Deck 9: Stock Valuation

Question 1

NASDAQ is the best-known example of a direct market.

Answer 1

False

Question 2

Direct search markets provide the best price information.

Answer 2

False

Question 3

Preferred dividend payments are contractual obligations of the firm, similar to the interest payments on corporate bonds.

Answer 3

False

Question 4

Direct search is the least efficient type of secondary market.

Question 5

An active secondary market for debt or equity securities makes raising new capital less expensive for firms.

Question 6

The New York Stock Exchange is the best-known example of an auction market.

Question 7

The stocks owned by households represent about 35% of the total value of all corporate equity.

Question 8

A broker market eliminates the need for time-consuming searching for a fair deal by buying and selling immediately from its inventory of securities.

Question 9

For a commission fee that is less than the cost of direct search, brokers give investors an incentive to make use of the information by hiring them.

Question 10

For investors, the function of secondary markets is to provide marketability for the securities they own at a fair price.

Question 11

A large number of investors in equities actually own through pension or retirement funds.

Question 12

Dealers are subject to capital risk, because they must finance their inventories of securities.

Question 13

Preferred shareholders are not guaranteed any dividend payments and have the lowest-priority claim on the firm's assets in the event of bankruptcy.

Question 14

In terms of the total stock value of the firms listed, the NYSE is the largest in the world and NASDAQ is the second largest.

Question 15

Brokers are exposed to inventory risk since they facilitate transactions on behalf of their clients while dealers are subject to capital risk because they must finance their inventories of securities.

Question 16

The common shareholders of a company have unlimited liability.

Question 17

Equity securities are certificates of ownership of a corporation.

Question 18

Companies raise capital in secondary markets by issuing new securities.

Question 19

Secondary market transactions in the United States mostly take place over the counter and not in exchanges.

Question 20

In an auction market, buyers and sellers confront each other directly and bargain over price.

Question 21

Which of the following statements is true about secondary markets in the United States?

A) In terms of total stock value of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
B) NASDAQ is an OTC (over-the-counter) market.
C) Firms listed on the NASDAQ tend to be, on average, larger in size, and their shares trade more frequently than those traded on NYSE.
D) In the United States, most secondary market transactions are done over the counter.

Question 22

Which of the following statements is true about secondary markets?

A) In secondary markets, outstanding shares of stock are bought and sold among investors.
B) Most secondary market transactions directly affect the capital of the firm that issues the securities.
C) An active secondary market causes firms to sell their new debt or equity issues at a higher transaction cost of funds.
D) All of the above statements are true.

Question 23

In the general dividend-valuation model, the price of a share of stock is the present value of all expected future dividends.

Question 24

A preferred stock with a defined maturity date is similar to a bond with a fixed maturity date. Thus, a preferred stock can be valued in a similar fashion to a bond.

Question 25

Which of the following statements is NOT true about secondary markets?

A) In terms of total stock value of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
B) NASDAQ is the second-largest stock market in the United States.
C) Firms listed on the NYSE tend to belarger in size and their shares trade more frequently than those traded on NASDAQ.
D) In the United States, most secondary market transactions are done on one of the many stock exchanges.

Question 26

For a company that has no growth, dividends stay constant over time.

Question 27

Failure to pay a preferred dividend signals to the market that the firm is in serious financial trouble.

Question 28

The stocks owned by ???----- represent about 35 percent of the total value of all corporate equity.

A) mutual funds
B) pension funds
C) Foreign investors
D) households

Question 29

Preferred stock with no fixed maturity can be valued as a perpetuity.

Question 30

The constant-growth stock has dividends growing at a constant rate over time.

Question 31

Which of the following statements is NOT true about secondary markets?

A) In terms of total stock value of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
B) NASDAQ is the second-largest stock market in the United States.
C) Firms listed on the NYSE tend to belarger in size and their shares trade more frequently than those traded on NASDAQ.
D) In the United States, most secondary market transactions are done on one of the many stock exchanges.

