2) Which NYSE member is typically an employee of a brokerage company such as Merrill Lynch?

Transcription

1 Questions in Chapter 8 concept.qz 1) A is an owner of a seat on the New York Stock Exchange. [A] broker [B] dealer [C] member [D] floor trader [E] specialist [A] :This is an individual who arranges security transactions among investors. Review section 8.3. [B] :This individual buys and sells from inventory. Review section 8.3. [D] :This is a NYSE member who trades for his own account, not for others. Review section 8.3. [E] :This individual is a market maker and does not arrange trades for others. Review section ) Which NYSE member is typically an employee of a brokerage company such as Merrill Lynch? [A] commission broker [B] specialist [C] floor broker [D] floor trader [E] market maker [B] :These individuals do not typically have such an affiliation with a brokerage company. Review section 8.3. [C] :These individuals do not typically have such an affiliation with a brokerage company. Review section 8.3. [D] :These individuals do not typically have such an affiliation with a brokerage company. Review section 8.3. [E] :These individuals do not typically have such an affiliation with a brokerage company. Review section ) A commission broker wishing to execute a customer order to buy shares of stock must attempt to locate a trader to deal with other than the specialist dealing in that stock because the: [A] commission broker must attempt to obtain the highest possible ask price. [B] specialist will trade only if there are other traders also trading in the stock. [C] specialist does not carry any shares of stock in inventory. [D] specialist's spread is typically very low compared to other brokers. [E] commission broker is responsible for getting the best possible price for the customer. [A] :No, they are required to find the lowest possible purchase price. Review section 8.3. [B] :This is not a correct statement of the duties of the specialist. Review section 8.3. [C] :Specialists do need to carry inventory in order to maintain an orderly market. Review section 8.3. [D] :Having the lowest spread is not the same as having the lowest ask price. Review section ) A brings buyers and sellers together but does not maintain an inventory. I. dealer II. specialist III. broker [A] I only [B] III only [C] I and II only [D] I and III only [E] II and III only [A] :A dealer buys and sells from inventory. Review section 8.3. [C] :At least one of these choices is incorrect. Review section 8.3. [D] :At least one of these choices is incorrect. Review section 8.3.

2 [E] :At least one of these choices is incorrect. Review section ) A firm's stock has a required return of 10 percent. The stock's dividend yield is 6 percent. What is the amount of the dividend the firm just paid if the current stock price is $40? [A] $2.18 [B] $2.31 [C] $2.50 [D] $2.87 [E] $3.60 [A] :Isn t the dividend yield equal to D1 divided by P0? What is D0? Review section 8.1. [C] :Isn t the dividend yield equal to D1 divided by P0? If the dividend yield is 6 percent, what is the capital gains yield? Review section 8.1. [D] :Isn t the dividend yield equal to D1 divided by P0? What is D0? Review section 8.1. [E] :Isn t the dividend yield equal to D1 divided by P0? If the dividend yield is 6 percent, what is the capital gains yield? Review section ) Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P4) is: I. D5 / (r - g) II. P0 X (1 + g) 4 III. D0 X [(1 + g) / (r - g)] [A] I only [B] II only [C] I and II only [D] I and III only [E] I, II, and III [A] :Correct, but at least one other choice is also correct. Review section 8.1. [B] :Correct, but at least one other choice is also correct. Review section 8.1. [D] :At least one of these choices is incorrect. Review section 8.1. [E] :At least one of these choices is incorrect. Review section ) Which NYSE member independently trades for his/her own account? [A] commission broker [B] specialist [C] floor broker [D] floor trader [E] runner [A] :This member executes customer orders on the exchange floor. Review section 8.3. [B] :This individual is a market maker who is obligated to make a market for a particular stock. Review section 8.3. [C] :This member executes orders for commission brokers. Review section 8.3. [D] :You are correct! [E] :This individual does not trade for his/her own account. Review section ) Cumulative voting is a procedure in which a shareholder may cast all of his/her votes for a single member of the board of directors.

3 [B] :You should review cumulative and straight voting in section ) According to the constant growth model, the dividend yield is equal to the required return minus the dividend growth rate. [B] :Try computing the dividend yield of a sample problem using the dividend growth model. Review section ) What would you pay for a stock that is expected to pay a $1.50 dividend in one year if the expected dividend growth rate is 3 percent and you require a 16 percent return on your investment? [A] $11.54 [B] $12.33 [C] $12.43 [D] $13.14 [E] $14.30 [B] :You need to review the dividend growth model in section 8.1. [C] :You need to review the dividend growth model in section 8.1. [D] :You need to review the dividend growth model in section 8.1. [E] :You need to review the dividend growth model in section ) Your firm is converting from cumulative voting to straight voting. You currently own the minimum number of shares needed to assure yourself a seat on the board in any election under cumulative voting. How many more shares must you purchase in order to assure yourself a seat under straight voting? Assume there are a total of 500,000 shares outstanding and that 3 directors go up for election each time. [A] none [B] 25,000 [C] 125,000 [D] 250,000 [E] 250,001 [A] :Under cumulative voting with 3 open seats, you must have 25 percent of the shares plus one share, meaning you must already own 125,001 shares. How many shares do you need under straight voting? Review section 8.2. [B] :Under cumulative voting with 3 open seats, you must have 25 percent of the shares plus one share, meaning you must already own 125,001 shares. How many shares do you need under straight voting? Review section 8.2. [D] :Under cumulative voting with 3 open seats, you must have 25 percent of the shares plus one share, meaning you must already own 125,001 shares. How many shares do you need under straight voting? Review section 8.2. [E] :Did you forget that you already own some shares? Review section ) NASDAQ: I. is actually two separate markets. II. typically has multiple market makers for the same security. III. permits electronic communications networks (ECNs) to utilize their trading system. IV. essentially permits individuals to enter their own buy and sell orders for securities. [A] II only

