CHAPTER 6 Stock Valuation
I. DEFINITIONS
GROWING PERPETUITY
a 1. 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: Easy
DIVIDEND GROWTH MODEL
b 2. 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 growth b. dividend growth c. capital pricing d. earnings capitalization e. discounted dividend Difficulty level: Easy
DIVIDEND YIELD
c 3. Next year’s 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: Easy
CAPITAL GAINS YIELD
d 4. The rate at which a stock’s price is expected to appreciate (or depreciate) is called the _____
yield.
a. current b. total c. dividend d. capital gains e. earnings Difficulty level: Easy
PREFERRED STOCK
d 5.
a. b. c. d. e. Difficulty level: Easy
PREFERRED STOCK
e 6. A _____ is a form of equity security that has a stated liquidating value. a. bond b. debenture c. proxy d. common stock e. preferred stock Difficulty level: Medium
COMMON STOCK
e 7. A form of equity which receives no preferential treatment in either the payment of dividends or
in bankruptcy distributions is called _____ stock.
a. dual class b. cumulative c. deferred d. preferred e. common Difficulty level: Easy
CUMULATIVE VOTING
b 8. The voting procedure whereby shareholders may cast all of their votes for one member of the
board is called _____ voting.
a. democratic b. cumulative c. straight d. deferred e. proxy Difficulty level: Easy
STRAIGHT VOTING
c 9. 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. democratic b. cumulative c. straight d. deferred e. proxy
A form of equity which receives preferential treatment in the payment of dividends is called _____ stock. dual class cumulative deferred preferred common
Difficulty level: Easy
PROXY VOTING
e 10. The voting procedure where a shareholder grants authority to another individual to vote his/her
shares is called _____ voting.
a. democratic b. cumulative c. straight d. deferred e. proxy Difficulty level: Easy
PREEMPTIVE RIGHTS
b 11. 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: Medium
DIVIDENDS
c 12. 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: Easy
PRIMARY MARKET
e 13. The market in which new securities are originally sold to investors is called the _____ market. a. dealer b. auction c. over-the-counter d. secondary e. primary Difficulty level: Easy
SECONDARY MARKET
d 14. The market in which previously issued securities are traded among investors is called the _____
market.
a. dealer b. auction c. over-the-counter d. secondary
e. primary Difficulty level: Easy
DEALER
e 15. An agent who buys and sells securities from inventory is called a: a. broker. b. trader. c. capitalist. d. principal. e. dealer. Difficulty level: Easy
BROKER
a 16. An agent who arranges security transactions among investors is called a: a. broker. b. trader. c. capitalist. d. principal. e. dealer. Difficulty level: Easy
NYSE MEMBER
b 17. The owner of a seat on the New York Stock Exchange is called a(n) _____ of the exchange. a. friend b. member c. agent d. trustee e. dealer Difficulty level: Easy
SPECIALIST
c 18. 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: Easy
FLOOR BROKER
d 19. 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: Easy
COMMISSION BROKER
e 20. 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: Easy
FLOOR TRADER
a 21. 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: Easy
SUPERDOT SYSTEM
b 22. 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. NASDAQ b. SuperDOT c. Instinet d. Internet e. brokerage. Difficulty level: Easy
ORDER FLOW
c 23. 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: Easy
OVER-THE-COUNTER MARKET
c 24. A securities market primarily comprised of dealers who buy and sell for their own inventories
is generally referred to as a(n) ______ market.