Question

true or false

9.Flotation Costs refers to the amount of cash needed for the firm to "stay afloat"

8.The corporate valuation model can be used only when a company doesn't pay dividends.

7.The cash flows associated with common stock are more difficult to estimate than those related to bonds.

6.Classified stock differentiates various classes of common stock, and can be used in different ways by different companies.

5. The total return for a stock can be calculated by taking the dividend yield less the capital gains yield.

Answer 1

(9) Flotation Cost refers to the cost incurred by an entity while issuing new debt or new equity in the form of common or preferred stock. It is usually composed of the underwriting fees, commissions, legal fees, etc incurred while issuing new debt/stock. Hence, this statement is false.

(8) Corporate Valuation Method alludes to the process of determining a firm's value by means of separately determining the value of its assets-in-place, the value of operations, present value of growth opportunities, non-operating assets and goodwill plus brand value. The process involves using various techniques for determining the value of each aforementioned component with some of the processes being balance sheet/cash flow statement based. However, in the absence of dividends, the firm can be valued using the free cash to firm approach or the multiples approach, thereby proving that corporate valuation is not the only recourse in case the firm does not pay dividends. Hence, this statement is false.

(7) The cash flows associated with common stock is indeed more difficult to estimate as compared to bond cash flows because bonds have mandatory contractual cash outflows in the form of bond coupons whereas cash flow to common stocks are residual claims. Hence, this statement is true.

(6) Classified stocks indeed differentiate between various classes of stocks and the difference are in the form of distinct rights, voting powers, dividend payment clauses etc baked into the firm's charters and bylaws. A common form of classified stocks is the issuance of preferred stocks which have fixed contractual periodic dividend payment clauses attached but no voting rights. Common stocks, on the other hand, have only residual claims on a firm's dividends, profits and cash flows but enjoys binding voting rights. A common stock might be further divided into Class A and Class B stocks with the former often enjoying disproportionate voting rights advantage over the latter. As is observable, stock classifications allow the company to achieve certain pre-thought objectives thereby making this statement true.

(5) Total Stock Return is the SUM of the dividend earnings (yield/earnings through dividend) and the capital gain earnings (yield/ earnings through appreciation/depreciation of stock price). Hence, the given statement is false.