4 [B] III and IV only [C] I, II, and III only [D] II, III, and IV only [E] I, II, III, and IV [A] :Correct, but there is at least one more option that is also correct. Review section 8.3. [B] :Correct, but there is at least one more option that is also correct. Review section 8.3. [C] :Who inputs orders into an ECN? Review section 8.3. [D] :What is the difference between the NASDAQ National Market and the NASDAQ SmallCap Market? Review section ) Which of the following are rights generally granted to common shareholders? I. first right of refusal to buy new preferred stock, if issued II. right to dividends, if paid III. right to assets after all liabilities have been paid in liquidation IV. right to vote by proxy [A] II and III only [B] II and IV only [C] I, II, and III only [D] II, III, and IV only [E] I, II, III, and IV [A] :Correct, but there is at least one more option that is also correct. Review section 8.2. [B] :Correct, but there is at least one more option that is also correct. Review section 8.2. [C] :At least one of these options is incorrect. Review section 8.2. [D] :You are correct! [E] :At least one of these options is incorrect. Review section ) The is measured by the number of shares that change hands each day on an exchange. [A] SuperDOT system [B] specialist's post [C] order flow [D] spread [E] price of a seat on the NYSE [A] :This is an electronic trading system, not a measure of trading volume. Review section 8.3. [B] :This is where specialists make themselves available as a market maker. Review section 8.3. [D] :The spread relates to a dealers' bid and ask prices, not trading volume. Review section 8.3. [E] :This does not measure trading volume on the exchange. Review section ) can freeze out minority shareholders. [A] Straight voting [B] Cumulative dividends [C] Proxy voting [D] Preferred dividends [E] Multiple classes of stock [B] :Since only preferred stocks have a cumulative feature, this must refer to preferred stock and preferred stock does not carry voting rights. Review section 8.2. [C] :The right to assign votes to someone else does not impact negatively on minority shareholders. Review section 8.2. [D] :The question relates to voting and, therefore, to common stock, not preferred stock. Review section 8.2. [E] :The existence of multiple classes of stock does not address the voting powers of minority shareholders directly. Review section 8.2.

5 16) Which one of the following common shareholder rights kicks in when a merger is proposed? [A] the right to share proportionately in dividends paid [B] the right to share proportionately in assets remaining after liabilities have been paid in a liquidation [C] the right to vote for directors [D] preference over preferred shareholders in the payment of dividends [E] the right to vote on stockholder matters of great importance [A] :This right is not related to mergers. Review section 8.2. [B] :This right is not related to mergers. Review section 8.2. [C] :This right is not related to mergers. Review section 8.2. [D] :This is never a right of common shareholders. Review section ) Which one of the following statements is accurate regarding the NASDAQ? [A] Only small firms trade on the NASDAQ. [B] Trading on the NASDAQ takes place at a central location. [C] The NASDAQ has floor traders just as the NYSE does. [D] The NASDAQ has a single market maker per security. [E] Inside quotes on the NASDAQ are the highest bid quotes and the lowest asked quotes posted for a security. [A] :Many small firms trade on NASDAQ, but some very large firms do as well. Review section 8.3. [B] :The NASDAQ is a dealer market that has no central location. Review section 8.3. [C] :The NASDAQ is an electronic dealer market. There is no exchange floor. Review section 8.3. [D] :The NASDAQ has multiple market makers per security since it is entirely a dealer market. Review section ) You can never value a stock that has supernormal dividend growth. [A] :In many cases, you can value these stocks. Review section ) The primary reason for creating dual or multiple classes of stock has to do with: [A] exchange listing. [B] convertible bonds. [C] freezing out minority shareholders. [D] paying for acquisitions. [E] control of the firm. [A] :Creating multiple classes of stock may adversely affect the ability to list on an exchange. Review section 8.2. [B] :While bonds may be exchangeable for only one class of stock, that is not the primary reason for creating multiple classes. Review section 8.2. [C] :This is not generally the primary reason for creating a new class of stock. Review section 8.2. [D] :This is not generally the primary reason for creating a new class of stock. Review section 8.2.

6 20) Four directors will be elected and you wish to be one. With cumulative voting, what percent of the shares, plus one share, do you need to have on your side to guarantee you a seat? [A] 12.5 percent [B] 16.7 percent [C] 20.0 percent [D] 25.0 percent [E] 33.3 percent [A] :You need to review cumulative voting in section 8.2. [B] :You need to review cumulative voting in section 8.2. [D] :You need to review cumulative voting in section 8.2. [E] :You need to review cumulative voting in section ) The price-earnings ratios for NYSE stocks reported in the Wall Street Journal are based on earnings per share for the past year. [B] :These are always reported based on the most recent financial results of the firm. Review section ) A firm's stock has a required return of 10 percent. The stock's dividend yield is 6 percent. What is the amount of next year s dividend if the current stock price is $40? [A] $2.00 [B] $2.40 [C] $2.80 [D] $3.20 [E] $3.60 [A] :Isn t the dividend yield equal to D1 divided by P0? Review section 8.1. [C] :Isn t the dividend yield equal to D1 divided by P0? Review section 8.1. [D] :Isn t the dividend yield equal to D1 divided by P0? Review section 8.1. [E] :Isn t the dividend yield equal to D1 divided by P0? Review section ) A stock that pays a constant dividend of $2.50 currently sells for $ What is the required rate of return? [A] 11.0 percent [B] 11.5 percent [C] 12.0 percent [D] 12.5 percent [E] 13.0 percent [A] :This is a present value of a perpetuity problem or, equivalently, a stock that has zero dividend growth. Review section 8.1. [B] :This is a present value of a perpetuity problem or, equivalently, a stock that has zero dividend growth. Review section 8.1. [C] :This is a present value of a perpetuity problem or, equivalently, a stock that has zero dividend growth. Review section 8.1. [D] :You are correct! [E] :This is a present value of a perpetuity problem or, equivalently, a stock that has zero dividend growth. Review section 8.1.