Question 32

The value of a supernormal growth stock is the present value of the mixed growth dividend payments and the present value of the constant-growth dividend payments.

Question 33

Which of the following statements is NOT true about secondary markets?

A) In terms of total stock value of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
B) NASDAQ is the second-largest stock market in the United States.
C) Firms listed on the NYSE tend to belarger in size and their shares trade more frequently than those traded on NASDAQ.
D) In the United States, most secondary market transactions are done on one of the many stock exchanges.

Question 34

The bond valuation model can be used to value preferred stocks with no fixed maturity.

Question 35

A fast-growing company will pay constant dividends over time.

Question 36

The constant-growth dividend model tells us that the current price of a share of stock is the next period dividend divided by the difference between the discount rate and the dividend growth rate.

Question 37

The market considers preferred stock to be a debt security because the dividend payment is a fixed contractual obligation and has credit ratings like bonds.

Question 38

Common and preferred stock are valued using a different formula than that used for bonds.

Question 39

Which of the following statements is NOT true about secondary markets?

A) In terms of total stock value of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
B) NASDAQ is the second-largest stock market in the United States.
C) Firms listed on the NYSE tend to belarger in size and their shares trade more frequently than those traded on NASDAQ.
D) In the United States, most secondary market transactions are done on one of the many stock exchanges.

Question 40

Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions.

Question 41

Applying the valuation procedure to common stocks is more difficult than applying it to bonds because:

A) the size and timing of the dividend cash flows are less certain than the coupon payments for bonds.
B) common stocks have no final maturity date.
C) unlike the rate of return, or yield, on bonds, the rate of return on common stock is not directly observable.
D) All of the above are true.

Question 42

Which of the following statements is NOT true about broker markets?

A) Brokers bring buyers and sellers together to earn a fee, called a commission.
B) Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves.
C) Investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search.
D) Brokers can guarantee an order because they have an inventory of securities.

Question 43

Which of the following statements is NOT true about auction markets?

A) In an auction market, buyers and sellers confront each other directly and bargain over price.
B) The participants can only communicate orally in auction markets.
C) The New York Stock Exchange is the best-known example of an auction market.
D) The auctioneer in an auction market is the specialist, who is designated by the exchange to represent orders placed by public customers.

Question 44

Which of the following is NOT a widely-known stock market index?

A) The Dow Jones Industrial Average
B) The OTQ Composite Index
C) The New York Stock Exchange Index
D) The Standard and Poor's 500 Index

Question 45

Which of the following statements is NOT true about preferred stock?

A) Preferred stock represents ownership in the firm.
B) Preferred stockholders are not guaranteed dividend payments by the firm.
C) Preferred stock dividends are paid by the issuer with after-tax dollars.
D) Preferred stock holders have limited voting privileges relative to common-stock owners.

Question 46

Assume that you are considering the purchase of a stock which will pay dividends of $4.50 during the next year. Further assume that you will be able to sell the stock for $85.00 one year from today and that your required rate of return is 15 percent. How much would you be willing to pay for the stock today? (Round off to the nearest $0.01)

A) $89.50
B) $65.37
C) $94.10
D) $77.83

Question 47

Dealer markets are characterized by:

A) no time-consuming search for a fair deal.
B) a guarantee of order fulfillment because the dealer holds an inventory of securities.
C) improved market efficiency because dealers provide continuous bid and ask prices for securities.
D) All of the above characterize dealer markets.

Question 48

Which of the following statements is true?

A) Preferred stockholders are considered to be the true owners of public corporations.
B) Dividends paid to preferred stockholders are not fixed.
C) Preferred stockholders usually do not have voting rights.
D) Preferred stock can never be converted to common stock.

Question 49

Which of the following statements is true about dealer markets?

