Test bank corporate finance 8e ros chap008

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 t

Multiple Choice Questions

1 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

4 A form of equity which receives no preferential treatment in either the payment of

dividends or in bankruptcy distributions is called _ stock

6 The voting procedure where you must own fifty percent plus one of the outstanding shares

of stock to guarantee that you will win a seat on the board of directors is called _ voting

a democratic

b cumulative

C straight

7 The voting procedure where a shareholder grants authority to another individual to vote his

or her shares is called _ voting

10 The market in which new securities are originally sold to investors is called the _ market

13 An agent who arranges a trade between a buyer and a seller is called a:

16 A member of the NYSE acting as a dealer in one or more securities on the exchange floor

17 A floor broker is a NYSE member who:

a supervises the commission brokers for a financial firm

b trades for his or her personal inventory

C executes orders on behalf of a commission broker.

d maintains an inventory and acts on behalf of a specialist

e is charged with maintaining a liquid, orderly market

19 The electronic system used by the NYSE which enables orders to be transmitted directly

to a specialist is called the _ system

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

23 An ECN is best described as:

a an electronic network which sends orders directly to the floor of the NYSE

b the network used in the primary market for selling newly issued shares

c the international trading network of the NYSE

D a website which allows investors to trade directly with one another.

e a computerized network used by independent brokers

SECTION: 8.3

TOPIC: ELECTRONIC COMMUNICATIONS NETWORK (ECN)

TYPE: DEFINITIONS

24 The inside quotes for a security are the:

a first posted bid and ask quotes of the trading day

b price quotes which apply only on the floor of the exchange

C highest bid quote and the lowest asked quote.

d lowest bid quote and the highest asked quote

e averages of all the bid and ask quotes listed in the specialist's order book

25 The Great Northern Fish Co pays an annual dividend of $2 per share on its common stock This dividend amount has been constant for the past ten years and is expected to remainconstant Given this, one share of the firm's stock:

a is basically worthless as it offers no growth potential

b has a market value equal to the present value of $2 paid one year from today

C is valued as if the dividend paid is a perpetuity.

d is valued with an assumed growth rate of one percent

e has a market value of $2 a share

SECTION: 8.1

TOPIC: VALUATION OF ZERO GROWTH STOCK

TYPE: CONCEPTS

26 The common stock of Ruby Janes pays a constant annual dividend Thus, the market price

of Ruby Janes stock will:

a also remain constant

b increase over time

c decrease over time

d increase when the market rate of return increases

E decrease when the market rate of return increases.

a market price; market price

b dividend yield; dividend yield

C rate of capital gain; rate of capital gain

d total return; total return

e capital gains; dividend yield

SECTION: 8.1

TOPIC: DIVIDEND YIELD VS CAPITAL GAINS YIELD

TYPE: CONCEPTS

28 The 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

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

a the same amount to every investor regardless of the investor's desired rate of return

B the present value of the future cash flows which it generates.

c an amount computed as the next annual dividend divided by the market rate of return

d the same amount as any other stock that pays the same current dividend and has the same required rate of return

e an amount computed as the next annual dividend divided by the required rate of return

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

31 Ernie's Auto Sales is a relatively new firm that is still in a period of rapid growth The company plans on retaining all of its earnings for the next four years Five years from now, the company projects paying an annual dividend of $.20 a share and then increasing that amount by 3.5 percent 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

32 Stanwycke Publishers currently pays no dividend The company is anticipating dividends

of $0.68, $0.70, $0.85, $.90, and $1 over the next five years, respectively After that, the company anticipates increasing the dividend by 4 percent annually The first step in

computing the value of this stock today is to compute the value of the stock in year:

33 Supernormal growth refers to a firm that increases its dividend by:

a three or more percent per year

B a rate which is most likely not sustainable over an extended period of time.

c a constant rate of 2 or more percent per year

d $0.10 or more per year

e an amount in excess of $0.50 a year

SECTION: 8.1

TOPIC: SUPERNORMAL GROWTH

TYPE: CONCEPTS

34 The total rate of return earned on a stock is comprised of which two of the following?

I current yield

II yield to maturity

III dividend yield

IV capital gains yield

36 The two-stage growth model evaluates the current price of a stock based on the

assumption the stock will:

a pay an increasing dividend for a period of time and then cease paying dividends altogether

b increase the dividend amount every other year

c pay a constant dividend for the first two quarters of each year and then increase the

dividend the last two quarters of each year

D grow at a fixed rate for a period of time after which it will continue growing but at a

two-a no dividends for three years, then increasing dividends forever

b $1 per share annual dividend for five years, then $1.25 annual dividends forever

c decreasing dividends for six years and then one final liquidating dividend payment

d dividends payments which increase by 2, 3, 4, and 5 percent respectively for four years followed by a constant dividend thereafter

E dividend payments which increase by 10 percent for three years followed by dividends

which increase by 4 percent annually thereafter

SECTION: 8.1

TOPIC: DIVIDEND GROWTH MODEL

TYPE: CONCEPTS

38 Shareholders in a leveraged corporation generally have the right to:

a select the corporate vice-presidents

b declare dividends

C elect the corporate directors.

