MGT 181 Midterm 2 Exam Questions with Correct Answers Latest Update 2025/2026
Two ways of stockholder cashflow - Answers 1. Company pays dividends
2. Selling share to individual/back to company
Price of stock - Answers Present value of ALL expected future dividends
Maximum amount willing to pay 1 period - Answers 1. Add dividend amount + amount that you
can sell
2. Enter Value 1 as FV
3. Enter % of return as I/Y
4. N = 1
5. Press PV for amount to pay
Maximum amount willing to pay X period - Answers 1. 0 for CF0
2. X for X period into CFx
3. Selling price + dividend for last year into last CF
4. Enter ROI %
5. Press NPV
Constant Dividend - Answers Firm will pay constant dividend forever
(Just like preferred stock)
Price is computed using the PERPETUITY FORMULA
Perpetuity Formula - Answers PV of Perpetuity = D/r
,PV = Present Value
D = Dividend or Coupon per period
r = discount rate
Constant Dividend Growth - Answers Firm will increase the dividend by a constant percent every
year
Computed using the GROWING PERPETUITY MODEL
Growing perpetuity model - Answers PV of Growing Perpetuity = D1 / r - g
D = Dividend or Coupon at period 1
R = discount rate
G = growth rate
Supernormal Growth - Answers Dividend growth is not consistent initially. Settles down to
constant growth eventually.
Calculated using multi-stage model
Growing perpetuity hint - Answers Remember to check if the dividend was just paid and the
question is about the next dividend that would've had a growth rate already.
If the question is asking for the upcoming dividend, treat that as dividend 1.
Stock valuation using multiples - Answers Pt = Benchmark PE Ratio * EPS
Pt = Stock price at the time
PE Ratio = Industry average, provided
EPS = Earnings per share
Common Stock Features - Answers Voting Rights
Proxy Voting
, Classes of stock
Other Rights:
* Share proportionally in declared dividends
* Share proportionally in remaining assets during liquidation
* Preemptive right - first shot at new stock issued to maintain propotional ownership if desired
Dividend Charateristics - Answers Not a liability of the firm until a dividend is declared by the
Board
Firm cannot go bankrupt for not declaring dividends
Dividend vs Taxes - Answers Not tax deductible
* Dividends not considered as business expense
Taxation of dividends received by individuals depends on the holding period
Dividends received by corporations have a MINIMUM 70% exclusion from taxable income
Preferred Stock characteristics - Answers Dividends
* Stated dividends must be paid before dividends can be paid to common stockholders
* Not liability to the firm, preferred dividends can be deferred indefinitely
* Most preferred dividends are cumulative - any missed preferred dividends must be paid before
common dividends
Preferred Stock does not generally carry voting rights
Dividend Yield - Answers Next year's annual dividend / current stock price
Two ways of stockholder cashflow - Answers 1. Company pays dividends
2. Selling share to individual/back to company
Price of stock - Answers Present value of ALL expected future dividends
Maximum amount willing to pay 1 period - Answers 1. Add dividend amount + amount that you
can sell
2. Enter Value 1 as FV
3. Enter % of return as I/Y
4. N = 1
5. Press PV for amount to pay
Maximum amount willing to pay X period - Answers 1. 0 for CF0
2. X for X period into CFx
3. Selling price + dividend for last year into last CF
4. Enter ROI %
5. Press NPV
Constant Dividend - Answers Firm will pay constant dividend forever
(Just like preferred stock)
Price is computed using the PERPETUITY FORMULA
Perpetuity Formula - Answers PV of Perpetuity = D/r
,PV = Present Value
D = Dividend or Coupon per period
r = discount rate
Constant Dividend Growth - Answers Firm will increase the dividend by a constant percent every
year
Computed using the GROWING PERPETUITY MODEL
Growing perpetuity model - Answers PV of Growing Perpetuity = D1 / r - g
D = Dividend or Coupon at period 1
R = discount rate
G = growth rate
Supernormal Growth - Answers Dividend growth is not consistent initially. Settles down to
constant growth eventually.
Calculated using multi-stage model
Growing perpetuity hint - Answers Remember to check if the dividend was just paid and the
question is about the next dividend that would've had a growth rate already.
If the question is asking for the upcoming dividend, treat that as dividend 1.
Stock valuation using multiples - Answers Pt = Benchmark PE Ratio * EPS
Pt = Stock price at the time
PE Ratio = Industry average, provided
EPS = Earnings per share
Common Stock Features - Answers Voting Rights
Proxy Voting
, Classes of stock
Other Rights:
* Share proportionally in declared dividends
* Share proportionally in remaining assets during liquidation
* Preemptive right - first shot at new stock issued to maintain propotional ownership if desired
Dividend Charateristics - Answers Not a liability of the firm until a dividend is declared by the
Board
Firm cannot go bankrupt for not declaring dividends
Dividend vs Taxes - Answers Not tax deductible
* Dividends not considered as business expense
Taxation of dividends received by individuals depends on the holding period
Dividends received by corporations have a MINIMUM 70% exclusion from taxable income
Preferred Stock characteristics - Answers Dividends
* Stated dividends must be paid before dividends can be paid to common stockholders
* Not liability to the firm, preferred dividends can be deferred indefinitely
* Most preferred dividends are cumulative - any missed preferred dividends must be paid before
common dividends
Preferred Stock does not generally carry voting rights
Dividend Yield - Answers Next year's annual dividend / current stock price
