Deck 6: Stock Valuation

Question 1

A ________ is a form of equity security that has a stated liquidating value.

A)debenture
B)bond
C)common stock
D)preferred stock
E)proxy

Answer 1

preferred stock

Question 2

Differential growth refers to the stock of a firm that increases its dividend by

A)three or more percent per year.
B)a stated percent each year.
C)a rate that is expected to be sustainable indefinitely.
D)an amount in excess of $.25 per year.
E)varying rates over a period of time.

Answer 2

varying rates over a period of time.

Question 3

The voting procedure whereby shareholders may cast all of their votes for one candidate for the board of directors is called ________ voting.

A)democratic
B)deferred
C)straight
D)cumulative
E)proxy

Answer 3

cumulative

Question 4

The free cash flow model,as compared to other models,tends to be most helpful when valuing a share of stock in a:

A)firm that pays dividends that increase at a constant rate of growth.
B)firm having similar growth opportunities as other firms.
C)non-dividend-paying firm that has external financing needs.
D)firm that plans to lower its dividend growth rate in the near future.
E)firm that pays a fixed annual dividend.

Question 5

The underlying assumption of the dividend growth model is that a stock is worth

A)the present value of the future income provided by that stock.
B)the same amount to every investor.
C)an amount computed as the next annual dividend divided by the market rate of return.
D)an amount computed as the last annual dividend divided by the required rate of return.
E)the same amount as any other stock that paid the same dividend this year.

Question 6

The rate at which a stock's price is expected to appreciate (or depreciate)is called the ________ yield.

A)current
B)capital gains
C)dividend
D)total
E)earnings

Question 7

Which one of these represents the portion of a stock's rate of return that is attributable to the growth rate of the dividends?

A)Capital gains yield
B)Real rate of return
C)Interest yield
D)Inflation rate
E)Dividend yield

Question 8

Alto stock pays an annual dividend of $1.10 a share and has done so for the past 6 years.No changes in the dividend amount are expected.The relevant market rate of return is 7.8 percent.Given this,one share of this stock

A)is basically worthless as it offers no growth potential.
B)is valued as a nonconstant growth stock.
C)is valued as a perpetuity.
D)is valued as a differential growth stock.
E)has a current market value of $1.10.

Question 9

The expected dividend yield is equal to

A)Dividend yield × Next year's stock price.
B)Expected cash dividend / Current stock price.
C)Expected cash dividend / Next year's stock price.
D)(Retention ratio × Expected earnings)/ Current stock price.
E)(Dividend payout ratio × Expected earnings)/ Next year's stock price.

Question 10

Based on the dividend growth model,an increase in investors' overall level of required returns will

A)cause the market values of all stocks to decrease,all else held constant.
B)not affect overall stock market prices.
C)cause dividend growth rates to increase to offset this change.
D)cause non-dividend-paying stocks to decrease in price while dividend-paying stock prices remain constant.
E)cause some stock prices to rise while others fall.

Question 11

According to finance professionals,which one of these factors has the biggest impact on a firm's PE ratio?

A)Accounting practices of the firm
B)Risk-level of the firm
C)Size of the firm
D)Growth opportunities
E)Age of the firm

Question 12

Jack owns shares of stock in Boynton Foods and wants to be elected to the company's board of directors.There are 10,000 shares of stock outstanding and each share is granted one vote for each open position on the board.Presently,the company is voting to elect two new directors.Jack can be assured of his election

A)if straight voting applies and he owns at least 25 percent of the shares,plus one additional share.
B)if straight voting applies and he owns at least one-third of the shares,plus one additional share.
C)if cumulative voting applies and he owns 25 percent of the shares,plus one additional share.
D)only if cumulative voting applies and he owns the majority of the shares.
E)if cumulative voting applies and he owns one-third of the shares,plus one additional share.

Question 13

The total return on a stock is equal to

A)Annual dividend / Current stock price.
B)Capital gains yield - Dividend yield.
C)Capital gains yield + Dividend yield.
D)(1 + Dividend yield)× (1 + Inflation rate)- 1.
E)(1 + Capital gains yield)/ (1 + Dividend yield)- 1.

