CHAPTER 6Stock ValuationI.DEFINITIONSGROWING PERPETUITYa1.An asset characterized by cash flows that increase at a constant rate forever is called a:a.growing perpetuity.b.growing annuity.c.common annuity.d.perpetuity due.e.preferred stock.Difficulty level: EasyDIVIDEND GROWTH MODELb2.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.a.zero growthb.dividend growthc.capital pricingd.earnings capitalizatione.discounted dividendDifficulty level: EasyDIVIDEND YIELDc3.Next years annual dividend divided by the current stock price is called the:a.yield to maturity.b.total yield.c.dividend yield.d.capital gains yield.e.earnings yield.Difficulty level: EasyCAPITAL GAINS YIELDd4.The rate at which a stocks price is expected to appreciate (or depreciate) is called the _ yield.a.currentb.totalc.dividendd.capital gainse.earningsDifficulty level: EasyPREFERRED STOCKd5.A form of equity which receives preferential treatment in the payment of dividends is called _ stock.a.dual classb.cumulativec.deferredd.preferrede.commonDifficulty level: EasyPREFERRED STOCKe6.A _ is a form of equity security that has a stated liquidating value.a.bondb.debenturec.proxyd.common stocke.preferred stockDifficulty level: MediumCOMMON STOCKe7.A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _ stock.a.dual classb.cumulativec.deferredd.preferrede.commonDifficulty level: EasyCUMULATIVE VOTINGb8.The voting procedure whereby shareholders may cast all of their votes for one member of the board is called _ voting.a.democraticb.cumulativec.straightd.deferrede.proxyDifficulty level: EasySTRAIGHT VOTINGc9.The voting procedure where you must own 50% 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.democraticb.cumulativec.straightd.deferrede.proxyDifficulty level: EasyPROXY VOTINGe10.The voting procedure where a shareholder grants authority to another individual to vote his/her shares is called _ voting.a.democraticb.cumulativec.straightd.deferrede.proxyDifficulty level: EasyPREEMPTIVE RIGHTSb11.Preemptive rights refer to the right of shareholders to:a.share proportionately in dividends paid.b.share proportionately in any new stock issues sold.c.share proportionately in liquidated assets.d.vote at annual shareholder meetings.e.override the votes of other shareholders.Difficulty level: MediumDIVIDENDSc12.Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called:a.retained earnings.b.net income.c.dividends.d.redistributions.e.infused equity.Difficulty level: EasyPRIMARY MARKETe13.The market in which new securities are originally sold to investors is called the _ market.a.dealerb.auctionc.over-the-counterd.secondarye.primaryDifficulty level: EasySECONDARY MARKETd14.The market in which previously issued securities are traded among investors is called the _ market.a.dealerb.auctionc.over-the-counterd.secondarye.primaryDifficulty level: EasyDEALERe15.An agent who buys and sells securities from inventory is called a:a.broker.b.trader.c.capitalist.d.principal.e.dealer.Difficulty level: EasyBROKERa16.An agent who arranges security transactions among investors is called a:a.broker.b.trader.c.capitalist.d.principal.e.dealer.Difficulty level: EasyNYSE MEMBERb17.The owner of a seat on the New York Stock Exchange is called a(n) _ of the exchange.a.friendb.memberc.agentd.trusteee.dealerDifficulty level: EasySPECIALISTc18.A member of the New York Stock Exchange acting as a dealer in one or more securities on the exchange floor is called a:a.floor trader.b.floor post.c.specialist.d.floor broker.e.commission broker.Difficulty level: EasyFLOOR BROKERd19.A member of the New York Stock Exchange who executes orders for commission brokers on a fee basis is a:a.floor trader.b.dealer.c.specialist.d.floor broker.e.floor agent.Difficulty level: EasyCOMMISSION BROKERe20.A member of the New York Stock Exchange who executes buy and sell orders from customers once transmitted to the exchange floor is called a:a.floor trader.b.dealer.c.specialist.d.floor broker.e.commission broker.Difficulty level: EasyFLOOR TRADERa21.A member of the New York Stock Exchange who trades for his or her own account, trying to anticipate temporary price fluctuations, is called a(n):a.floor trader.b.exchange customer.c.specialist.d.floor broker.e.commission broker.Difficulty level: EasySUPERDOT SYSTEMb22.The electronic system used by the New York Stock Exchange which enables orders to be transmitted directly to a specialist is called the _ system.a.NASDAQb.SuperDOTc.Instinetd.Internete.brokerage.Difficulty level: EasyORDER FLOWc23.The _ has a multiple market maker system rather than a specialist system.a.NYSE.b.AMEX.c.NASDAQ.d.NIKKEI e.None of the above.Difficulty level: EasyOVER-THE-COUNTER MARKETc24.A securities market primarily comprised of dealers who buy and sell for their own inventories is generally referred to as a(n) _ market.a.auctionb.privatec.over-the-counterd. regionale.electronic