7 24) In a specialist system like the NYSE, there is more than one market maker per listed stock. [A] :The specialist on the NYSE is the only market maker for a particular stock. Review section ) Which one of the following items does NOT usually appear in a Wall Street Journal common stock quote? [A] capital gains rate [B] dividend yield [C] closing price [D] high and low price for the last year [E] number of shares traded [B] :This is generally reported. Review section 8.3. [C] :This is generally reported. Review section 8.3. [D] :This is generally reported. Review section 8.3. [E] :This is generally reported. Review section ) ABC company's preferred stock is selling for $25 a share. It is expected that the company will pay its constant preferred dividend in perpetuity. If the required return is 12 percent, what will be the dividend two years from now? [A] $2.39 [B] $2.50 [C] $3.00 [D] $3.30 [E] $3.76 [A] :What is the current dividend? Review section 8.1. [B] :What is the current dividend? Review section 8.1. [D] :What is the current dividend? Will the dividend change? Review section 8.1. [E] :What is the current dividend? Will the dividend change? Review section ) You can buy a stock for $30.00 per share and then choose one of the following dividend payment schemes. If the first year's dividend growth rate is 5 percent, you should choose the method where dividends grow: [A] at a decreasing rate. [B] by the same dollar amount each year. [C] at a constant rate. [D] at an increasing rate. [E] by 5 percent for the first three years and 5.25 percent thereafter. [A] :This is not your best choice. Since this is a negative growth rate the stock price will decline each year. Review section 8.1. [B] :This is not your best choice. Dividends will grow at a decreasing growth rate each year. Review section 8.1. [C] :This is not your best choice. Review section 8.1. [D] :You are correct! [E] :How is this choice better than choice D? Review section 8.1.

8 28) There is an election being held to fill 2 seats on the board of directors of a firm in which you hold stock. There are a total of 420 shares outstanding. If the election is conducted under cumulative voting and you own 120 shares, how many more shares must you buy to be assured of earning a seat on the board? [A] 0 [B] 2 [C] 21 [D] 91 [E] 141 [A] :With cumulative voting and 2 open seats, you need to own one-third of the shares plus one. Review section 8.2. [B] :With cumulative voting and 2 open seats, you need to own one-third of the shares plus one. Review section 8.2. [D] :With cumulative voting and 2 open seats, you need to own one-third of the shares plus one. Review section 8.2. [E] :Did you forget that you own 120 shares already? Review section ) The spread is: [A] the bid price minus the ask price. [B] the basic source of dealer profits. [C] the amount by which the selling price exceeds the offering price. [D] the price you would pay if you wished to purchase a share of stock. [E] also known as an inside quote. [A] :Is this correct since the dealer buys at the bid and sells at the ask? Review section 8.3. [C] :The selling and offering price are the same thing. Review section 8.3. [D] :If you buy, you pay the ask price. Review section 8.3. [E] :Inside quotes are the highest bid quotes and the lowest ask quotes for a security, which is not the same as the spread. Review section ) The term is usually applied to stock that has no special preference either in paying dividends or in bankruptcy. [A] preferred stock [B] debenture [C] common stock [D] cumulative voting [E] proxy [A] :This type of stock has certain privileges in both dividend payments and bankruptcy. Review section 8.2. [B] :This term does not refer to stock. Review section 8.2. [D] :This is not a kind of stock. Review section 8.2. [E] :This is not a kind of stock. Review section ) One of the key differences between the NASDAQ and the NYSE is that, unlike the NYSE, the NASDAQ is a computer network that has no physical location where trading takes place. [B] :The NYSE has a physical location, the NASDAQ does not. Review section 8.3.

9 32) Biolabs, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Investors believe that at the end of year 31 the firm will pay a dividend of $12.00 per share. The dividend will increase at a 6 percent rate annually thereafter. Given a required return of 15 percent, the stock should sell for: [A] $1.21. [B] $1.64. [C] $2.01. [D] $4.39. [E] $ [A] :Did you get a price of $ for P30? What is P0? Review section 8.1. [B] :Did you get a price of $ for P30? What is P0? Review section 8.1. [D] :Did you get a price of $ for P30? What is P0? Review section 8.1. [E] :Did you get a price of $ for P30? What is P0? Review section ) Which NYSE member is responsible for maintaining a fair, orderly market for the securities assigned to them? [A] commission broker [B] specialist [C] floor broker [D] floor trader [E] discount broker [A] :This individual is not charged with maintaining a fair, orderly market. Review section 8.3. [C] :This individual is not charged with maintaining a fair, orderly market. Review section 8.3. [D] :This individual is not charged with maintaining a fair, orderly market. Review section 8.3. [E] :This individual is not charged with maintaining a fair, orderly market. Review section ) A grant of authority by a shareholder allowing another individual to vote his/her shares is a: [A] preferred stock. [B] proxy. [C] specialist. [D] cumulative voting right. [E] dual class stock. [A] :The question addresses voting rights, which preferred stock does not carry. Review section 8.2. [C] :This response does not address voting rights. Review section 8.2. [D] :Cumulative voting does not refer to the right to vote on behalf of another shareholder. Review section 8.2. [E] :This response does not impact upon the ability of one shareholder to vote on behalf of another. Review section ) Toys, Co. stock is currently selling for $ The expected dividend for next year is $1.50 and the required return is 10 percent. What is this firm's dividend growth rate assuming constant growth? [A] 7 percent [B] 8 percent [C] 9 percent [D] 10 percent [E] 15 percent [B] :What is the dividend yield? What is the capital gains yield? Review section 8.1. [C] :What is the dividend yield? What is the capital gains yield? Review section 8.1. [D] :What is the dividend yield? What is the capital gains yield? Review section 8.1.

10 [E] :What is the dividend yield? What is the capital gains yield? Review section ) You just voted against a merger proposal from another corporation. You must own: [A] preferred stock. [B] a debenture. [C] common stock. [D] cumulative dividend stock. [E] Class B stock. [A] :Preferred stock does not carry voting rights. Review section 8.2. [B] :Bonds do not carry voting rights. Review section 8.2. [D] :Since only preferred stocks have a cumulative feature, this must refer to preferred stock and preferred stock does not carry voting rights. Review section 8.2. [E] :A second class of common stock may or may not have voting rights. There is a better answer. Review section ) Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Investors believe that, beginning at the end of year 31 the firm will begin to pay a dividend of $12.00 per share. The dividend will never change. Given a required return of 15 percent, what should the stock sell for today? [A] $1.21 [B] $2.15 [C] $8.15 [D] $42.00 [E] $80.00 [B] :Did you get a price of $80.00 for P30? What is P0? Review section 8.1. [C] :Did you get a price of $80.00 for P30? What is P0? Review section 8.1. [D] :Did you get a price of $80.00 for P30? What is P0? Review section 8.1. [E] :You have found P30. Now you must compute P0. Review section ) Which of the following statements is (are) true about dividends on common stock? I. Payment of dividends is a tax deductible business expense for a corporation. II. Dividends that have been declared but are not yet paid are liabilities of the corporation. III. Dividends received by both individuals and corporations are fully taxable. [A] II only [B] III only [C] I and III only [D] II and III only [E] I, II, and III [B] :Dividends received by corporations are typically partially tax exempt. Review section 8.2. [C] :At least one of these choices is incorrect. Review section 8.2. [D] :At least one of these choices is incorrect. Review section 8.2. [E] :At least one of these choices is incorrect. Review section ) Which one of the following statements is true about the differences between debt and common stock? [A] Debt is ownership in a firm but equity is not. [B] Creditors have voting power while stockholders do not. [C] Periodic payments made to either class of security are tax deductible for the issuer. [D] Interest payments are promised while dividend payments are not. [E] Bondholders can also own equity, but shareholders can not own bonds.

11 [A] :The reverse of this statement is true. Review section 8.2. [B] :The reverse of this statement is true. Review section 8.2. [C] :Only the interest payments on bonds are tax deductible. Review section 8.2. [D] :You are correct! [E] :There is nothing that prevents equity owners from becoming bondholders as well. Review section ) Which NYSE member is responsible for getting the best possible prices for their customers' orders? [A] commission broker [B] specialist [C] floor broker [D] floor trader [E] exchange official [B] :This individual is a market maker who is obligated to make a market for a particular stock. Review section 8.3. [C] :This is a NYSE member who executes orders for commission brokers on a fee basis. Review section 8.3. [D] :This is a NYSE member who trades for his/her own account, not for others. Review section 8.3. [E] :This person does not transact trades for customers. Review section ) Preferred stock is similar to debt in that: I. both frequently carry credit ratings. II. both can be repaid using a sinking fund. III. both receive a stated payment from a corporation during the year. IV. both are considered debt instruments. [A] I and III only [B] I and IV only [C] II and IV only [D] I, II, and III only [E] II, III, and IV only [A] :Correct, but there is at least one more correct option. Review section 8.2. [B] :At least one of these options is incorrect. Review section 8.2. [C] :At least one of these options is incorrect. Review section 8.2. [D] :You are correct! [E] :At least one of these options is incorrect. Review section ) Suppose Pale Hose, Inc. has just paid a dividend of $1.40 per share. Sales and profits for Pale Hose are expected to grow at a rate of 5 percent per year. Its dividend is expected to grow by the same amount. If the required return is 10 percent, what is the value of a share of Pale Hose? [A] $14.00 [B] $15.25 [C] $25.80 [D] $28.00 [E] $29.40 [A] :You need to review the dividend growth model in section 8.1. [B] :You need to review the dividend growth model in section 8.1. [C] :You need to review the dividend growth model in section 8.1. [D] :Did you use D0 instead of D1 in your calculations? Review section ) The effect of cumulative voting is to permit minority participation.