Question 14

The voting procedure where you must control 50 percent plus one of the outstanding shares of stock to guarantee that you will win a seat on the board of directors is called ________ voting.

A)proxy
B)cumulative
C)deferred
D)straight
E)democratic

Question 15

Multiple classes of stock are primarily created to

A)allow certain shareholders to retain control of a firm.
B)replace cash dividends with share repurchases.
C)allow common stock to have cumulative privileges.
D)eliminate pre-emptive rights.
E)ensure all shareholders have equal rights.

Question 16

Which of these factors are most associated with a high PE ratio?

A)High growth opportunities and high risk
B)Low risk and low growth opportunities
C)Conservative accounting practices and low risk
D)High risk and low growth opportunities
E)Aggressive accounting practices and high growth opportunities

Question 17

Which one of these formulas is used to estimate a firm's growth rate?

A)Annual dividend / Current stock price
B)(1 - Dividend payout ratio)× r
C)Retention ratio × ROE
D)Retention ratio × ROA
E)(1 - Dividend payout ratio)× R

Question 18

The EV/EBITDA ratio has an advantage over the PE ratio in situations where comparisons are being made of firms that vary based on their

A)method of depreciation.
B)rate of growth.
C)degree of leverage.
D)level of cash.
E)sales level.

Question 19

The voting procedure where a shareholder grants authority to another individual to vote his/her shares is called ________ voting.

A)proxy
B)deferred
C)straight
D)cumulative
E)democratic

Question 20

A stock that pays a constant annual dividend will have a market price that

A)increases when the market rate of return increases.
B)decreases when the market rate of return increases.
C)decreases over time.
D)increases over time.
E)always remains constant.

Question 21

Which one of the following statements concerning preferred stock is correct?

A)Unpaid preferred dividends are a liability of the firm whether or not they have been declared.
B)Preferred shareholders may be granted voting rights if preferred dividend payments remain unpaid.
C)Any unpaid preferred dividends will accrue interest at a rate equal to the dividend rate.
D)All unpaid dividends on both cumulative and noncumulative preferred stock must be paid before any common stock dividends can be declared.
E)Preferred dividends will be paid quarterly only when the firm has current net income that exceeds the amount of the quarterly dividend.

Question 22

The market in which new securities are originally sold to investors is called the ________ market.

A)dealer
B)auction
C)over-the-counter
D)secondary
E)primary

Question 23

A stock report contains the following information: P/E 21.4,closing price 28.16,dividend 1.10,net chg .06,and an ask of 28.22 × 300.Which one of the following statements is correct given this information?

A)The stock price has increased by 6 percent thus far this year.
B)The closing price on the previous trading day was $28.10.
C)The earnings per share are approximately $2.
D)The dividend yield is 21.4 percent.
E)The bid-ask spread is $.300.

Question 24

Greener Grass Co.pays a constant annual dividend of $1 a share and has 1,000 shares of common stock outstanding.The company

A)must always show a current liability on its balance sheet of $1,000 for dividends payable.
B)must still declare each dividend before it becomes an actual company liability.
C)is obligated to continue paying $1 a share each year.
D)can deduct $1,000 a year as a business expense as a result of its dividend payment.
E)can be forced into bankruptcy by its shareholders if it fails to pay at least $1 a year in dividends.

Question 25

What is the primary business of the NYSE?

A)Set market prices
B)Provide a face-to-face trading floor
C)Attract and process order flow
D)Provide a primary market
E)Regulate securities trading

Question 26

Lew,an individual investor,sold 100 shares of Global Tech stock on Monday.Janice,another individual investor,purchased those shares but never met Lew.You know for certain that this trade occurred in which market?

A)Primary market
B)Dealer market
C)NASDAQ
D)Secondary market
E)NYSE

Question 27

Which one of the following transactions occurs in the primary market?

A)Repurchase of GHI stock from Tim by GHI
B)Tax-free gift of DEF stock to Heather by Jennifer
C)Sale of ABC stock by Fred Jones to Mary Smith
D)Initial sale of JKL stock by JKL to Jamie
E)Transfer of MNO stock from Tom to his son,Jon

Question 28

Staggered elections

A)apply only in situations where multiple classes of stock exist.
B)primarily benefit minority shareholders.
C)increase turnover on the board of directors.
D)are used with straight voting.
E)help prevent takeovers.