networkDifficulty level: EasyECNsd25.Electronic communications networks, or ECNs, act to:a.increase liquidity.b.increase competition.c.increase the cost to invest.d.A & B.e.A & C.Difficulty level: MediumII.CONCEPTSVALUATION OF ZERO GROWTH STOCKc26.The James River Co. pays an annual dividend of $1.50 per share on its common stock. This dividend amount has been constant for the past 15 years and is expected to remain constant. Given this, one share of James River Co. stock:a.is basically worthless as it offers no growth potential.b.has a market value equal to the present value of $1.50 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 3%.e.has a market value of $15.00.Difficulty level: EasyVALUATION OF ZERO GROWTH STOCKe27.The common stock of the Kenwith Co. pays a constant annual dividend. Thus, the market price of Kenwith 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.Difficulty level: EasyDIVIDEND YIELD VS. CAPITAL GAINS YIELDc28.The Koster Co. currently pays an annual dividend of $1.00 and plans on increasing that amount by 5% each year. The Keyser Co. currently pays an annual dividend of $1.00 and plans on increasing their dividend by 3% annually. Given this, it can be stated with certainty that the _ of the Koster Co. stock is greater than the _ of the Keyser Co. stock.a.market price; market priceb.dividend yield; dividend yieldc.rate of capital gain; rate of capital gaind.total return; total returne.capital gains; dividend yieldDifficulty level: MediumDIVIDEND GROWTH MODELd29.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 of 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.a.I onlyb.II onlyc.III and IV onlyd.I and II onlye.I, II, and III onlyDifficulty level: MediumDIVIDEND GROWTH MODELb30.The underlying assumption of the dividend growth model is that a stock is worth:a.the same amount to every investor regardless of their desired rate of return.b.the present value of the future income which the stock 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.Difficulty level: MediumDIVIDEND GROWTH MODELc31.Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the: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 theincrease in the market rate.c.market values of all stocks to decrease, all else constant.d.stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price.e.dividend growth rates to increase to offset this change.Difficulty level: MediumDIFFERENTIAL GROWTHc32.Latchers Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _ years from today before determining todays value.a.4b.5c.6d.7e.8Difficulty level: MediumDIFFERENTIAL GROWTHd33.The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6 years, respectively. After that, the company anticipates increasing the dividend by 4% annually. The first step in computing the value of this stock today, is to compute the value of the stock when it reaches constant growth in year:a.3.b.4.c.5.d.6.e.7.Difficulty level: MediumDIFFERENTIAL GROWTHb34.Supernormal growth refers to a firm that increases its dividend by:a.three or more% per year.b.a rate which is most likely not sustainable over an extended period of time.c.a constant rate of 2 or more% per year.d.$.10 or more per year.e.an amount in excess of $.10 a year.Difficulty level: MediumDIVIDEND YIELD AND CAPITAL GAINSe35.The total rate of return earned on a stock is comprised of which two of the following?I.current yieldII.yield to maturityIII.dividend yieldIV.capital gains yielda.I and II onlyb.I and IV onlyc.II and III onlyd.II and IV onlye.III and IV onlyDifficulty level: MediumDIVIDEND YIELDc36.The total rate of return on a stock can be positive even when the price of the stock depreciates because of the:a.capital appreciation.b.interest yield.c.dividend yield.d.supernormal growth.e.real rate of return.Difficulty level: MediumDIVIDEND YIELD AND CAPITAL GAINSc37.Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to _ if Fred is to achieve his 10% rate of return.a.remain constantb.decrease by 5%c.increase by 5%d.increase by 10%e.increase by 15%Difficulty level: MediumDIVIDEND GROWTH MODELd38.Which one of the following correctly defines the dividend constant growth model?a.P0 = D0 (R-g)b.D = P0 (R-g)c.R = (P0 D0) + gd.R = (D1 P0) + ge.P0 = (D1 R) + gDifficulty level: MediumSHAREHOLDER RIGHTSa39.Shareholders generally have the right to:I.elect the corporate directors.II.select the senior management of the firm.III.elect the chief executive officer (CEO).IV.elect the chief operating officer (COO).a.I onlyb.I and III onlyc.II onlyd.I and II onlye.III and IV onlyDifficulty level: MediumCUMULATIVE VOTINGc40.Jack owns 35 shares of stock in Beta, Inc. and wants to exercise as much control as possible over the company. Beta, Inc. has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect two new directors. Which one of the following