12 [B] :Since directors are elected all at once, this type of voting increases the power of even a small block of shares. Review section ) Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. What is growth rate of the dividend during year 2? [A] 10 percent [B] 15 percent [C] 20 percent [D] 25 percent [E] 50 percent [B] :Dividends grow from $1.10 to $1.21. What is this increase in percentage terms? Review section 8.1. [C] :Dividends grow from $1.10 to $1.21. What is this increase in percentage terms? Review section 8.1. [D] :Dividends grow from $1.10 to $1.21. What is this increase in percentage terms? Review section 8.1. [E] :Dividends grow from $1.10 to $1.21. What is this increase in percentage terms? Review section ) Which of the following statements is (are) correct? I. When the constant growth model holds, g is equal to the capital gains yield. II. The total return on a share of stock is equal to the dividend yield plus the capital gains yield. III. The dividend yield on a stock is the annual dividend divided by the par value. [A] I only [B] II only [C] I and II only [D] II and III only [E] I, II, and III [A] :Correct, but at least one other choice is also correct. Review section 8.1. [B] :Correct, but at least one other choice is also correct. Review section 8.1. [D] :At least one of these choices is incorrect. Review section 8.1. [E] :At least one of these choices is incorrect. Review section ) Which of the following are reasons why the valuation of a common stock is generally more difficult than the valuation of a bond? I. Future cash flows from a stock are not known in advance. II. A common stock does not have a maturity date. III. Common stock valuation is sensitive to estimates of the dividend growth rate. IV. Dividend payments can be skipped. [A] I and II only [B] I and IV only [C] I and III only [D] II, III, and IV only [E] I, II, III, and IV [A] :Correct, but at least one other choice is also correct. Review section 8.1. [B] :Why isn't stock valuation sensitive to changes in the growth rate? Review section 8.1. [C] :Does a stock mature? Do bonds? Review section 8.1. [D] :How are the future cash flows of a stock known in advance? Aren't bond cash flows known in advance? Review section 8.1.

13 47) As a common shareholder in a firm, which one of the following allows you to share proportionally in any new stock sold? [A] proxy [B] preemptive right [C] cumulative voting [D] straight voting [E] Class B common stock [A] :This deals with voting rights, not new stock issues. Review section 8.2. [C] :This deals with voting rights, not new stock issues. Review section 8.2. [D] :This deals with voting rights, not new stock issues. Review section 8.2. [E] :This does not relate to the right to share proportionally in any new stock sold. Review section ) The NASDAQ acts as both a primary market and a secondary market for shares of stock. [B] :The types of transactions that occur differentiate primary and secondary markets, but they coexist on the same exchange. Review section ) If Russian Motors closed at $22 and the current quarterly dividend is $.25, what is the dividend yield that will be reported in the Wall Street Journal? [A] 1.14 percent [B] 1.33 percent [C] 2.28 percent [D] 4.55 percent [E] 5.50 percent [A] :Did you multiply the quarterly dividend by 4 when computing the dividend yield? Review sections 8.1 and 8.3. [B] :Did you multiply the quarterly dividend by 4 when computing the dividend yield? Review sections 8.1 and 8.3. [C] :Did you multiply the quarterly dividend by 4 when computing the dividend yield? Review sections 8.1 and 8.3. [D] :You are correct! [E] :Did you multiply the quarterly dividend by 4 when computing the dividend yield? Review sections 8.1 and ) ABC Corporation's common stock dividend yield is 4 percent. The company just paid a dividend of $1 and is expected to maintain a constant 6 percent growth rate. What is the required rate of return on ABC's stock? [A] 9.00 percent [B] 9.19 percent [C] percent [D] percent [E] percent [A] :Did you get a current stock price of $25 by using the dividend yield formula? Review section 8.1. [B] :Did you get a current stock price of $25 by using the dividend yield formula? Review section 8.1. [C] :Did you use D0 instead of D1 in your calculations? Review section 8.1. [D] :You are correct! [E] :Did you get a current stock price of $25 by using the dividend yield formula? Review section 8.1.

14 51) Which one of the following is a true statement regarding publicly traded stocks and bonds? [A] A share of preferred stock is generally easier to value than a share of common stock. [B] The price of a stock is greater than the present value of all future dividends. [C] The dividend growth model can be used to value stocks only if the dividend growth rate is constant from now into infinity. [D] A share of preferred stock represents an ownership interest in a corporation. [E] Preferred stock is more like common stock than a bond. [B] :The price is equal to the present value of all future dividends. Review section 8.1. [C] :The dividend growth model can also be used to help value stocks in supernormal growth cases. Review section 8.1. [D] :Preferred stock is not an ownership interest. Review section 8.2. [E] :Except for tax treatment, preferred stock is not much like common stock at all. Review section ) A shareholder of common stock normally receives which of the following rights? I. the right to share proportionately in assets remaining after all of the liabilities, including any to the preferred shareholders, have been paid in a liquidation II. the right to vote for the corporate directors III. preference over preferred shareholders in the payment of dividends IV. the right to vote on stockholder matters of great importance [A] I and II only [B] III and IV only [C] I, II, and IV only [D] I, II, and III only [E] I, II, III, and IV [A] :Correct, but there is at least one more correct option. Review section 8.2. [B] :At least one of these options is incorrect. Review section 8.2. [D] :At least one of these options is incorrect. Review section 8.2. [E] :At least one of these options is incorrect. Review section ) Dividends on preferred stock are tax deductible to the issuing firm. [A] :Dividends are not a tax-deductible expense. Review section ) As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a: [A] capital gains yield and a dividend growth rate. [B] capital gains growth rate and a dividend growth rate. [C] dividend yield and a required rate of return. [D] dividend yield and the expected price next year. [E] dividend yield and a capital gains yield. [A] :These two are the same thing. Review section 8.1. [B] :These two are the same thing. Review section 8.1. [C] :The required return and the total return are considered to be the same thing. Review section 8.1. [D] :The expected price next year is not included in the total return. Review section 8.1.

