c. d.
e. Difficulty level: Medium
DIVIDENDS
b 45. 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 only b. I and IV only c. II and III only d. I, II, and IV only e. I, III, and IV only Difficulty level: Medium
PREFERRED STOCK
a 46. 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: Medium
PREFERRED STOCK
b 47. A 6% preferred stock pays _____ a year in dividends per share. a. $3 b. $6 c. $12 d. $30 e. $60 Difficulty level: Easy
PREFERRED STOCK
e 48. 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.
will be declared in default and can face bankruptcy if they do not pay $1 per year to each shareholder on a timely basis.
has a liability which must be paid at a later date should the company miss paying an annual dividend payment.
must still declare each dividend before it becomes an actual company liability.
c. d. e.
Preferred dividends must be paid timely each quarter or the unpaid dividends start accruing interest.
All unpaid dividends on preferred stock, regardless of the type of preferred, must be paid before any income can be distributed to common shareholders.
Preferred shareholders may be granted voting rights and seats on the board if preferred dividend payments remain unpaid.
Difficulty level: Medium
PREFERRED STOCK
e 49. 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. $1 b. $5 c. $10 d. $50 e. $100 Difficulty level: Medium
COMMON STOCK VALUES
c 50. 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: Medium
PRIMARY MARKET
d 51. Which one of the following transactions occurs in the primary market? a. the sale of ABC stock by Fred Jones to Mary Smith b. the tax-free gift of DEF stock to Heather by Jennifer c. the repurchase of GHI stock from Tim by GHI d. the initial sale of JKL stock by JKL to Jamie e. the transfer of MNO stock from Tom to his son, Jon Difficulty level: Medium
DEALERS AND BROKERS
d 52. 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: Easy
PERPETUITY FORMULA
d
53. a. b. c. d. e. The formula Po = DIV/r represents
the present value of a stream of zero growth dividends in perpetuity. the value of a no growth dividend stream.
a lower value than if a growth element was included. All of the above. None of the above.
Difficulty level: Easy
SPECIALIST’S POST
b 54. The post is a stationary position on the floor of the New York Stock Exchange where a _____ is
assigned to work.
a. floor trader b. specialist c. dealer d. floor broker e. commission broker Difficulty level: Medium
STOCK MARKET REPORTING
d 55. The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on this information, which one of the following statements is correct? a. The closing price on the previous day was $1.42 higher than today’s closing price. b. A dealer will buy the stock at $22.87 and sell it at $26 a share. c. The stock increased in value between yesterday’s close and today’s close by $.0142. d. The earnings per share are equal to 1/26th of $22.87. e. The earnings per share have increased by $1.42 this year. Difficulty level: Medium
STOCK QUOTE
b 56. A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD% chg 3.4, and a net chg of -.50. Which of the following statements are correct given this information? I. The stock price has increased by 3.4% during the current year. II. The closing price on the previous trading day was $32.60. III. The earnings per share are approximately $1.89. IV. The current yield is 17.5%. a. I and II only b. I and III only c. II and III only d. III and IV only e. I, III, and IV only Difficulty level: Medium
DISCOUNT RATE
b 57. The discount rate in equity valuation is composed entirely of a. the dividends paid and the capital gains yield. b. the dividend yield and the growth rate.
c. d. e. the dividends paid and the growth rate.
the capital gains earned and the growth rate. the capital gains earned and the dividends paid.
Difficulty level: Medium
NPVGO
b 58. The net present value of a growth opportunity, NPVGO, can be defined as a. the present value of an investment in one new project.
b. the steady growth in dividends from continual re-investment with positive NPV. c. continual reinvestment of earnings when r < g. d. a single period investment when r > g. e. None of the above.
Difficulty level: Medium
III. PROBLEMS
STOCK VALUE – CONSTANT GROWTH
e 59. Angelina’s made two announcements concerning their common stock today. First, the company announced that their next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Angelina’s stock if your goal is to earn a 10% rate of return? a. $21.60 b. $22.46 c. $27.44 d. $34.62 e. $36.00 Difficulty level: Easy
STOCK VALUE – CONSTANT GROWTH
d 60. How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend, the dividends increase by 4% annually and you require an 8% rate of return? a. $19.23 b. $20.00 c. $20.40 d. $20.80 e. $21.63 Difficulty level: Easy
STOCK VALUE – CONSTANT GROWTH
d 61. Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to increase by 5% annually. What is one share of this stock worth to you today if the appropriate discount rate is 14%? a. $7.14 b. $7.50
c. $11.11 d. $11.67 e. $12.25 Difficulty level: Easy
STOCK VALUE - CONSTANT GROWTH
c 62. Majestic Homes stock traditionally provides an 8% rate of return. The company just paid a $2 a year dividend which is expected to increase by 5% per year. If you are planning on buying 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 9% at the time of your purchase? a. $48.60 b. $52.50 c. $55.13 d. $57.89 e. $70.00 Difficulty level: Easy
STOCK VALUE - CONSTANT GROWTH
c 63. Leslie’s Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn 12% return on your equity investments? a. $10.00 b. $13.33 c. $16.67 d. $18.88 e. $20.00 Difficulty level: Easy
STOCK VALUE – DIFFERENTIAL GROWTH
b 64. Martin’s Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least a 15% rate of return. What is the maximum amount you are willing to pay to buy one share of this stock today? a. $10.00 b. $13.33 c. $16.67 d. $18.88 e. $20.00 Difficulty level: Medium
REQUIRED RETURN
c 65. The common stock of Eddie’s Engines, Inc. sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed.