Deck 6: Stock Valuation

Question 1

A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.

A)preferred
B)common
C)deferred
D)dual class
E)cumulative

Answer 1

common

Question 2

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

Answer 2

proxy

Question 3

Next year's annual dividend divided by the current stock price is called the:

A)yield to maturity.
B)total yield.
C)dividend yield.
D)capital gains yield.
E)earnings yield.

Answer 3

dividend yield.

Question 4

A member of the New York Stock Exchange acting as a dealer in one or more securities on the exchange floor is called a:

A)floor trader.
B)floor post.
C)specialist.
D)floor broker.
E)commission broker.

Question 5

The market in which previously issued securities are traded among investors is called the _____ market.

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

Question 6

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

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

Question 7

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 8

A member of the New York Stock Exchange who executes buy and sell orders directly from customers once transmitted to the exchange floor is called a:

A)dealer.
B)floor trader.
C)commission broker.
D)floor broker.
E)specialist

Question 9

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 10

The voting procedure whereby shareholders may cast all of their votes for one member of the board is called _____ voting.

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

Question 11

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

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

Question 12

The voting procedure where you must own 50% 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 13

A form of equity which receives preferential treatment in the payment of dividends is called _____ stock.

A)preferred
B)cumulative
C)common
D)dual class
E)deferred

Question 14

Payments made by a corporation to its shareholders,in the form of either cash,stock or payments in kind,are called:

A)retained earnings.
B)net income.
C)dividends.
D)redistributions.
E)infused equity.

Question 15

A member of the New York Stock Exchange who executes orders for commission brokers on a fee basis is a:

A)floor trader.
B)dealer.
C)specialist.
D)floor broker.
E)floor agent.

Question 16

The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.

A)zero growth
B)dividend growth
C)capital pricing
D)earnings capitalization
E)differential growth

Question 17

Preemptive rights refer to the right of shareholders to:

A)share proportionately in dividends paid.
B)override the votes of other shareholders.
C)vote at annual shareholder meetings.
D)share proportionately in liquidated assets.
E)share proportionately in any new stock issues sold.

Question 18

An agent who buys and sells securities from inventory is called a:

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

Question 19

An asset characterized by cash flows that increase at a constant rate forever is called a:

A)preferred stock.
B)growing annuity.
C)common annuity.
D)perpetuity due.
E)growing perpetuity.

Question 20

The owner of a seat on the New York Stock Exchange is called a(n)_____ of the exchange.

A)member
B)friend
C)dealer
D)trustee
E)agent

Question 21

Latcher's Inc.is a relatively new firm that is still in a period of rapid development.The company plans on retaining all of its earnings for the next six years.Seven years from now,the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually thereafter.To value this stock as of today,you would most likely determine the value of the stock _____ years from today before determining today's value.

A)4
B)5
C)6
D)7
E)8

Question 22

ABC Co.is owned by a group of shareholders who all vote independently and who all want personal control over the firm.If straight voting is utilized,a shareholder:

A)must either own enough shares to totally control the elections or else he/she has no control whatsoever.
B)will be able to elect at least one director as long as there are at least three open positions and the shareholder owns at least 25% 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)is only permitted to elect one director, regardless of the number of shares owned.
E)who owns more shares than anyone else, regardless of the percentage of outstanding shares owned, will control the elections.

Question 23

The James River Co.pays an annual dividend of $1.50 per share on its common stock.This dividend amount has been constant for the past 15 years and is expected to remain constant.Given this,one share of James River Co.stock:

A)is basically worthless as it offers no growth potential.
B)is valued with an assumed growth rate of 3%.
C)has a market value of $15.00.
D)has a market value equal to the present value of $1.50 paid one year from today.
E)is valued as if the dividend paid is a perpetuity.

Question 24

The Koster Co.currently pays an annual dividend of $1.00 and plans on increasing that amount by 5% each year.The Keyser Co.currently pays an annual dividend of $1.00 and plans on increasing its dividend by 3% annually.Given this,it can be stated with certainty that the _____ of the Koster Co.stock is greater than the _____ of the Keyser Co.stock.

A)market price; market price
B)total return; total return
C)dividend yield; dividend yield
D)capital gains; dividend yield
E)None of the above.