15 55) McGonigal's Meats, Inc. currently pays no dividends. You overhear the CFO tell the CEO that the plan is to begin paying dividends in 3 years. The first dividend will be $1.00 with dividends increasing by 5 percent thereafter. Given a required return of 15 percent, what would you pay for the stock today? [A] $7.18 [B] $7.56 [C] $8.29 [D] $10.00 [E] $10.50 [A] :Did you get a price of $10.00 for P2? What is P0? Review section 8.1. [C] :Did you get a price of $10.00 for P2? What is P0? Review section 8.1. [D] :It appears you have computed P2. You now must compute P0. Review section 8.1. [E] :Did you get a price of $10.00 for P2? What is P0? Review section ) The current price of ABC Corporation stock is $ Dividends are expected to grow at 7 percent indefinitely and the most recently paid dividend was $1. What is the required rate of return on ABC's stock? [A] 9.00 percent [B] 9.14 percent [C] 9.33 percent [D] percent [E] percent [A] :It appears you used D0 instead of D1 in your calculations. Review section 8.1. [C] :You need to review the dividend growth model in section 8.1. [D] :You need to review the dividend growth model in section 8.1. [E] :You need to review the dividend growth model in section ) Most preferred stock has dividends that are cumulative. [B] :This is one of the features that make preferred stock a desirable investment. Review section ) For income tax purposes, preferred stock is more like debt than common stock. [A] :Given that dividends aren't tax deductible for the issuer, preferred stock is more like common stock for tax purposes. Review section ) Which one of the following terms is typically associated with both preferred stock and common stock? [A] proxy [B] voting rights [C] dividend yield [D] arrearage [E] cumulative voting [A] :This doesn't apply to preferred stock since it has no voting rights. Review section 8.2.

16 [B] :This doesn't apply to preferred stock since it has no voting rights. Review section 8.2. [D] :This doesn't apply to common stock since it has no promised dividends. Review section 8.2. [E] :This doesn't apply to preferred stock since it has no voting rights. Review section ) Which one of the following typically applies to preferred stock but NOT to common stock? [A] par value [B] dividend yield [C] cumulative dividends [D] legal classification as an equity security [E] tax deductible dividends [A] :Both types of stock typically have a par value. Review section 8.2. [B] :You can compute a dividend yield for both types of stock. Review section 8.2. [D] :Both are considered equity from a legal standpoint. Review section 8.2. [E] :Dividends are not tax deductible in either case. Review section ) Often, a firm creates a second class of stock that has as compared with the first class. [A] a lower priority in liquidation [B] the right to cumulative dividends [C] unequal voting rights [D] a preemptive right [E] cumulative voting power [A] :This is not usually a focus of a second class of stock. Review section 8.2. [B] :This response refers to preferred stock, not common stock. Review section 8.2. [D] :The first class of stock usually has a preemptive right. Review section 8.2. [E] :This is not usually a focus of a second class of stock. Review section ) Killnum Corp. just announced that the dividend for next year will be $2.50 per share rather than the originally expected $1.50 per share. After that, dividends will resume the historical constant growth of 5 percent per year. What would you expect to happen to the price of Killnum stock? Ignore any tax effects. [A] The price will likely double. [B] The price will likely rise by less than 100 percent. [C] The price will likely rise by exactly 50 percent. [D] The price will remain unchanged. [E] The price will likely rise by the present value of $1. [A] :Regardless of the required return, the value of the stock will grow by the percentage increase in the dividend per share. Try a couple of different required rates to convince yourself this is so. Review section 8.1. [C] :Regardless of the required return, the value of the stock will grow by the percentage increase in the dividend per share. Try a couple of different required rates to convince yourself this is so. Review section 8.1. [D] :Regardless of the required return, the value of the stock will grow by the percentage increase in the dividend per share. Try a couple of different required rates to convince yourself this is so. Review section 8.1. [E] :Regardless of the required return, the value of the stock will grow by the percentage increase in the dividend per share. Try a couple of different required rates to convince yourself this is so. Review section ) Suppose you own 500 shares of Biogen common stock. Two directors are to be elected. Since the firm uses cumulative voting, you can cast as many as votes for a single director. [A] 100 [B] 250

17 [C] 500 [D] 750 [E] 1,000 [A] :This choice is irrational since you should be able to cast at least as many votes as you have shares. Review section 8.2. [B] :This choice is irrational since you should be able to cast at least as many votes as you have shares. Review section 8.2. [C] :Remember, this is cumulative voting and there are two seats up for election. Review section 8.2. [D] :Remember, this is cumulative voting and there are two seats up for election. Review section ) A is a NYSE member who trades for his/her own account. [A] broker [B] dealer [C] member [D] floor trader [E] specialist [A] :This is an individual who arranges security transactions among investors. Review section 8.3. [B] :This individual buys and sells from inventory. Review section 8.3. [C] :This is an owner of a seat on the NYSE. They do not necessarily trade for their own accounts. Review section 8.3. [D] :You are correct! [E] :This individual is a market maker who is obligated to make a market for a particular stock. Review section ) Given no change in required returns, the value of a share of stock whose dividend is constant will: [A] increase over time at a rate of r percent. [B] decrease over time at a rate of r percent. [C] increase over time at a rate equal to (1 + g), where g is any positive number greater than 1.0. [D] decrease over time at a rate equal to (1 + g), where g is any positive number greater than 1.0. [E] remain unchanged. [A] :Note that the dividend growth rate is zero. Review section 8.1. [B] :Note that the dividend growth rate is zero. Review section 8.1. [C] :Note that the dividend growth rate is zero. Review section 8.1. [D] :Note that the dividend growth rate is zero. Review section ) You are attempting to value the shares of a new, high-technology firm in a developing industry. You would MOST likely: [A] use the zero growth dividend model. [B] use the nonconstant growth dividend model. [C] use the zero dividend model. [D] find the value by valuing the stock as a perpetuity. [E] not be able to value this company. [A] :Would dividend growth be zero forever? Review section 8.1. [C] :Would dividends be zero forever? Review section 8.1. [D] :Would dividend growth be zero forever? Review section 8.1. [E] :Yes, you can value this company. Review section 8.1.