d issue corporate bonds

e obtain all the corporate assets in a bankruptcy

SECTION: 8.2

TOPIC: SHAREHOLDER RIGHTS

TYPE: CONCEPTS

39 Terri owns 45 shares of stock in Winsum Ventures and wants to win a seat on the board ofdirectors Winsum Ventures has a total of 200 shares of stock outstanding Each share

receives one vote Presently, the company is voting to elect four new directors Which one of the following statements must be true given this information?

a Regardless of the type of voting employed, Terri does not own enough shares to control any

of the seats

b If straight voting applies, Terri is assured one seat on the board

c If straight voting applies, Terri can control all the open seats

D If cumulative voting applies, Terri is assured one seat on the board.

e If cumulative voting applies, Terri can control all the open seats

A must individually own sufficient shares to totally control the outcome of the entire election

process if he or she is to control the outcome of any one election

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 percent 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 vote for one director, regardless of the number of shares owned

e who owns more shares than anyone else, regardless of the number of shares owned, will control the elections

SECTION: 8.2

TOPIC: STRAIGHT VOTING

TYPE: CONCEPTS

41 Brownstone United 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 Likewise, no other single shareholder owns sufficient shares to

personally control the outcome of the election The most likely result of this situation is a(n):

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.

I right to all the corporate profits

II sole right to elect the corporate directors

III right to vote on proposed mergers

IV right to the residual assets in a liquidation

a I and II only

b II and III only

c I and IV only

D II, III, and IV only

e I, II, III, and IV

SECTION: 8.2

TOPIC: SHAREHOLDER RIGHTS

TYPE: CONCEPTS

43 The Denver Post has a general dividend policy whereby the firm pays a constant annual dividend of $1.50 per share of common stock The firm has 2,000 shares of stock outstanding.The company:

a must always show a current liability of $3,000 for dividends payable

B must still declare each dividend before it becomes an actual company liability.

c is obligated to continue paying $1.50 per share per year as a dividend

d will be declared in default and can face bankruptcy if they do not pay at least $1.50 per year

to each shareholder on a timely basis

e has a liability which must be paid at a later date should the company miss paying an annual dividend payment

SECTION: 8.2

TOPIC: DIVIDENDS

TYPE: CONCEPTS

44 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 receive preferential tax treatment

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

SECTION: 8.2

TOPIC: DIVIDENDS

TYPE: CONCEPTS

45 The owner of preferred stock:

A is entitled to a distribution of income prior to the common shareholders.

b has the right to veto the outcome of an election held by the common shareholders

c has the right to declare the company bankrupt whenever there are insufficient funds to pay dividends to the common shareholders

d receives tax-free dividends if they are an individual and own more than 20 percent of the outstanding preferred shares

e has the right to collect payment on any unpaid dividends as long as the stock is

47 Preferred shareholders are granted:

A the right to dividends prior to common shareholders.

b a guarantee of dividends of a set amount every quarter

c annual dividends equal to a set percentage of the firm's annual net income

d annual dividends equal to a set percentage of the preferred stock's market value

e the right to receive unpaid dividend payments provided the stock is noncumulative

SECTION: 8.2

TOPIC: PREFERRED STOCK

TYPE: CONCEPTS

48 In a liquidation, each share of 6 percent preferred stock is generally entitled to a liquidation payment of _ as long as there are sufficient funds available

49 Which of the following are correct statements concerning corporate dividends?

I Dividends are generally treated as ordinary income for individual shareholders

II Dividends are a liability of a corporation only after they have been declared.III Dividends are a tax deductible expense once they have been paid

IV Dividends receive preferential treatment when they become corporate income

a I and II only

b III and IV only

C I, II, and IV only

d II, III, and IV only

e I, II, III, and IV

SECTION: 8.2

TOPIC: DIVIDENDS

TYPE: CONCEPTS

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

a the sale of 100 shares of Delta stock by Tami Lynn to Jennifer Lee

51 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 bid price when purchasing securities.

c A broker in market securities earns income in the form of a bid-ask spread

d A broker takes ownership of the securities being traded

e A broker deals solely in the primary market

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

a The closing price on the previous day was $0.30 higher than today's closing price

b A dealer will buy the stock at $42.55 and sell it at a price that is $0.30 higher, or $42.85

C Yesterday's closing price was $0.30 less than today's closing price.

d The earnings per share are equal $18

e The earnings per share have increased by $0.30 this year

SECTION: 8.3

TOPIC: STOCK MARKET REPORTING

TYPE: CONCEPTS

56 Which one of the following correctly applies to the NYSE?

a The NYSE is owned by members who purchase "seats" on the exchange

b The assigned dealer of a particular security on the exchange is called a floor trader

C The NYSE is a public corporation with shares trading on the exchange floor.

d The order flow is limited to 100 million shares per day

57 The floor of the NYSE trading room:

A includes an area commonly referred to as "the Garage".

b is dotted with trading posts shaped as octagons

c consists of trading posts aligned in linear fashion around the outside walls

d is populated with specialists who move around the room to conduct trades

e is populated with floor traders carrying out trades on behalf of their firm's clients

59 Jessica's Pharmacy made two announcements concerning their common stock today First,the company announced the next annual dividend will be $1.48 a share Secondly, all

dividends after that will increase by 2.5 percent annually What is the maximum amount you should pay to purchase a share of this stock if your goal is to earn a 12 percent rate of return?

60 How much are you willing to pay for one share of Delphia stock if the company just paid

a $1.34 annual dividend, the dividends increase by 2.8 percent annually, and you require a 14 percent rate of return?