A) NYSE is the best-known example of a dealer market.
B) A dealer market involves time-consuming search for a fair deal.
C) The advantage of a dealer over a brokered market is that brokers cannot guarantee that an order will be executed promptly, while dealers can, because they have an inventory of securities.
D) All of the above are true of dealer markets.

Question 50

Owners of preferred stock:

A) have limited voting rights.
B) usually receive fixed dividend payments.
C) are given priority treatment over common stock with respect to dividends payments, and the claims against the firm's assets in the event of bankruptcy or liquidation.
D) All of the above statements are true.

Question 51

Which of the following statements is NOT true about common stock?

A) Common-stock holders have the right to vote on the election of the board of directors of their company.
B) Common stock is considered to have no fixed maturity.
C) Owners of common stock are guaranteed dividend payments by the firm.
D) Common-stock holders have limited liability toward the obligations of the corporation.

Question 52

Which of the following statements is NOT true about auction markets?

A) In an auction market, buyers and sellers confront each other directly and bargain over price.
B) The participants can only communicate orally in auction markets.
C) The New York Stock Exchange is the best-known example of an auction market.
D) The auctioneer in an auction market is the specialist, who is designated by the exchange to represent orders placed by public customers.

Question 53

Which of the following statements is NOT true about the general dividend valuation model?

A) The model does not assume any specific pattern for future dividends, such as a constant growth rate.
B) It makes a specific assumption about when the share of stock is going to be sold in the future.
C) The model calls for forecasting an infinite number of dividends for a stock.
D) The price of a share of stock is the present value of all expected future dividends.

Question 54

Preferred stock is sometimes treated like a debt security because:

A) legally preferred stock is a debt security.
B) preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings.
C) preferred dividends are deductible from taxable income just like interest payments on bonds.
D) preferred stock holders receive a residual value and not a stated value.

Question 55

The least efficient of all the different types of secondary markets is the:

A) auction market.
B) direct search market.
C) dealer market.
D) broker market.

Question 56

In brokered markets:

A) the commission charged by brokers is a lower cost to buyers and sellers than the cost of direct search.
B) buyers and sellers are brought together for a commission.
C) brokers build a pool of price information through their extensive contacts.
D) All of the above are true of broker markets.

Question 57

Which of the following statements is true about common stock?

A) Common stock is considered to have a fixed maturity.
B) Owners of common stock are guaranteed dividend payment by the firm.
C) Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy.
D) Common-stock holders have unlimited liability toward the obligations of the corporation.

Question 58

Which of the following statements is NOT true about preferred stock?

A) Preferred dividend payments are paid by the issuer with after-tax dollars.
B) Preferred dividends are tax deductible just like the interest payments on bonds.
C) Preferred stock holders have limited voting privileges relative to common-stock owners.
D) Preferred stocks are generally viewed as perpetuities because they have no fixed maturity.

Question 59

Direct search markets are characterized by:

A) complete price information.
B) extensive broker and dealer participation.
C) private placement transactions and sale of common stock of small private companies.
D) a high level of efficiency.

Question 60

In comparison to the NYSE,

A) NASDAQ has less company listed.
B) total share volume is lower on the NASDAQ.
C) firms listed on the NASDAQ tend to be smaller.
D) NASDAQ firms exceed NYSE listed firms in total capitalization.

Question 61

The constant-growth dividend model will provide invalid solutions when:

A) the growth rate of the stock exceeds the required rate of return for the stock.
B) the growth rate of the stock is less than the required rate of return for the stock.
C) the growth rate of the stock is equal to the risk-free rate.
D) None of the above.

Question 62

Givens, Inc., is a fast-growing technology company that paid a $1.25 dividend last week. The company's expected dividend growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $1.25
B) $6.46
C) $8.37
D) $7.23

Question 63

Which of the following statements is NOT true about zero-growth stocks?

A) The dividend payment pattern remains constant over time.
B) The cash flow pattern resembles a perpetuity with a constant cash flow.
C) The dividend pattern grows over time.
D) There is no growth in dividends over time.