18 67) You just purchased a share of XYZ stock for $ The company just paid an annual dividend of $1.50. Dividends are expected to grow at a rate of 5 percent indefinitely. What is your required return on the stock? [A] 5.00 percent [B] 7.00 percent [C] percent [D] percent [E] percent [A] :It appears you have considered only the capital gains yield. What about the dividend yield? Review section 8.1. [B] :It appears you have considered only the dividend yield. What about the capital gains yield? Review section 8.1. [C] :You need to review the dividend growth model in section 8.1. [D] :You are correct! [E] :You need to review the dividend growth model in section ) You are attempting to value a stock in an industry where firms are generating exceptional dividend growth. This growth is expected to slow to an equilibrium growth rate in about five years. Of the stock valuation models studied, the most appropriate is the model. [A] perpetuity [B] constant growth [C] supernormal growth [D] perpetual growth [E] preferred stock [A] :Note that dividends will not be constant forever as required by this model. Review section 8.1. [B] :Note that dividends will not grow at a constant rate forever as required by this model. Review section 8.1. [D] :Note that dividends will not grow at a constant rate forever as required by this model. Review section 8.1. [E] :Note that dividends will not be constant forever as required by this model. Review section ) Over the past four years, a company has paid dividends of $1.00, $1.10, $1.20, and $1.30, respectively. This pattern is expected to continue into the future. This is an example of a company paying a: [A] dividend that grows by 10 percent each year. [B] dividend that grows at a constant rate. [C] dividend that grows by a decreasing amount. [D] dividend that grows at a decreasing rate. [E] preferred stock dividend. [A] :Dividends grow at 10 percent in the first year only. Review section 8.1. [B] :If you calculate the percentage increase in dividends, it is not constant over these four years. Review section 8.1. [C] :The dividend grows at a constant amount, 10 cents per year. Review section 8.1. [D] :You are correct! [E] :With the exception of some special cases, preferred dividends would normally be the same each year. Review section ) Which of the following statements about dividends are correct? I. Dividends are a liability only after they are declared. II. Dividends provide a return to the shareholders for their investment in a firm. III. The payment of dividends is at the discretion of the board of directors. IV. The payment of dividends by a corporation is a tax deductible business expense. [A] I and II only [B] II and III only [C] I, II, and III only [D] II, III, and IV only

19 [E] I, II, III, and IV [A] :Correct, but there is at least one more correct option. Review section 8.2. [B] :Correct, but there is at least one more correct option. Review section 8.2. [D] :At least one of these options is incorrect. Review section 8.2. [E] :At least one of these options is incorrect. Review section ) The stock of Golf World currently sells for $ per share. The firm has a dividend growth rate of 7 percent and just paid a dividend of $6.25. If the required rate of return is 12 percent, what would you expect to receive when you sell the stock immediately after you receive the dividend one year from now? [A] $ [B] $ [C] $ [D] $ [E] $ [A] :Did you compute the price for P1? Review section 8.1. [B] :Did you compute the price for P1? Review section 8.1. [D] :Did you compute the price for P1? Review section 8.1. [E] :Did you compute the price for P1? Review section ) Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4 percent forever. Stocks of similar risk yield 10 percent. The price of Bradley Broadcasting stock today should be: [A] $ [B] $ [C] $ [D] $ [E] $ [A] :Did you get $23.07 for P3? Now, discount this price and the first three dividends back to the present. Review section 8.1. [B] :Did you get $23.07 for P3? Now, discount this price and the first three dividends back to the present. Review section 8.1. [D] :Did you get $23.07 for P3? Now, discount this price and the first three dividends back to the present. Review section 8.1. [E] :Did you get $23.07 for P3? Now, discount this price and the first three dividends back to the present. Review section ) Which one of the following actions is a violation of the rights of one or more classes of a firm's stakeholders? [A] A firm paid common dividends even though preferred dividends were in arrears. [B] A firm paid preferred shareholders before common shareholders in a liquidation. [C] Preferred shareholders were given the ability to place members on the board of directors to represent their interests after dividends were missed for several consecutive quarters. [D] Common shareholders were allowed to vote by proxy even though they did not attend the shareholders' meeting in person. [E] Creditors were paid before preferred shareholders in a liquidation. [B] :This is one of the preferences enjoyed by preferred stockholders. Review section 8.2. [C] :This is one of the preferences enjoyed by preferred stockholders. Review section 8.2. [D] :This is one of the rights of the owners of common stock. Review section 8.2. [E] :This is one of the preferences enjoyed by a firm's creditors. Review section 8.2.