Question 25

A member of the New York Stock Exchange who trades for his or her own account,trying to anticipate temporary price fluctuations,is called a(n):

A)specialist.
B)floor broker.
C)floor trader.
D)exchange customer.
E)commission broker.

Question 26

The electronic system used by the New York Stock Exchange which enables orders to be transmitted directly to a specialist is called the ______ system.

A)Instinet
B)Internet
C)NASDAQ
D)SuperDOT
E)brokerage

Question 27

Which one of the following correctly defines the constant dividend growth model?

A)R = (D₁ /P₀) + g
B)P₀ = (D₁ / R) + g
C)R = (P₀ /D₀) + g
D)P₀ = D₀ / (R-g)
E)D₀ = P₀ * (R-g)

Question 28

The Robert Phillips Co.currently pays no dividend.The company is anticipating dividends of $0,$0,$0,$.10,$.20,and $.30 over the next 6 years,respectively.After that,the company anticipates increasing the dividend by 4% annually.The first step in computing the value of this stock today,is to compute the value of the stock when it reaches constant growth in year:

A)3
B)4
C)5
D)6
E)7

Question 29

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

A)private
B)auction
C)electronic network
D)regional
E)over-the-counter

Question 30

Assume that you are using the dividend growth model to value stocks.If you expect the market rate of return to increase across the board on all equity securities,then you should also expect the:

A)market values of all stocks to increase, all else constant.
B)market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate.
C)dividend growth rates to increase to offset this change.
D)stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price.
E)market values of all stocks to decrease, all else constant.

Question 31

Jack owns 35 shares of stock in Beta,Inc.and wants to exercise as much control as possible over the company.Beta,Inc.has a total of 100 shares of stock outstanding.Each share receives one vote.Presently,the company is voting to elect two new directors.Which one of the following statements must be true given this information?

A)If straight voting applies, Jack is assured one seat on the board.
B)If straight voting applies, Jack can control both open seats.
C)If cumulative voting applies, Jack is assured one seat on the board.
D)If cumulative voting applies, Jack can control both open seats.
E)Regardless of the type of voting employed, Jack does not own enough shares to control any of the seats.

Question 32

The total rate of return on a stock can be positive even when the price of the stock depreciates because of the:

A)capital appreciation.
B)real rate of return.
C)interest yield.
D)supernormal growth.
E)dividend yield.

Question 33

The ________ has a multiple market maker system rather than a specialist system.

A)NASDAQ
B)NIKKEI
C)NYSE
D)AMEX
E)None of the above.

Question 34

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

A)the present value of the future income that the stock generates.
B)the same amount to every investor regardless of his desired rate of return.
C)an amount computed as the next annual dividend divided by the market rate of return.
D)an amount computed as the next annual dividend divided by the required rate of return.
E)the same amount as any other stock that pays the same current dividend and has the same required rate of return.

Question 35

Fred Flintlock wants to earn a total of 10% on his investments.He recently purchased shares of ABC stock at a price of $20 a share.The stock pays a $1 a year dividend.The price of ABC stock needs to _____ if Fred is to achieve his 10% rate of return.

A)remain constant
B)decrease by 5%
C)increase by 5%
D)increase by 10%
E)increase by 15%

Question 36

Differential growth refers to a firm that increases its dividend by:

A)three or more percent per year.
B)$.10 or more per year.
C)a constant rate of two or more percent per year.
D)an amount in excess of $.15 year.
E)a rate which is most likely not sustainable over an extended period of time.

Question 37

Shareholders generally have the right to:
I.elect the corporate directors.
II.select the senior management of the firm.
III.elect the chief executive officer (CEO).
IV.elect the chief operating officer (COO).

A)I only
B)I and III only
C)II only
D)I and II only
E)III and IV only

Question 38

The total rate of return earned on a stock is composed of which two of the following?
I.current yield
II.yield to maturity
III.dividend yield
IV.capital gains yield

A)I and II only
B)I and IV only
C)II and III only
D)II and IV only
E)III and IV only

Question 39

The common stock of the Kenwith Co.pays a constant annual dividend.Thus,the market price of Kenwith stock will:

A)decrease when the market rate of return increases.
B)increase when the market rate of return increases.
C)decrease over time.
D)increase over time.
E)always remain constant.

