Deck 7: Equity Markets and Stock Valuation

Question 1

The dividend yield is defined as:

A) the current annual cash dividend divided by the current market price per share.
B) the current annual cash dividend divided by the current book value per share.
C) next year's expected cash dividend divided by the current market price per share.
D) next year's expected cash dividend divided by the current book value per share.
E) next year's expected cash dividend divided by next year's expected market price per share.

Answer 1

next year's expected cash dividend divided by the current market price per share.

Question 2

Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

A) Cumulative common
B) Noncumulative common
C) Noncumulative preferred
D) Cumulative preferred
E) Senior common

Answer 2

Cumulative preferred

Question 3

Dividends are best defined as:

A) cash payments to shareholders.
B) cash payments to either bondholders or shareholders.
C) cash or stock payments to shareholders.
D) cash or stock payments to either bondholders or shareholders.
E) distributions of stock to current shareholders.

Answer 3

cash or stock payments to shareholders.

Question 4

A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a:

A) floor trader.
B) specialist.
C) runner.
D) commission broker.
E) market maker.

Question 5

An individual who executes buy and sell orders on the floor of an exchange for a fee is called a:

A) floor broker.
B) specialist.
C) floor trader.
D) proxy.
E) flow specialist.

Question 6

Which one of the following types of securities has no priority in a bankruptcy proceeding?

A) Convertible bond
B) Senior debt
C) Common stock
D) Preferred stock
E) Straight bond

Question 7

A specialist is a(n):

A) employee who executes orders to buy and sell for clients of his or her brokerage firm.
B) individual who trades on the floor of an exchange for his or her personal account.
C) NYSE member who functions as a dealer for a limited number of securities.
D) broker who buys and sells securities from a market maker.
E) trader who only deals with primary offerings.

Question 8

The capital gains yield equals which one of the following?

A) Total yield
B) Current discount rate
C) Market rate of return
D) Dividend yield
E) Dividend growth rate

Question 9

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?

A) Stock pricing model
B) Equity pricing model
C) Capital gain model
D) Dividend growth model
E) Present value model

Question 10

Kate could not attend the last shareholders meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which one of the following terms is used to describe the method by which Kate's shares were voted?

A) Straight
B) Cumulative
C) Consent-form
D) Proxy
E) In absentia

Question 11

The stream of customer instructions to buy and sell securities is called the:

A) order flow.
B) market maker.
C) execution stream.
D) operations flow.
E) buyer's stream.

Question 12

Newly issued securities are sold to investors in which one of the following markets?

A) Proxy
B) Stated value
C) Inside
D) Secondary
E) Primary

Question 13

Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are 3 open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting?

A) Proxy
B) Aggregate
C) Cumulative
D) Straight
E) Condensed

Question 14

The owner of a trading license who trades on the floor of the NYSE for his or her personal account is called a(n):

A) specialist.
B) independent broker.
C) floor trader.
D) stand-alone agent.
E) dealer.

Question 15

There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting.

A) simultaneous
B) straight
C) proxy
D) cumulative
E) sequential

Question 16

What is the market called that allows shareholders to resell their shares to other investors?

A) Primary
B) Proxy
C) Secondary
D) Inside
E) Initial

Question 17

The electronic system that transmits buy and sell orders directly to a specialist on the floor of the NYSE is called:

A) NASDAQ.
B) SuperDOT.
C) TICKER.
D) ECN.
E) ORDFLOW.

Question 18

A broker is an agent who:

A) trades on the floor of an exchange for himself or herself.
B) buys and sells from inventory.
C) offers new securities for sale to dealers only.
D) who is ready to buy or sell at any time.
E) brings buyers and sellers together.

Question 19

Any person who owns a license to trade on the NYSE is called a:

A) dealer.
B) floor trader.
C) specialist.
D) member.
E) proxy.

Question 20

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

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

Question 21

The required return on a stock is equal to which one of the following if the dividend on the stock decreases by 1 percent per year?

A)
B)
C)
D)
E)

Question 22

Which one of the following is a web site that enables Lester to sell his shares of ABC stock directly to Marti?

A) SuperDOT
B) POST
C) ECN
D) SEAT
E) eNET

Question 23

Which one of the following statements is correct?

A) Both preferred stock and corporate bonds can be callable.
B) Both preferred stock and corporate bonds have a stated liquidation value of $1,000 each.
C) Interest payments to bondholders as well as dividend payments to preferred shareholders are tax deductible expenses for the issuing firm.
D) Bondholders generally receive a fixed payment while preferred shareholders receive a variable payment.
E) Preferred shareholders receive preferential treatment over bondholders in a liquidation.