20 74) The dividend on Soviet Motors common stock will be $2 in 1 year, $3.50 in 2 years, and $5.00 in 3 years. A business associate has committed to buying the stock from you for $75 in 3 years. If you require a 10 percent return on your investment, how much would you be willing to pay for a share of this stock? [A] $59.69 [B] $64.65 [C] $64.82 [D] $65.66 [E] $71.30 [A] :You need to discount the $2 back one year, the $3.50 back two years, and the $80 back three years at the required return to determine the present value of the stock. Review section 8.1. [B] :You need to discount the $2 back one year, the $3.50 back two years, and the $80 back three years at the required return to determine the present value of the stock. Review section 8.1. [D] :You need to discount the $2 back one year, the $3.50 back two years, and the $80 back three years at the required return to determine the present value of the stock. Review section 8.1. [E] :You need to discount the $2 back one year, the $3.50 back two years, and the $80 back three years at the required return to determine the present value of the stock. Review section ) What would you pay for a share of ABC Corporation stock today if it is going to pay a $2 dividend and be worth $110 in one year? You require a 12 percent return on your equity investments. [A] $ 95 [B] $100 [C] $110 [D] $115 [E] $120 [A] :How much will you receive in total one year from now? What is the present value of that amount? Review section 8.1. [C] :How much will you receive in total one year from now? What is the present value of that amount? Review section 8.1. [D] :How much will you receive in total one year from now? What is the present value of that amount? Review section 8.1. [E] :How much will you receive in total one year from now? What is the present value of that amount? Review section ) A dividend on common stock, whether declared or not, is never a legal liability of a firm. [A] :A dividend becomes a liability when it is declared. Review section ) You are considering investing in a firm and wish to place a value on the common stock. The dividend on the firm's stock has not changed in the last five years. Absent any information suggesting future changes in the dividend rate, the most appropriate stock valuation model would be the model. [A] zero growth [B] constant growth [C] nonconstant growth [D] growing perpetuity [E] bond pricing

21 [B] :This is correct if you are assuming the constant growth rate is zero. There is a better choice. Review section 8.1. [C] :There is nothing in the statement of the question that would lead to this conclusion. Review section 8.1. [D] :There is nothing in the statement of the question that would lead to this conclusion. Review section 8.1. [E] :Remember even though the dividends aren't growing they will be paid forever. Review section ) A broker and a dealer are the same thing. [A] :A dealer is an agent who buys and sells securities from his/her inventory. Does a broker ever take ownership of the securities he/she trades? Review section ) A maintains an inventory and stands ready to buy and sell at any time. I. dealer II. specialist III. broker [A] I only [B] III only [C] I and II only [D] I and III only [E] II and III only [A] :Correct, but at least one other choice is correct as well. Review section 8.3. [B] :A broker arranges security transactions. They do not maintain an inventory. Review section 8.3. [D] :At least one of these choices is incorrect. Review section 8.3. [E] :At least one of these choices is incorrect. Review section ) Dividends are payments by a corporation to shareholders which may be paid either in cash or in shares of stock. [B] :This is a correct definition of a dividend. Review section ) If you use the constant growth model to value stock, you assume that P1 = P0 X (1 + g). [B] :Won t next year s dividend increase at a rate equal to the dividend growth rate? Review section ) You wish to be on the board of directors of a company. If you wish to buy as low a percentage of the total outstanding shares as is necessary, you should look for a firm that has outstanding and buy as many as necessary to assure you of gaining a seat on the board. [A] cumulative preferred stock [B] cumulative voting Class B preferred stock

22 [C] convertible debentures [D] straight voting common stock [E] cumulative voting common stock [A] :This would be a poor choice since preferred stock does not have voting rights. Review section 8.2. [B] :This would be a poor choice since preferred stock does not have voting rights. Review section 8.2. [C] :This would be a poor choice since convertible debt does not have voting rights. Review section 8.2. [D] :There is another choice that allows you to acquire a lower number of shares and still be assured of gaining a seat on the board. Review section ) Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4 percent forever. Stocks of similar risk yield 10 percent. What is expected capital gains yield on Bradley Broadcasting stock during year 8? [A] 3 percent [B] 4 percent [C] 9 percent [D] 10 percent [E] 14 percent [A] :This is a constant dividend growth problem from year three onward. How does the capital gains yield relate to the dividend growth rate in year 8? Review section 8.1. [C] :This is a constant dividend growth problem from year three onward. How does the capital gains yield relate to the dividend growth rate in year 8? Review section 8.1. [D] :This is a constant dividend growth problem from year three onward. How does the capital gains yield relate to the dividend growth rate in year 8? Review section 8.1. [E] :This is a constant dividend growth problem from year three onward. How does the capital gains yield relate to the dividend growth rate in year 8? Review section ) A is an agent who buys and sells securities from inventory. [A] broker [B] dealer [C] member [D] floor trader [E] specialist [A] :This is an individual who arranges security transactions among investors. Review section 8.3. [C] :This is an owner of a seat on the NYSE. Review section 8.3. [D] :This is an individual who trades for their own account, not for others. Review section 8.3. [E] :This individual is a market maker and does not arrange trades for others. Review section ) The required return on a share of stock is comprised of a dividend yield and a capital gains yield. [B] :You need to review the components of the dividend growth model in section ) Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are given Stable's last dividend amount, its dividend growth rate, and a discount rate, you can compute: I. the price today. II. the price at the end of five years from now.