Question 64

Metasteel Limited Co. has a stable sales track record that are not expected to grow in the next several years. Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price? (Round the answer to two decimal places.)

A) $103.50
B) $13.50
C) $39.30
D) $31.94

Question 65

Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $13.50
B) $9.72
C) $12.50
D) $11.63

Question 66

Which of the following are the three simplifying assumptions that cover most stock growth patterns?

A) Dividends remain constant over time, dividends grow at a constant rate, and dividends are equal to zero.
B) Dividends have a zero-growth rate, dividends grow at a varying rate, and dividends are equal to zero.
C) Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern.
D) None of the above.

Question 67

Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $10.76
B) $11.88
C) $11.50
D) $9.80

Question 68

Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a dividend growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock? (Round to the nearest dollar.)

A) $74
B) $32
C) $80
D) $60

Question 69

Zephyr Electricals is a company with no growth potential. Its last dividend payment was $4.50, and it expects no change in future dividends. What is the current price of the company's stock given a discount rate of 9 percent?

A) $40.50
B) $50.00
C) $45.00
D) $500.00

Question 70

Which of the following statements is NOT true about constant-growth stocks?

A) The cash dividend remains constant over time.
B) Mature companies with a history of stable growth show this pattern.
C) The dividends grow at a constant rate from one period to the next forever.
D) Far distant-dividends have a very small present value and add little to the stock's price.

Question 71

You are interested in investing in a company that expects to grow steadily at an annual rate of 6 percent for the foreseeable future. The firm paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this stock? (Round to the nearest dollar.)

A) $58
B) $61
C) $23
D) $24

Question 72

Ryder Supplies has its stock currently selling at $63.25. The company is expected to grow at a constant rate of 7 percent. If the appropriate discount rate is 17 percent, what is the expected dividend, a year from now? (Round the answer to two decimal places.)

A) $4.43
B) $3.25
C) $10.75
D) $6.33

Question 73

Xinhua Manufacturing Company has been generating stable revenues that are not expected to grow in the foreseeable future. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? (Round the final answer to two decimal places.)

A) $39.00
B) $3.69
C) $27.08
D) $21.23

Question 74

Jacob Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent? ( Do not round intermediate calculations. Round final answer to two decimal places.)

A) $4.85
B) $5.37
C) $5.50
D) $6.14

Question 75

Kleine Toymakers is introducing a new line of robotic toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Kleine plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of return is 15 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $13.24
B) $12.00
C) $6.57
D) $10.24

Question 76

Which of the following statements is true about growth stocks?

A) These are stocks of firms that grow their sales at above-average rates and are expected to do so for a length of time.
B) These are stocks of firms that grow their earnings at above-average rates and are expected to do so for a length of time.
C) They generally pay dividends during their fast growth phase.
D) None of the above.

Question 77

Which of the following statements is true about the general dividend valuation model?

A) It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.
B) It implies that the value of a firm's common stock can be determined only if the expected future dividends are infinite.
C) It implies that the value of a growth stock can be determined by forecasting the future price of the stock.
D) The model cannot be used to calculate the value of a common stock unless the dividends exceed the firm's expected growth rate.

Question 78

A communications company pays annual dividends of $8.50 with no possibility of it changing in the next several years. If the firm's stock is currently selling at $60.71, what is the required rate of return? (Round to nearest whole number.)

A) 14%
B) 16%
C) 13%
D) 15%

Question 79

Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Do not round intermediate calculations. Round final answer to the nearest percent.)

A) 13%
B) 16%
C) 20%
D) 21%

Question 80

Ambassador Corp. sells household cleaners producing a revenue stream that has remained unchanged in the last few years. The firm does not expect any change in its earnings or dividends for the next several years. The stock is currently selling at $46.88. If the required rate of return is 16 percent, what is the dividend paid by this company? (Round the answer to two decimal places.)

A) $2.93
B) $4.65
C) $6.89
D) $7.50