Question 24

Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for year 5 if the firm increases its dividend by 2 percent annually?

A)
B)
C)
D)
E)

Question 25

Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following 3 years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 7?

A)
B)
C)
D)
E)

Question 26

Gleason, Inc. elects its board of directors on a staggered basis using cumulative voting. This implies that:

A) if there are two open seats, then the candidate with the highest number of votes and the candidate with the lowest number of votes will be selected.
B) the candidates for the open seats are voted for in individual elections.
C) all open positions are filled with one round of voting, assuming there are no tie votes.
D) shareholders can accumulate their votes over multiple years and cast all those votes in one election.
E) the firm's entire board of directors is elected annually in one combined election.

Question 27

On which one of the following dates do dividends become a liability of the issuer for accounting purposes?

A) First day of the fiscal year in which the dividend is expected to be paid
B) Twelve months prior to the expected dividend payment date
C) On the declaration date
D) On the date of record
E) On the date of payment

Question 28

Kate owns a stock with a market price of $31 per share. This stock pays a constant annual dividend of $0.60 per share. If the price of the stock suddenly increases to $36 a share, you would expect the: I. dividend yield to increase.
II) dividend yield to decrease.
III) capital gains yield to increase.
IV) capital gains yield to decrease.

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

Question 29

Which one of the following statements is correct?

A) From a legal perspective, preferred stock is a form of corporate equity.
B) All classes of stock must have equal voting rights per share.
C) Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions.
D) Dividends are tax-free income for individual investors.
E) Shareholders prefer noncumulative dividends over cumulative dividends.

Question 30

The specific location on the floor of an exchange where a particular security is traded is called a:

A) box office.
B) figure 6.
C) specialist's post.
D) trading booth.
E) seat.

Question 31

The dividend growth model can be used to value the stock of firms which pay which type of dividends? I. constant annual dividend
II) annual dividend with a constant increasing rate of growth
III) annual dividend with a constant decreasing rate of growth
IV) zero dividend

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

Question 32

Dividends are which one of the following?

A) Payable at the discretion of a firm's president
B) Treated as a tax-deductible expense to the paying firm
C) Paid out of aftertax profits
D) Paid to holders of record as of the declaration date
E) Only partially taxable to high-income individual shareholders

Question 33

Which one of the following will increase the current value of a stock?

A) Decrease in the dividend growth rate
B) Increase in the required return
C) Increase in the market rate of return
D) Decrease in the expected dividend for next year
E) Increase in the capital gains yield

Question 34

Jensen Shipping has four open seats on its board of directors. How many shares will a shareholder need to control to ensure that his or her candidate is elected to the board given the fact that the firm uses straight voting? Assume one share equals one vote.

A) 20 percent of the shares plus one vote
B) 25 percent of the shares plus one vote
C) 1/3 of the shares plus one vote
D) 50 percent of the shares plus one vote
E) 51 percent of the shares plus one vote

Question 35

Inside quotes are defined as the:

A) bid and asked prices presented by NYSE specialists.
B) last bid and asked price offered prior to the market close.
C) lowest asked and highest bid offers.
D) daily opening bid and asked quotes.
E) last traded bid and asked prices.

Question 36

If shareholders are granted a preemptive right they will:

A) be given the choice of receiving dividends either in cash or in additional shares of stock.
B) be paid dividends prior to the preferred shareholders during the preemptive period.
C) be entitled to two votes per share of stock.
D) be able to choose the timing and amount of any future dividends.
E) have priority in the purchase of any newly issued shares.

Question 37

Which one of the following must equal zero if a firm pays a constant annual dividend?

A) Dividend yield
B) Capital gains yield
C) Total return
D) Market value per share
E) Book value per share

Question 38

Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following?

A) Non-dividend-paying stock
B) Stock with a constant dividend
C) Stock with irregular dividends
D) Stock with a constant growth dividend
E) Stock with growing dividends for a limited period of time

Question 39

The price of a stock at year 4 can be expressed as:

A)
B)
C)
D)
E)

Question 40

Aardvark, Inc. pays a constant annual dividend. At the end of trading on Wednesday, the price of its stock was $28. At the end of trading on the following day, the stock price was $27. As a result of the decline in the stock's price, the dividend yield _____ while the capital gains yield _____.