Question 40

The constant dividend growth model:
I.assumes that dividends increase at a constant rate forever.
II.can be used to compute a stock price at any point in time.
III.states that the market price of a stock is only affected by the amount of the dividend.
IV.considers capital gains but ignores the dividend yield.

A)I only
B)II only
C)III and IV only
D)I and II only
E)I, II, and III only

Question 41

The value of common stock today depends on

A)the expected future holding period and the discount rate.
B)the expected future dividends and the capital gains.
C)the expected future dividends, capital gains and the discount rate.
D)the expected future holding period and capital gains.
E)None of the above.

Question 42

A stock listing contains the following information: P/E 17.5,closing price 33.10,dividend .80,YTD% chg 3.4,and net chg of -.50.Which of the following statements are correct given this information?
I.The stock price has increased by 3.4% during the current year.
II.The closing price on the previous trading day was $32.60.
III.The earnings per share are approximately $1.89.
IV.The current yield is 17.5%.

A)I and II only
B)I and III only
C)II and III only
D)III and IV only
E)I, III, and IV only

Question 43

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

A)Unpaid preferred dividends are a liability of the firm.
B)Preferred dividends must be paid quarterly provided the firm has net income that exceeds the amount of the quarterly dividend.
C)Preferred dividends must be paid timely each quarter or the unpaid dividends start accruing interest.
D)All unpaid dividends on preferred stock, regardless of the type of preferred, must be paid before any income can be distributed to common shareholders.
E)Preferred shareholders may be granted voting rights and seats on the board if preferred dividend payments remain unpaid.

Question 44

A 8% preferred stock priced at $100 per share should pay _____ a year in dividends per share.

A)$3
B)$6
C)$8
D)$30
E)$60

Question 45

The owner of preferred stock:

A)has the right to declare the company bankrupt whenever there are insufficient funds to pay dividends to the common shareholders.
B)has the right to veto the outcome of an election held by the common shareholders.
C)is entitled to a distribution of income prior to the common shareholders.
D)has the right to collect payment on any unpaid dividends as long as the stock is non-cumulative preferred.
E)receives tax-free dividends if he is an individual and owns more than 20% of the outstanding preferred shares.

Question 46

The discount rate in equity valuation is composed entirely of:

A)the dividend yield and the growth rate.
B)the dividends paid and the capital gains yield.
C)the dividends paid and the growth rate.
D)the capital gains earned and the dividends paid.
E)the capital gains earned and the growth rate.

Question 47

Lee Hong Imports paid a $1.00 per share annual dividend last week.Dividends are expected to increase by 5% annually.What is one share of this stock worth to you today if the appropriate discount rate is 14%?

A)$7.14
B)$7.50
C)$11.11
D)$11.67
E)$12.25

Question 48

The dividends paid by a corporation:
I.to an individual become taxable income of that individual.
II.reduce the taxable income of the corporation.
III.are declared by the chief financial officer of the corporation.
IV.to another corporation may or may not represent taxable income to the recipient.

A)I only
B)I and IV only
C)II and III only
D)I, II, and IV only
E)I, III, and IV only

Question 49

The Zilo Corp.has 1,000 shareholders and is preparing to elect three new board members.You do not own enough shares to control the elections but are determined to oust the current leadership.The most likely result of this situation is a:

A)negotiated settlement where you are granted control over one of the three open positions.
B)legal battle for control of the firm based on your discontent as an individual shareholder.
C)arbitrated settlement whereby you are granted control over one of the three open positions.
D)total loss of power for you since you are a minority shareholder.
E)proxy fight for control of the firm.

Question 50

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

A)A dealer in market securities arranges sales between buyers and sellers for a fee.
B)A dealer in market securities pays the asked price when purchasing securities.
C)A broker in market securities earns income in the form of a bid-ask spread.
D)A broker does not take ownership of the securities being traded.
E)A broker deals solely in the primary market.

Question 51

Angelina's made two announcements concerning its common stock today.First,the company announced that its next annual dividend has been set at $2.20 a share.Secondly,the company announced that all future dividends will increase by 5% annually.What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?

