Deck 9: Share Valuation

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Valuation of common and preferred stock is done using a different valuation formula than that used for bonds.

Question 5

Preferred dividend payments are fixed amounts paid regularly, similar to the interest payments on corporate bonds.

Question 6

Legally, common stockholders have unlimited liability.

Question 7

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 8

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

Question 9

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

Question 10

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

Question 11

Householdsown about 35% of the total value of all corporate equity.

Question 12

Companies raise capital in secondary markets by issuing new securities.

Question 13

Direct search markets provide the best price information.

Question 14

Direct search is the least efficient type of secondary market.

Question 15

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

Question 16

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

Question 17

Pension funds are the largest institutional investors in equities.

Question 18

Equity securities are certificates of ownership of a corporation.

Question 19

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

Question 20

In terms of total volume of activity and total capitalization of the firms listed, the NYSE is the largest in the world and NASDAQ is the second largest.

Question 21

Which one 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 they charge a commission that is less than the cost of direct search.
D) Brokers can guarantee an order because they have an inventory of securities.

Question 22

Which ONE 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 23

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 24

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 25

Which ONE of the following statements is true about secondary markets?

A) In secondary markets, outstanding shares of stock are bought and sold among investors.
B) For an investor, the function of secondary markets is to provide profitability for the shares of securities they own.
C) An active secondary market causes firms to sell their new debt or equity issues at a higher cost of funds.
D) All of the above are true statements

Question 26

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

A) In terms of total volume of activity and total capitalization of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
B) In terms of the number of companies listed and shares traded on a daily basis, NASDAQ is larger than the NYSE.
C) Firms listed on the NASDAQ tend to be, on average, larger in size, and their shares trade more frequently than firms whose securities trade on NYSE.
D) In the United States, most secondary market transactions are done over the counter.

Question 27

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

Question 28

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

Question 29

The bond valuation model can be used to value perpetual preferred stock.

Question 30

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 transaction fee.
C) brokers build a pool of price information through their extensive contacts.
D) All of the above are true of broker markets.

Question 31

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

Question 32

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

Question 33

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

A) In terms of total volume of activity and total capitalization of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
B) In terms of the number of companies listed and shares traded on a daily basis, the NASDAQ is larger than the NYSE.
C) Firms listed on the NYSE tend to be, on average, larger in size and their shares trade more frequently than firms whose securities trade on NASDAQ.
D) In the United States, most secondary market transactions are done on one of the many stock exchanges.

Question 34

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

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

Whenever the dividend growth rate exceeds the required rate of return, the constant-growth model provides invalid solutions.

Question 38

The largest holders of equity securities are

A) mutual funds.
B) pension funds.
C) foreign investors.
D) households.

Question 39

In comparison to the NYSE,

A) NASDAQ has less companies 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 40

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

Question 41

Preferred stock is sometimes regarded like a debt security because

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

Question 42

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

A) Common-stock holders have the right to vote on the selection of the board of directors for the firm.
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.

Question 43

PV of dividends: 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?

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

Question 44

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

A) Preferred dividend payments are fixed amounts paid regularly by the firm, similar to the interest payments on corporate bonds.
B) Preferred dividends are deductable from taxable income just like the interest on bonds.
C) Preferred stock holders have limited voting privileges relative to common-stock owners.
D) While preferred stock is legally classified as perpetuities, some issues do have a fixed maturity.

Question 45

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 46

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

A) In an auction market, buyers and sellers face each other directly and bargain over price.
B) The NASDAQ is the most efficient stockmarket in the United States.
C) The New York Stock Exchange is the best-known example of an auction market.
D) The auctioneer in this case is the specialist, who is designated by the exchange to represent orders placed by public customers.

Question 47

PV of dividends: Jacobs 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?

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

Question 48

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

A) The model does not assume any specific pattern for dividend growth.
B) It makes a specific assumption about when the stock is going to be sold in the future.
C) The model calls for forecasting an infinite number of dividends for a stock.
D) All of the above are true.

Question 49

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 50

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

A) Dividend stays constant over time.
B) Mature companies with a history of stable growth show this pattern.
C) Dividends grow at a constant rate each period forever.
D) Dividends that are to be paid out in the distant future have a very small present value and add little to the stock's price.