Question 29

A securities market primarily consisting of dealers who buy and sell for their own inventories is generally referred to as a(n)________ market.

A)over-the-counter
B)auction
C)broker
D)regional
E)trading floor

Question 30

The owner of preferred stock

A)owns shares that generally have a stated liquidating value of $1,000 per share.
B)has the right to veto the outcome of an election held by the common shareholders.
C)has the right to collect payment on any unpaid dividends as long as the stock is noncumulative.
D)is entitled to a distribution of income prior to the common shareholders.
E)is guaranteed voting rights similar to a common shareholder.

Question 31

NASDAQ has which one of these features?

A)Broker system
B)Trading floor
C)Multiple market maker system
D)Designated market maker system
E)Trading stations called "posts"

Question 32

Which one of the following statements concerning dealers and brokers in the financial markets is correct?

A)A broker never assumes ownership of the securities being traded.
B)A dealer pays the ask price when purchasing securities.
C)A broker earns income in the form of a bid-ask spread.
D)A dealer in market securities arranges sales between buyers and sellers for a fee.
E)A broker deals solely in the primary market.

Question 33

Electronic communications networks (ECNs)

A)have open access to the NYSE but no access to NASDAQ.
B)totally replaced face-to-face trading on the NYSE in 2015.
C)are available only to financial institutional traders.
D)act to increase liquidity in the financial markets.
E)are used solely by market makers to place bid and ask quotes.

Question 34

Denver Wool is owned by a group of shareholders who all vote independently and who all want personal control over the firm.There are three open seats and Danielle is one of six contenders.If straight voting is utilized and Danielle is a current shareholder,then he

A)is only permitted to elect one director,regardless of the number of shares he owns.
B)will be assured of his election if he owns at least one-sixth,plus one,of the outstanding shares.
C)must own at least two-thirds of the shares,plus one,to exercise control over the elections.
D)can only be assured of his election if he owns sufficient shares to control the entire election.
E)can be assured of his election provided he owns more shares than any other single shareholder.

Question 35

A dealer will buy at the ________ price and sell at the ________ price.

A)bid; bid
B)ask; ask
C)ask; bid
D)bid; ask
E)spread; spread

Question 36

What is the primary role of a designated market maker (DMM)?

A)Provide a two-sided market
B)Act as a floor broker
C)Function as a supplementary liquidity provider
D)Act as a one-sided trader
E)Process only electronic trades

Question 37

An agent who arranges security transactions among investors without maintaining an inventory is called a

A)broker.
B)trader.
C)capitalist.
D)principal.
E)dealer.

Question 38

Corporate dividends

A)are a source of tax-free income for individual investors.
B)reduce the taxable income of the payer.
C)are only 70 percent taxable to corporate shareholders.
D)are paid out of pretax income and thus are taxed at the personal level.
E)are taxed at the personal level even though they are paid from after-tax income.

Question 39

A market participant who buys and sells securities from inventory is called a

A)broker.
B)trader.
C)principal.
D)capitalist.
E)dealer.

Question 40

A stock quote shows a last price of 32.13,a P/E of 17,and a net change of −.23.Based on this information,which one of the following statements is correct?

A)The closing price on the previous trading day was $.23 lower than today's closing price.
B)A dealer can purchase the stock for $.23 less than an investor can.
C)The earnings per share decreased by $.23 a share this year.
D)The earnings per share have increased by 17 percent this year.
E)The earnings per share are equal to 1/17^th of $32.13.

Question 41

Ernst Electrical increases its annual dividend by 1.8 percent annually.The stock commands a market rate of return of 18 percent and sells for $19.07 a share.What is the expected amount of the next dividend?

A)$3.03
B)$3.07
C)$3.18
D)$3.21
E)$3.09

Question 42

Blasco just paid an annual dividend of $1.63 a share.What is one share of this stock worth to you if the dividends increase by 3 percent annually and you require a rate of return of 14 percent?

