: F-09
AACSB: Analytical Thinking

4) The market value of common stock is completely unrelated to its par value.
Answer: TRUE
Diff: 1
Topic: Common Stock
Learning Obj.: LG 2
Learning Outcome: F-09
AACSB: Analytical Thinking

5) The par value on a common stock is used as a basis for determining its fixed dividend.
Answer: FALSE
Diff: 1
Topic: Common Stock
Learning Obj.: LG 2
Learning Outcome: F-09
AACSB: Analytical Thinking

6) The number of authorized shares of common stock is always greater than or equal to the
number of outstanding shares of common stock.
Answer: TRUE
Diff: 1
Topic: Common Stock
Learning Obj.: LG 2
Learning Outcome: F-09
AACSB: Analytical Thinking

7) The number of outstanding shares of common stock is always greater than or equal to the
number of authorized shares of common stock.
Answer: FALSE
Diff: 1
Topic: Common Stock
Learning Obj.: LG 2
Learning Outcome: F-09
AACSB: Analytical Thinking




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