a. auction b. private c. over-the-counter d. regional e. electronic network Difficulty level: Easy
ECNs
d 25. 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: Medium
II. CONCEPTS
VALUATION OF ZERO GROWTH STOCK
c 26. 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: Easy
VALUATION OF ZERO GROWTH STOCK
e 27. 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: Easy
DIVIDEND YIELD VS. CAPITAL GAINS YIELD
c 28. 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 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 Difficulty level: Medium
DIVIDEND GROWTH MODEL d 29. 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 only b. II only c. III and IV only d. I and II only e. I, II, and III only Difficulty level: Medium
DIVIDEND GROWTH MODEL
b 30. 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: Medium
DIVIDEND GROWTH MODEL
c 31. 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 the increase 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: Medium
DIFFERENTIAL GROWTH
c 32. Latcher’s 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 today’s value.
a. 4 b. 5 c. 6 d. 7 e. 8 Difficulty level: Medium
DIFFERENTIAL GROWTH
d 33. 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: Medium
DIFFERENTIAL GROWTH
b 34. 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: Medium
DIVIDEND YIELD AND CAPITAL GAINS
e 35. 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 a. I and II only b. I and IV only c. II and III only d. II and IV only e. III and IV only Difficulty level: Medium
DIVIDEND YIELD
c 36. 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: Medium
DIVIDEND YIELD AND CAPITAL GAINS
c 37. 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 constant b. decrease by 5% c. increase by 5% d. increase by 10% e. increase by 15% Difficulty level: Medium
DIVIDEND GROWTH MODEL
d 38. 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) + g d. R = (D1 ? P0) + g e. P0 = (D1 ? R) + g Difficulty level: Medium
SHAREHOLDER RIGHTS
a 39. 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 only b. I and III only c. II only d. I and II only e. III and IV only Difficulty level: Medium
CUMULATIVE VOTING
c 40. 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. e.
If cumulative voting applies, Jack can control both open seats.
Regardless of the type of voting employed, Jack does not own enough shares to control any of the seats.
Difficulty level: Medium
STRAIGHT VOTING
a 41. 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: Medium
PROXY VOTING
e 42. 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: Medium
SHAREHOLDER RIGHTS
e 43. 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 only b. II and III only c. I and IV only d. I, II, and IV only e. I, II, III, and IV Difficulty level: Medium
DIVIDENDS
e 44. 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.