Question 51

Which ONE of the following statements is true about fast growth stocks?

A) These are firms that grow their sales at above-average rates and are expected to do so for a length of time.
B) These are 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 52

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 53

PV of dividends: 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 rat of return is 15 percent?

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

Question 54

Which ONE 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.

Question 55

PV of dividends: Givens, Inc., is a fast growing technology company that paid a $1.25 dividend last week. The company's expected 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?

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

Question 56

The three simplifying assumptions that cover most stock growth patterns are

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

Question 57

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

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

Question 58

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 smaller than 10%.
D) None of the above.

Question 59

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

A) Preferred stock represents ownership in the firm.
B) Owners of preferred stock are not guaranteed dividend payments by the firm.
C) Preferred stock dividends are fixed financial amounts paid regularly by the firm just like bond coupon payments.
D) Preferred stock holders have limited voting privileges relative to common-stock owners.

Question 60

PV of dividends: 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?

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

Question 61

Constant growth: 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 62

Constant growth: 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?

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

Question 63

Nonconstant growth: BioSci, Inc., a biotech firm has forecast the following growth rates for the next three years: 30 percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate of 7 percent for the next several years. The company paid a dividend of $2.00 last week. If the required rate of return is 16 percent, what is the market value of this stock?

A) $51.03
B) $36.86
C) $56.12
D) $46.37

Question 64

Preferred stock: Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly dividend paid by this firm?

A) $8.76
B) $10.50
C) $2.19
D) $2.63

Question 65

Preferred stock valuation: The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent?

A) $23.06
B) $65.88
C) $37.57
D) $43.25

Question 66

Nonconstant growth: Starskeep, Inc., is a fast growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return on such stocks is 20 percent, what is the current price of the stock?

A) $15.63
B) $4.70
C) $30.30
D) $22.68

Question 67

Constant growth: A company is growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now?

A) $58.31
B) $46.29
C) $51.02
D) $42.83

Question 68

Constant growth: Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a 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

Nonconstant growth: Grant, Inc., is a fast growth stock and expects to grow at a rate of 25 percent for the next four years. It then will settle to a constant-growth rate of 10 percent. The first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of the stock?

A) $85.94
B) $97.19
C) $50.59
D) $65.68

Question 70

Preferred stock valuation: The Columbia Consumer Products Co. has issued perpetual preferred stock with a $100 par value. The firm pays a quarterly dividend of $2.60 on this stock. What is the current price of this preferred stock given a required rate of return of 12.5 percent?

A) $47.25
B) $80.00
C) $20.80
D) $83.20

Question 71

Preferred stock: The preferred stock of Acme International is selling currently at $110.35. If your required rate of return is 9.75 percent, what is the dividend paid by this stock?

A) $9.75
B) $11.32
C) $10.76
D) $8.53

Question 72

Zero growth: 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 73

Zero growth: Zephyr Electricals is a company with no growth potential. Its last dividend 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 74

Zero growth: 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 sales or earnings in 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?

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

Question 75

Zero growth: Xinhua Manufacturing Company has been generating stable revenues but sees no growth in it for 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?

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

Question 76

Nonconstant growth: Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects its growth rate to be at a constant rate of 7 percent. If the required rate of return is 15 percent, what is the current market price of the stock?

A) $69.41
B) $93.63
C) $57.54
D) $80.29

Question 77

Nonconstant growth: Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of 35 percent for the next four years. After four years, the firm will grow at a constant rate of 6 percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is 20 percent, what is the stock worth today?

A) $14.64
B) $32.18
C) $36.43
D) $21.82

Question 78

Constant growth: 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? (Round to the nearest percent.)

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

Question 79

Zero growth: Metasteel Limited Co. has a stable sales track record but does not expect 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?

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

Question 80

Preferred stock valuation: Ajax Company has issued perpetual preferred stock with a par of $100 and a dividend of 5.5 percent. If the required rate of return is 7.75 percent, what is the stock's current market price?

A) $12.90
B) $70.97
C) $53.27
D) $62.14