A)$31.60
B)$32.46
C)$37.44
D)$44.00
E)$46.51

Question 52

The Scott Co.has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock.The firm has 1,000 shares of stock outstanding.The company:

A)must always show a current liability of $1,000 for dividends payable.
B)is obligated to continue paying $1 per share per year.
C)must still declare each dividend before it becomes an actual company liability.
D)has a liability which must be paid at a later date should the company miss paying an annual dividend payment.
E)will be declared in default and can face bankruptcy if it does not pay $1 per year to each shareholder on a timely basis.

Question 53

The closing price of a stock is quoted at 22.87,with a P/E of 26 and a net change of 1.42.Based on this information,which one of the following statements is correct?

A)The closing price on the previous day was $1.42 higher than today's closing price.
B)A dealer will buy the stock at $22.87 and sell it at $26 a share.
C)The stock increased in value between yesterday's close and today's close by $.0142.
D)The earnings per share are equal to 1/26^th of $22.87.
E)The earnings per share have increased by $1.42 this year.

Question 54

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

A)The repurchase of GHI stock from Tim by GHI
B)The tax-free gift of DEF stock to Heather by Jennifer
C)The sale of ABC stock by Fred Jones to Mary Smith
D)The transfer of MNO stock from Tom to his son, Jon
E)The initial sale of JKL stock by JKL to Jamie

Question 55

The post is a stationary position on the floor of the New York Stock Exchange where a _____ is assigned to work.

A)floor trader
B)dealer
C)specialist
D)commission broker
E)floor broker

Question 56

Common stock shareholders are generally granted rights which include the right to:
I.share in company profits.
II.vote for company directors.
III.vote on proposed mergers.
IV.residual assets in a liquidation.

A)I and II only
B)II and III only
C)I and IV only
D)I, II, and IV only
E)I, II, III, and IV

Question 57

The net present value of a growth opportunity,NPVGO,can be defined as

A)the initial investment necessary for a new project.
B)the net present value per share of an investment in a new project.
C)a continual reinvestment of earnings when r < g.
D)a single period investment when r > g.
E)None of the above.

Question 58

In a liquidation,each share of 5% preferred stock is generally entitled to a liquidation payment of _____ as long as there are sufficient funds available.

A)$1
B)$5
C)$10
D)$50
E)$100

Question 59

The formula P₀ = DIV/r represents

A)the present value of a stream of zero growth dividends in perpetuity.
B)the value of a no growth dividend stream.
C)a lower value than if a positive growth element was included.
D)All of the above.
E)None of the above.

Question 60

How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend,the dividends increase by 4% annually and you require an 8% rate of return?

A)$19.23
B)$20.00
C)$20.40
D)$20.80
E)$21.63

Question 61

Shares of the Katydid Co.common stock are currently selling for $33.60.The last dividend paid was $1.60 per share.The market rate of return is 10%.At what rate is the dividend growing?

A)3.50%
B)4.60%
C)5.00%
D)6.05%
E)6.91%

Question 62

Wilbert's Clothing Stores just paid a $1.25 annual dividend.The company has a policy whereby the dividend increases by 2% annually.You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another three years.If you desire a 12% rate of return,how much should you expect to pay for 100 shares when you can afford to buy this stock? Ignore trading costs.

A)$1,040
B)$1,160
C)$1,353
D)$1,766
E)$1,810

Question 63

You have decided that you would like to own some shares of GH Corp.but need an expected 12.5% rate of return to compensate for the perceived risk of such ownership.What is the maximum you are willing to spend per share to buy GH stock if the company pays a constant $3.40 annual dividend per share?

A)$26.04
B)$26.87
C)$27.20
D)$28.29
E)$29.59

Question 64

Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5% annually.The market rate of return on this stock is 9%.What is the amount of the last dividend paid by Weisbro and Sons?

A)$.77
B)$.80
C)$.84
D)$.87
E)$.88

Question 65

The Bell Weather Co.is a new firm in a rapidly growing industry.The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year.The company just paid its annual dividend in the amount of $1.00 per share.What is the current value of one share of this stock if the required rate of return is 10.25%?

A)$33.04
B)$38.19
C)$41.05
D)$43.19
E)$45.81

Question 66

The Reading Co.has adopted a policy of increasing the annual dividend on their common stock at a constant rate of 3.5% annually.The last dividend they paid was $0.95 a share.What will the company's dividend be in five years?