A) remained constant; remained constant
B) increased; remained constant
C) increased; increased
D) decreased; remained constant
E) decreased; decreased

Question 41

Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share. What is the rate of return?

A) 4.56 percent
B) 5.39 percent
C) 5.61 percent
D) 6.63 percent
E) 6.91 percent

Question 42

Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC?

A) NASDAQ Capital Market
B) Over-the-Counter Bulletin Board
C) Pink sheets
D) NASDAQ Global Market
E) NYSE

Question 43

Keller Metals common stock is selling for $36 a share and has a dividend yield of 3.2 percent. What is the dividend amount?

A) $0.32
B) $1.15
C) $3.49
D) $11.25
E) $11.52

Question 44

To be a member of the NYSE, you must:

A) be a primary dealer.
B) buy a seat.
C) own a trading license.
D) be registered as a floor trader.
E) be a specialist.

Question 45

The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that future dividends will increase by 2.8 percent annually. What is the amount of the expected dividend in year 5?

A) $2.39
B) $2.41
C) $2.46
D) $2.53
E) $2.58

Question 46

Many of the smaller sell orders sent to the floor of the NYSE are:

A) handled by the floor traders.
B) purchased by the commission brokers.
C) electronically transmitted to the specialists.
D) executed on an ECN.
E) executed in the primary market.

Question 47

Plastics, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future dividends will be increasing by 2.25 percent annually. How much are you willing to pay for one share of this stock if you require a 16 percent return?

A) $13.45
B) $13.61
C) $13.76
D) $14.02
E) $14.45

Question 48

The NYSE:

A) presently conducts all of its trading through SuperDOT.
B) is a dealer market.
C) is in the business of attracting order flow.
D) is solely a primary market.
E) is based on a multiple market maker system.

Question 49

The common stock of Mid-Towne Movers is selling for $33 a share and has a 9 percent rate of return. The growth rate of the dividends is 1 percent annually. What is the amount of the next annual dividend?

A) $2.58
B) $2.61
C) $2.64
D) $2.67
E) $2.70

Question 50

The common stock of Green Garden Flowers is selling for $24 a share. The company pays a constant annual dividend and has a total return of 3.8 percent. What is the amount of the dividend?

A) $0.38
B) $0.76
C) $0.91
D) $1.38
E) $1.54

Question 51

Delphin's Marina is expected to pay an annual dividend of $0.58 next year. The stock is selling for $8.53 a share and has a total return of 12 percent. What is the dividend growth rate?

A) 3.82 percent
B) 4.03 percent
C) 4.28 percent
D) 5.20 percent
E) 5.49 percent

Question 52

The Printing Company stock is selling for $32.60 a share based on a 14 percent rate of return. What is the amount of the next annual dividend if the dividends are increasing by 2.5 percent annually?

A) $3.48
B) $3.52
C) $3.57
D) $3.66
E) $3.75

Question 53

Which one of the following parties on the NYSE floor post bid and asked prices?

A) Floor traders
B) Specialists
C) Floor brokers
D) Commission brokers
E) Fee brokers

Question 54

You have agreed to pay a five percent commission to your best friend if he can locate a buyer for your car. This arrangement is most similar to the compensation arrangement for which one of these individuals who is involved with the stock market?

A) Specialist
B) Floor trader
C) Market maker
D) Commission broker
E) Dealer

Question 55

Which one of the following features applies to NASDAQ but not the NYSE?

A) Trading in the crowd
B) Multiple market maker system
C) SuperDot
D) Broker market
E) Physical trading floor

Question 56

The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 15 percent rate of return?

A) $7.86
B) $8.33
C) $10.87
D) $11.04
E) $11.38

Question 57

The more actively traded large companies that are listed on NASDAQ are traded in which one of the NASDAQ markets?

A) National
B) Capital
C) Regional
D) Global Select
E) Global

Question 58

Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you if you require a 14 percent rate of return?

A) $12.56
B) $12.95
C) $13.31
D) $13.68
E) $14.07

Question 59

Which one of the following players on the floor of the NYSE is obligated to maintain a fair, orderly market for a limited number of securities?

A) Specialist
B) Floor trader
C) $2 broker
D) Commission broker
E) Floor broker

Question 60

If a trade is made "in the crowd", the trade has occurred:

A) between a broker and a specialist.
B) between two brokers.
C) electronically on NASDAQ.
D) on SuperDOT.
E) on an ECN.

Question 61

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at the level through year three, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?