statements must be true given this information?a.If straight voting applies, Jack is assured one seat on the board.b.If straight voting applies, Jack can control both open seats.c.If cumulative voting applies, Jack is assured one seat on the board.d.If cumulative voting applies, Jack can control both open seats.e.Regardless of the type of voting employed, Jack does not own enough shares to control any of the seats.Difficulty level: MediumSTRAIGHT VOTINGa41.ABC Co. is owned by a group of shareholders who all vote independently and who all want personal control over the firm. If straight voting is utilized, a shareholder:a.must either own enough shares to totally control the elections or else he/she has no control whatsoever.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% 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 elect 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.Difficulty level: MediumPROXY VOTINGe42.The Zilo Corp. 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. The most likely result of this situation is a: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.Difficulty level: MediumSHAREHOLDER RIGHTSe43.Common stock shareholders are generally granted rights which include the right to:I.share in company profits.II.vote for company directors.III.vote on proposed mergers.IV.residual assets in a liquidation.a.I and II onlyb.II and III onlyc.I and IV onlyd.I, II, and IV onlye.I, II, III, and IVDifficulty level: MediumDIVIDENDSe44.The Scott Co. has a general dividend policy whereby they pay a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:a.must always show a current liability of $1,000 for dividends payable.b.is obligated to continue paying $1 per share per year.c.will be declared in default and can face bankruptcy if they do not pay $1 per year to each shareholder on a timely basis.d.has a liability which must be paid at a later date should the company miss paying an annual dividend payment.e.must still declare each dividend before it becomes an actual company liability.Difficulty level: MediumDIVIDENDSb45.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 may or may not represent taxable income to the recipient.a.I onlyb.I and IV onlyc.II and III onlyd.I, II, and IV onlye.I, III, and IV onlyDifficulty level: MediumPREFERRED STOCKa46.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% of the outstanding preferred shares.e.has the right to collect payment on any unpaid dividends as long as the stock is noncumulative preferred.Difficulty level: MediumPREFERRED STOCKb47.A 6% preferred stock pays _ a year in dividends per share.a.$3b.$6c.$12d.$30e.$60Difficulty level: EasyPREFERRED STOCKe48.Which one of the following statements concerning preferred stock is correct?a.Unpaid preferred dividends are a liability of the firm.b.Preferred dividends must be paid quarterly provided the firm has net income that exceeds the amount of the quarterly dividend.c.Preferred dividends must be paid timely each quarter or the unpaid dividends start accruing interest.d.All unpaid dividends on preferred stock, regardless of the type of preferred, must be paid before any income can be distributed to common shareholders.e.Preferred shareholders may be granted voting rights and seats on the board if preferred dividend payments remain unpaid.Difficulty level: MediumPREFERRED STOCKe49.In a liquidation, each share of 5% preferred stock is generally entitled to a liquidation payment of _ as long as there are sufficient funds available.a.$1b.$5c.$10d.$50e.$100Difficulty level: MediumCOMMON STOCK VALUESc50.The value of common stock today depends on a.the expected future holding period and the discount rate. b.the expected future dividends and the capital gains. c.the expected future dividends, capital gains and the discount rate. d.the expected future holding period and capital gains. e.None of the above. Difficulty level: MediumPRIMARY MARKETd51.Which one of the following transactions occurs in the primary market?a.the sale of ABC stock by Fred Jones to Mary Smithb.the tax-free gift of DEF stock to Heather by Jenniferc.the repurchase of GHI stock from Tim by GHId.the initial sale of JKL stock by JKL to Jamiee.the transfer of MNO stock from Tom to his son, JonDifficulty level: MediumDEALERS AND BROKERSd52.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 asked price when purchasing securities.c.A broker in market securities earns income in the form of a bid-ask spread.d.A broker does not take ownership of the securities being traded.e.A broker deals solely in the primary market.Difficulty level: EasyPERPETUITY FORMULAd53.The formula Po = DIV/r represents a.the present value of a stream of zero growth dividends in perpetuity. b.the value of a no growth dividend stream. c.a lower value than if a growth element was included. d.All of the above. e.None of the ab