A)$12.40
B)$11.99
C)$10.54
D)$15.26
E)$11.64

Question 43

In a stock market report,the open price represents the

A)price a dealer is willing to pay.
B)price at which a designated market maker will sell.
C)first trade of the day.
D)closing price on the previous trading day.
E)current bid price.

Question 44

Winslow Brothers common stock sells for $36.60 a share and pays an annual dividend that increases by 1.8 percent annually.The market rate of return on this stock is 14.7 percent.What is the amount of the last dividend paid?

A)$5.29
B)$4.64
C)$4.84
D)$4.56
E)$5.37

Question 45

Feltwater Furniture has 134,000 shares of stock outstanding.The firm expects to earn net income of $286,000 next year with annual increases of 4 percent per year thereafter.The firm pays out 70 percent of its net income in dividends.The required return is 16 percent.What is the share price?

A)$14.16
B)$12.45
C)$13.08
D)$12.95
E)$14.63

Question 46

Tyler Industries stock traditionally provides a rate of return of 13.7 percent.The company just paid an annual dividend of $1.21 a share and recently announced it will commence increasing its dividends by 1.6 percent each year.For this stock to return its traditional rate,what should the market price of this stock be?

A)$10.00
B)$11.62
C)$10.16
D)$9.12
E)$8.97

Question 47

The ELL common stock pays an annual dividend of $2.23 a share and is committed to maintaining a constant dividend.How much are you willing to pay for one share of this stock if your required return is 16 percent?

A)$14.56
B)$14.67
C)$13.94
D)$13.88
E)$14.04

Question 48

Shares of ABBO stock are currently selling for $14.43 a share.The last annual dividend paid was $1.61 a share,and dividends increase at a constant rate.If the market rate of return is 14 percent,what is the dividend growth rate?

A)2.32%
B)2.56%
C)1.81%
D)2.05%
E)2.50%

Question 49

Wilton's Market just announced its next annual dividend will be $1.62 a share with future dividends increasing by 2.2 percent annually.How much will one share of this stock be worth 6 years from now if the required return is 12.5 percent?

A)$16.76
B)$17.92
C)$18.14
D)$18.32
E)$15.79

Question 50

Last week,Railway Cabooses paid its annual dividend of $1.12 a share.The company has been reducing its dividends by 4 percent each year.What is one share of stock worth at a required return of 17 percent?

A)$4.06
B)$5.12
C)$6.80
D)$8.27
E)$7.90

Question 51

New Tours last annual dividend was $2 a share.The company plans to lower the dividend by $.30 each year for the next 3 years.In Year 5,it will pay a final liquidating dividend of $17 a share.If the required return is 22 percent,what is the current per share value of this stock?

A)$9.23
B)$13.08
C)$10.61
D)$14.13
E)$8.86

Question 52

Dille Inc.pays no dividend at the present time.In Years 2 and 3,the firm will pay annual dividends of $4 a share.After that,it will pay a constant $2 a share dividend indefinitely.What is this stock worth at a required return of 17 percent?

A)$12.29
B)$11.81
C)$12.77
D)$12.50
E)$11.07

Question 53

General Stores recently announced that it will pay annual dividends of $1.05,$.80,and $.50 over the next 3 years,respectively.The following year,the firm will close and pay a final dividend of $11.30 a share.What is one share of this stock worth today at a discount rate of 16.6 percent?

A)$8.24
B)$7.21
C)$7.92
D)$6.72
E)$6.81

Question 54

JJ Companies will pay an annual dividend of $4.20 a share on its common stock next year.Last week,the company paid a dividend of $4.00 a share.The company adheres to a constant rate of growth dividend policy.What will one share of this stock be worth 8 years from now if the applicable discount rate is 14 percent?

A)$68.95
B)$81.44
C)$74.21
D)$71.16
E)$77.09

Question 55

Midtown Enterprises paid its first annual dividend yesterday in the amount of $.26 a share.The company plans to double each annual dividend payment for the next 3 years.After that,it will pay a constant $2.40 per share dividend indefinitely.What is one share of this stock worth today if the market rate of return on similar securities is 14.5 percent?

A)$10.79
B)$11.40
C)$14.08
D)$12.93
E)$13.66

Question 56

CS Markets has 84,500 shares of stock outstanding.The firm paid out $68,200 in dividends this year and expects their total dividends to increase by 3.5 percent per year.The required return is 12 percent.What is the share price?

A)$8.47
B)$9.83
C)$6.20
D)$7.64
E)$9.50

Question 57

The Olde Mill just paid an annual dividend of $.38 a share and plans on decreasing this amount by 1 percent annually.What is the expected dividend for Year 6?

A)$.3542
B)$.3602
C)$.3636
D)$.3578
E)$.3584

Question 58

XanEx is a new firm that just paid an annual dividend of $1 a share.The firm plans to increase its dividend by 10 percent a year for the next 4 years and then decrease the growth rate to 2 percent annually.If the required rate of return is 18.25 percent,what is one share of this stock worth today?

A)$8.05
B)$8.19
C)$11.05
D)$11.19
E)$14.81

Question 59

Mario's is going to pay $1,$2.65,and $4 a share over the next 3 years,respectively.After that,the company plans to pay annual dividends of $1.65 per share indefinitely.If your required return is 14 percent,how much are you willing to pay for one share today?

A)$12.74
B)$14.02
C)$12.90
D)$13.57
E)$13.67

Question 60

The Extreme Reaches Corp.'s last annual dividend was $1.98 per share.The company is planning on paying $2,$2,$2.50,and $3 a share over the next 4 years,respectively.After that,the dividend will be a constant $2.50 per share per year.What is the current price of this stock if the rate of return is 13 percent?

A)$19.17
B)$21.96
C)$16.57
D)$18.70
E)$23.71

Question 61

Tall Tree Timber has annual net income of $213,640 and 72,000 shares of stock outstanding.Big Trees is a similar firm with similar growth opportunities that has 75,000 shares of stock outstanding with a market price of $31.80 a share and earnings per share of $1.48.What is the estimated value of Tall Tree Timber?

A)$3,603,208
B)$4,590,373
C)$5,009,046
D)$4,087,082
E)$3,874,298

Question 62

Shares of ABT stock offer an expected total return of 14.6 percent.What is the dividend yield if the dividend increases by 2.8 percent annually?

A)17.40%
B)13.20%
C)11.80%
D)8.74%
E)12.80%

Question 63

Duncan Street Mills is an all-equity firm with 28,000 shares of stock outstanding.The firm expects sales of $400,000 next year.Sales are expected to grow by 5 percent for the following 2 years and then level off to a constant 3 percent growth rate.Net cash flow varies in direct proportion to sales and is currently equal to 15 percent of sales.The required return for this firm is 16 percent.What is the estimated current value of one share of stock?

A)$17.02
B)$16.21
C)$16.94
D)$18.76
E)$17.34

Question 64

Janlea Co.had total net earnings of $158,600 this past year and paid out 60 percent of those earnings in dividends.There are 84,000 shares of stock outstanding at a current market price of $18.43 a share.If the dividend growth rate is 2.8 percent,what is the required rate of return?

A)14.27%
B)12.56%
C)8.95%
D)10.40%
E)11.60%

Question 65

Hanover Inc.is an all-equity firm with 35,000 shares of stock outstanding.The firm expects sales of $750,000 next year.Sales are expected to grow by 10 percent the following year and then level off to a constant 4 percent growth rate.Net cash flow varies in direct proportion to sales and is currently equal to 17 percent of sales.The required return for this firm is 14 percent.What is the estimated current value of one share of stock?

A)$38.35
B)$36.21
C)$34.71
D)$35.20
E)$36.71

Question 66

A common stock pays an annual dividend of $3.40 and sells for $51.20 a share.What is the total expected rate of return if the dividend yield represents 40 percent of the total return?

A)17.74%
B)16.60%
C)14.50%
D)15.49%
E)14.17%

Question 67

Nu-Tek,Inc.is expecting a period of intense growth,so it has decided to reduce its annual dividend by 10 percent a year for the next 3 years.After that,it will maintain a constant dividend of $1.90 a share.Last year,the annual dividend was $2.70 a share.What is the market value of this stock if the required rate of return is 15 percent?