A) $25.51
B) $26.08
C) $24.57
D) $26.02
E) $26.84

Question 62

New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of this stock if the required return is 16 percent?

A) $8.50
B) $9.67
C) $10.46
D) $12.23
E) $12.49

Question 63

The common stock of Tasty Treats is valued at $10.80 a share. The company increases its dividend by 8 percent annually and expects its next dividend to be $0.20 per share. What is the total rate of return on this stock?

A) 8.64 percent
B) 9.12 percent
C) 9.40 percent
D) 9.85 percent
E) 10.64 percent

Question 64

A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield?

A) 4.13 percent
B) 4.84 percent
C) 5.21 percent
D) 5.52 percent
E) 5.78 percent

Question 65

The required return on Mountain Meadow stock is 14 percent and the dividend growth rate is 3.5 percent. The stock is currently selling for $11.80 a share. What is the dividend yield?

A) 7.50 percent
B) 8.00 percent
C) 9.75 percent
D) 10.50 percent
E) 12.50 percent

Question 66

The Market Place recently announced that it will pay its first annual dividend two years from today. The first dividend will be $0.50 a share with that amount doubling each year for the following two years. After that, the dividend is expected to increase by 4 percent annually. What is the value of this stock today if the required return is 15 percent?

A) $11.68
B) $12.47
C) $12.99
D) $14.02
E) $14.94

Question 67

A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1.00 a share. What is the current value of this stock if the required rate of return is 12 percent?

A) $17.71
B) $18.97
C) $20.50
D) $21.08
E) $21.69

Question 68

For the past six years, the price of Slate Rock stock has been increasing at a rate of 8.6 percent a year. Currently, the stock is priced at $47 a share and has a required return of 14 percent. What is the dividend yield?

A) 1.20 percent
B) 2.87 percent
C) 3.39 percent
D) 4.28 percent
E) 5.40 percent

Question 69

Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock sells for $28.40 a share at a required return of 14 percent. What is the amount of the last dividend this company paid?

A) $3.50
B) $3.55
C) $3.60
D) $3.65
E) $3.70

Question 70

River Rock, Inc. just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past ten years and expects to continue doing so. What will a share of this stock be worth six years from now if the required return is 16 percent?

A) $23.60
B) $24.65
C) $25.08
D) $25.50
E) $26.90

Question 71

Auto Transmissions is expected to pay annual dividends of $1.90 and $2.10 over the next two years, respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is the value of this stock at a required return of 15 percent?

A) $13.67
B) $14.21
C) $14.83
D) $15.08
E) $15.60

Question 72

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be on this stock if you sell it three years from now?

A) $2.43
B) $2.51
C) $2.63
D) $2.87
E) $2.92

Question 73

Blackwell Ink is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 5 percent annually. What is a share of this stock worth today at a required return of 15 percent?

A) $4.07
B) $4.28
C) $4.49
D) $4.72
E) $4.95

Question 74

The Toy Box pays an annual dividend of $2.40 per share and sells for $46.60 a share based on a market rate of return of 15 percent. What is the capital gains yield?

A) 7.35 percent
B) 7.78 percent
C) 9.23 percent
D) 9.85 percent
E) 10.11 percent

Question 75

The Border Crossing just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is 14 percent?

A) $30.04
B) $32.18
C) $33.33
D) $35.80
E) $36.75

Question 76

A stock has paid dividends of $1.80, $1.85, $2.00, $2.20, and $2.25 over the past five years, respectively. What is the average capital gains yield?

A) 2.80 percent
B) 3.24 percent
C) 4.45 percent
D) 5.34 percent
E) 5.79 percent

Question 77

Business Services, Inc. is expected to pay its first annual dividend of $0.80 per share three years from now. Starting in year six, the company is expected to start increasing the dividend by 2 percent per year. What is the value of this stock today at a required return of 12 percent?

A) $6.16
B) $6.47
C) $6.63
D) $7.22
E) $7.47

Question 78

General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for 5 years. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 per share. What is the current value of this stock if the required return is 18 percent?

A) $3.01
B) $3.55
C) $3.89
D) $4.27
E) $4.88

Question 79

The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17 percent rate of return?

A) $2.38
B) $2.43
C) $2.56
D) $2.60
E) $2.64

Question 80

Klaus Toys just paid its annual dividend of $1.40. The required return is 16 percent and the dividend growth rate is 2 percent. What is the expected value of this stock five years from now?

A) $11.04
B) $11.26
C) $11.67
D) $12.41
E) $12.58