Chapter seven: stocks

true

A call provision gives the issuing corporation the right to call in the preferred stock for redemption. True or False

common stock

If a preferred stock issue has a conversion feature, the stock can be converted into _____. a. common stock b. corporate bonds c. bonds with voting rights d. cumulative stock e. founders stock

the stock is a good buy.

If the expected rate of return on a stock exceeds the required rate, it means that _____ a. the stock is experiencing an abnormal growth pattern. b. the stock should be sold. c. the company is not trying to maximize the price per share. d. the stock is a good buy. e. the dividends are not declared.

An increased rate of return

On January 3 of the current year, the per-share stock price of a firm was $25, and on January 4 of the current year, it was $19. Which of the following is a probable reason for the decrease in the stock price? a. A boom in the economy b. A reduction in the cost of debt c. An increased rate of return d. Higher future dividends e. An increase in the firm's growth rate

8,000 shares

Scubapro Corporation currently has 500,000 shares of common stock outstanding and plans to issue 200,000 more shares in a seasoned equity offering. The current shareholders have preemptive rights on any new issues of common stock by Scubapro Corporation. How many shares would an investor who currently has 20,000 shares, have the right to buy if she exercises her preemptive right? a. 200,000 shares b. 120,000 shares c. 20,000 shares d. 12,000 shares e. 8,000 shares

income stocks

Stocks that produce returns that are based primarily on dividends are traditionally called _____. a. preemptive stocks b. income stocks c. growth stocks d. founders' stocks e. classified stocks

call premium

The amount in excess of par value that a company must pay when it repurchases a security is known as the _____. a. call premium b. preemptive price c. cumulative dividend d. participating dividend e. growth stock

The stock price will decrease as a result of the higher rate of return demanded by investors.

The current expected value of a stock is $32. If investors demand a higher rate of return of 10 percent instead of the 8 percent rate of return, what will the impact on the stock price of the firm be? a. The stock price will increase by 10 percent. b. The stock price will not be affected by the change in the rate of return. c. The stock price will increase to $35. d. The stock price will reduce to zero. e. The stock price will decrease as a result of the higher rate of return demanded by investors.

$2.25

The economic value added (EVA) of a firm is $6.25 million, and the firm has 2.78 million outstanding shares. What is the maximum amount of dividend that can be paid to shareholders without threatening the firm's current value? a. $1.65 b. $2.25 c. $3.12 d. $3.89 e. $4.41

$44.00

The last dividend on Spirex Corporation's common stock was $4.00, and the expected growth rate is 10 percent. If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock? a. $38.00 b. $40.00 c. $45.00 d. $44.00 e. $50.00

the payback period of a stock

The price-earnings (P/E) ratio gives an indication of _____. a. a firm's debt position b. a stock's dividend yield c. the payback period of a stock d. the par value of a stock e. the maturity value of a stock

Market price per share ÷ Earnings per share

Which of the following formulas calculates price-earnings (P/E) ratio? a. Market price per share ÷ Book value per share b. Earnings available to common stockholders (EAC) ÷ Number of shares c. Common dividends ÷ Number of shares d. Market price per share ÷ Earnings per share e. Average cost of funds × Invested capital

A German company selling stock in Japan

Which of the following is considered as a Euro stock? a. A German company selling stock in the United States b. A Japanese company selling stock in Japan c. A U.S. company selling stock in U.S. d. A German company selling stock in Japan e. A Japanese company selling stock in the United States

It generally pays little or no dividends because the firm retains most of its earnings to fund developmental opportunities.

Which of the following is true about a growth stock? a. It pays a fixed amount of dividends every year. b. It has voting rights and generally pays a fixed amount of interest each year until maturity. c. It pays cumulative dividends at the time of maturity. d. It generally pays little or no dividends because the firm retains most of its earnings to fund developmental opportunities. e. It pays large and relatively constant dividends each year.

Growth stocks pay little or no dividends; rather, the firms retain most of their earnings each year to reinvest in assets.

Which of the following is true about the payment of dividends by a firm? a. Dividends are paid only to the bondholders of the firm. b. Common stockholders have priority over preferred stockholders with regard to dividend payments. c. Preferred stocks pay accumulated dividends only once i.e. at the time of maturity. d. Growth stocks pay little or no dividends; rather, the firms retain most of their earnings each year to reinvest in assets. e. Common stockholders generally receive a fixed amount of dividend every year.

If the share is purchased for $10, the stockholders are obligated to contribute $5 per share to the firm.

A firm has 1,000 shares of common stock outstanding with a par value of $15 per share. Upon liquidation, the firm has insufficient funds and requires an additional $5,000 to repay its creditors. Which of the following statements is true about the common shareholders' financial obligation? a. If the share is purchased for $8, the stockholders are obligated to pay $2 per share to the creditors. b. If the share is purchased for $20, the stockholders are obligated to pay interest equal to $15 per share to the firm. c. If the share is purchased for $15, the stockholders are obligated to pay $15 per share to the bondholders. d. If the share is purchased for $18, the stockholders are obligated to pay a dividend of $3 per share to the firm. e. If the share is purchased for $10, the stockholders are obligated to contribute $5 per share to the firm.

the firm has a large amount of cash and a number of good investment opportunities that will grow the firm

A firm most likely will repurchase shares of its common stock in the financial markets when _______. a. the price of the firm's stock is overvalued b. management wants to increase the ownership control of the outside investors c. the firm has a large amount of cash and a number of good investment opportunities that will grow the firm d. common stockholders are the last to receive proceeds from liquidation e. the returns on the firm's stock is generated by solely by capital gains

20%

A share of a preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the simple annual rate of return? a. 12% b. 18% c. 20% d. 23% e. 28%

False

A typical common stock issue has a maturity period of 10 years. True or False

American depository receipts provide U.S. investors with the ability to invest in foreign companies with less complexity and difficulty than might otherwise be possible.

Which of the following is true of American depository receipts? a. With the exception of stocks traded in the United States, stocks that are traded in a country other than the issuing company's home country are called American depository receipts. b. American depository receipts are pools of stocks of different American companies issued by foreign companies that are traded in international stock markets. c. An American depository receipt is the stock of an American company that is traded in foreign countries. d. If a Japanese company sells its stocks in the United States, the transaction is termed an American depository receipt. e. American depository receipts provide U.S. investors with the ability to invest in foreign companies with less complexity and difficulty than might otherwise be possible.

Preferred stocks

Which of the following securities can be converted into common stock by investors? a. Proxy stocks b. Growth stocks c. Preemptive stocks d. Founders' shares e. Preferred stocks

Preferred stock

Which of the following stocks is a nonvoting stock and is referred to as hybrid stock? a. Common stock b. Preferred stock c. Founders' shares d. Preemptive stock e. Growth stock

Preferred stock

Which of the following types of securities is referred to as a hybrid security? a. Corporate bonds b. Preferred stock c. Founders' shares d. Foreign equity e. Growth stock

$137.50

You are trying to determine the appropriate price to pay for a share of common stock. If you purchase this stock, you plan to hold it for 1 year. At the end of the year you expect to receive a dividend of $5.50 and to sell the stock for $154. The appropriate rate of return for this stock is 16 percent. What should the current price of this stock be? a. $150.22 b. $162.18 c. $137.50 d. $98.25 e. $175.83