A)$13.86
B)$13.39
C)$14.88
D)$14.23
E)$14.15

Question 68

Primary Colors has a debt-equity ratio of 0.56,a return on assets of 8.2 percent,and a dividend payout ratio of 45 percent.What is the firm's rate of growth?

A)6.04%
B)6.52%
C)8.13%
D)7.04%
E)7.26%

Question 69

The Yarn Outlet has net income of $87,400 for the year with 6,500 shares of stock outstanding.Big Knitter is a similar firm with similar growth opportunities that has 8,400 shares of stock outstanding with a market price of $9.34 a share and earnings per share of $.86.What is the estimated value of the Yarn Outlet?

A)$1,016,279
B)$837,040
C)$1,142,105
D)$751,620
E)$949,205

Question 70

Lassiter Motors has a debt-equity ratio of 0.45 and total debt of $186,000.The firm's market-to-book ratio is 2.6.The earnings before interest and taxes is $69,200,interest is $26,400,depreciation and amortization total $87,100,and the tax rate is 34 percent.What is the firm's EV to EBITDA ratio if the firm has $31,000 in cash?

A)7.34
B)5.47
C)6.01
D)6.38
E)7.87

Question 71

The Vineyard recently paid an annual dividend of $2.78.This dividend increases at 1.65 percent per year and currently sells for $42.19 a share.What is the rate of return?

A)8.21%
B)8.41%
C)8.46%
D)8.35%
E)8.28%

Question 72

An investor wants to purchase shares in a firm that has no growth opportunities but pays an annual dividend of $2.35.The market rate of return on similar securities is 17.5 percent.What is the maximum price the investor should pay for this stock?

A)$14.52
B)$12.88
C)$13.43
D)$12.76
E)$13.18

Question 73

Webster preferred stock pays an annual dividend of $6.20 a share.What is the maximum price you should pay today to purchase this stock if you desire a rate of return of 14.25 percent?

A)$40.12
B)$43.51
C)$46.50
D)$51.88
E)$55.02

Question 74

Snider's Hardwoods has a dividend payout ratio of 45 percent,a return on assets of 9.4 percent,and a debt-equity ratio of 0.38.What is the firm's rate of growth?

A)6.78%
B)7.39%
C)7.13%
D)6.55%
E)4.10%

Question 75

DOC just paid a dividend of $.46 a share.The dividends are expected to increase by 30 percent a year for the next 2 years and then increase by 2 percent annually thereafter.What is the current value of a share if the appropriate discount rate is 15 percent?

A)$5.72
B)$6.91
C)$5.38
D)$6.26
E)$6.42

Question 76

Nu Tek's next annual dividend will be $4.26 a share and all later dividends are expected to increase by 4.4 percent annually.What is the rate of return if this stock is currently selling for $48.74 a share?

A)10.76%
B)11.98%
C)13.14%
D)13.67%
E)12.87%

Question 77

ALP Inc.has decided to issue preferred stock with an annual dividend of $5 a share.Similar stocks are currently yielding 14 percent.What price should the firm expect to receive for each new share issued?

A)$35.71
B)$33.08
C)$44.92
D)$40.71
E)$38.97

Question 78

SK Enterprises has total assets of $421,800,outstanding debt of $129,000,cash of $18,700,sales of $387,400,costs of $241,900,and depreciation of $31,200.The firm has 11,300 shares of stock priced at $34.40 a share.What is the firm's EV to EBITDA ratio?

A)4.08
B)3.43
C)4.27
D)3.67
E)3.82

Question 79

Nu-Tech stock's last annual dividend was $1.10 a share.Dividends are expected to increase by 15 percent for the next 2 years and then increase at a constant 3 percent annually.The required return is 17.5 percent.What is the current value per share?

A)$11.09
B)$10.33
C)$9.28
D)$10.63
E)$9.62

Question 80

Last year,Grenville common stock had a rate of return of 15.84 percent,a fixed annual dividend of $2.65 a share,and a dividend yield of 2.7 percent.What was the rate of price appreciation on the stock?

A)13.50%
B)12.48%
C)12.75%
D)13.14%
E)13.85%