A)$.90
B)$.93
C)$1.03
D)$1.13
E)$1.23

Question 67

Martin's Yachts has paid annual dividends of $1.40,$1.75,and $2.10 a share over the past three years,respectively.The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant.Given the lack of future growth,you will only buy this stock if you can earn at least a 12% rate of return.What is the maximum amount you are willing to pay to buy one share of this stock today?

A)$10.00
B)$13.33
C)$16.67
D)$17.50
E)$20.00

Question 68

The common stock of Grady Co.had an 11.25% rate of return last year.The dividend amount was $.70 a share which equated to a dividend yield of 1.5%.What was the rate of price appreciation on the stock?

A)1.50%
B)8.00%
C)9.75%
D)11.25%
E)12.75%

Question 69

The dividend yield on Alpha's common stock is 4.8%.The company just paid a $2.10 dividend.The rumor is that the dividend will be $2.205 next year.The dividend growth rate is expected to remain constant at the current level.What is the required rate of return on Alpha's stock?

A)10.04%
B)16.07%
C)21.88%
D)43.75%
E)45.94%

Question 70

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share.The company has promised to maintain a constant dividend.How much are you willing to pay for one share of this stock if you want to earn 12% return on your equity investments?

A)$10.00
B)$13.33
C)$16.67
D)$18.88
E)$20.00

Question 71

A stock pays a constant annual dividend and sells for $31.11 a share.If the dividend yield on this stock is 9%,what is the dividend amount?

A)$1.40
B)$1.80
C)$2.20
D)$2.40
E)$2.80

Question 72

Shares of common stock of the Samson Co.offer an expected total return of 12%.The dividend is increasing at a constant 8% per year.The dividend yield must be:

A)- 4%.
B)4%.
C)8%.
D)12%.
E)20%.

Question 73

The common stock of Eddie's Engines,Inc.sells for $20.00 a share.The stock is expected to pay $1.80 per share next month when the annual dividend is distributed.Eddie's has established a pattern of increasing their dividends by 4% annually and expects to continue doing so.What is the market rate of return on this stock?

A)7%
B)9%
C)11%
D)13%
E)15%

Question 74

B&K Enterprises will pay an annual dividend of $2.10 a share on its common stock next year.Last week,the company paid a dividend of $2.00 a share.The company adheres to a constant rate of growth dividend policy.What will one share of B&K common stock be worth ten years from now if the applicable discount rate is 9%?

A)$71.16
B)$74.01
C)$76.97
D)$80.05
E)$85.52

Question 75

Turnips and Parsley common stock sells for $31.65 a share at a market rate of return of 9.5%.The company just paid their annual dividend of $1.20.What is the rate of growth of their dividend?

A)5.2%
B)5.5%
C)5.9%
D)6.0%
E)6.3%

Question 76

Bet'R Bilt Bikes just announced that their annual dividend for this coming year will be $1.42 a share and that all future dividends are expected to increase by 2.5% annually.What is the market rate of return if this stock is currently selling for $14.20 a share?

A)9.5%
B)10.0%
C)12.5%
D)13.5%
E)15.0%

Question 77

Martha's Vineyard recently paid a $3.60 annual dividend on its common stock.This dividend increases at an average rate of 4.5% per year.The stock is currently selling for $57.88 a share.What is the rate of return on the stock?

A)6.5%
B)7.5%
C)8.5%
D)9.0%
E)11.0%

Question 78

Majestic Homes stock traditionally provides an 8% rate of return.The company just paid a $2 a year dividend which is expected to increase by 5% per year.If you are planning on buying 1,000 shares of this stock next year,how much should you expect to pay per share if the market rate of return for this type of security is 9% at the time of your purchase?

A)$48.60
B)$52.50
C)$55.13
D)$57.89
E)$70.00

Question 79

The Merriweather Co.just announced that it is paying a dividend next year of $1.60 and is establishing a policy whereby the dividend will increase by 3.5% annually thereafter.How much will one share of this stock be worth five years from now if the required return is 12%?

A)$21.60
B)$22.36
C)$23.14
D)$23.95
E)$24.79

Question 80

The common stock of Energizer's pays an annual dividend that is expected to increase by 10% annually.The stock commands a market rate of return of 12% and sells for $55.00 a share.What is the expected amount of the next dividend to be paid on Energizer's common stock?

A)$.90
B)$1.00
C)$1.10
D)$1.21
E)$1.33