Finance 331 test 3
Which of the following statements about stock classes is CORRECT? -Some classes of common stock are entitled to more votes per share than other classes. -All common stocks, regardless of class, must have the same voting rights. -All common stocks fall into one of three classes: A, B, and C. -All common stocks, regardless of class, must pay the same dividend. -All firms have several classes of common stock.
-Some classes of common stock are entitled to more votes per share than other classes.
A preemptive right gives stockholders the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight. True False
False
An investor using the DCF stock valuation model would assign a value based on the length of time he or she plans to hold the stock. True False
False
If a stock has a beta of zero, it will be riskless when held in isolation. True False
False
To find the total return on a share of stock, find the dividend yield and subtract any commissions paid when the stock is purchased and sold. True False
False
Assume that a company's dividends are expected to grow at a rate of 25% per year for 5 years and then to slow down and to grow at a constant rate of 5% thereafter. The required (and expected) total return, rs, is expected to remain constant at 12%. Which of the following statements is correct? -The stock price will grow at a different rate each year during the first 5 years, but its average growth rate over this period will be the same as the average growth rate in dividends; that is, the average stock price growth rate will be (25% + 5%)/2. -Right now, it would be easier (require fewer calculations) to find the dividend yield expected in Year 7 than the dividend yield expected in Year 3. -The dividend yield will be higher in the early years and then will decline as the annual capital gains yield gets larger and larger, other things held constant. -The stock price will grow each year at the same rate as the dividends. -Because the growth rate is 25% in the first 5 years, the stock's realized return will always be greater than the stock's required return.
Right now, it would be easier (require fewer calculations) to find the dividend yield expected in Year 7 than the dividend yield expected in Year 3.
If investors expected inflation to increase in the future, and they also became more risk averse, what could be said about the change in the Security Market Line (SML)? -The SML would shift down and the slope would decrease. -The SML would shift up and the slope would decrease. -The SML would shift up and the slope would increase. -The SML would shift down and the slope would increase. -The SML would remain unchanged.
The SML would shift up and the slope would increase.
In a portfolio of three different stocks, which of the following could not be true? -The beta of the portfolio is greater than the beta of one or two of the individual stocks. -The riskiness of the portfolio is greater than the riskiness of one or two of the stocks. -The riskiness of the portfolio is less than the riskiness of each stock held in isolation. -The beta of the portfolio is less than the beta of each of the individual stocks. -The beta of the portfolio is equal to the beta of one of the individual stocks.
The beta of the portfolio is less than the beta of each of the individual stocks.
Which of the following assumptions would cause the constant growth stock valuation model to be invalid? The constant growth model is given below: The growth rate is negative. The growth rate is zero. The required rate of return is above 30%. The required rate of return is less than the growth rate. None of the above assumptions would invalidate the model.
The required rate of return is less than the growth rate.
A document that gives one party the authority to act for another party is a proxy. This includes the power to vote shares of common stock. Proxies can be important tools relating to control of firms. True False
True
Because most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets, the relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders. True False
True
Because stock has a residual claim rather than a contractual obligation, the cash flows associated with common stock are more difficult to estimate than those related to bonds. True False
True
Classified stock is the differentiation of different shares of common stock. It gives companies a way to meet special needs such as when owners of a start-up firm need additional equity capital but do not want to relinquish voting control. True False
True
In order to prevent dilution of control or dilution of value, shareholders use preemptive rights to purchase, on a pro rata basis, any new shares issued by the firm. -True -False
True
The type of classified stock where the shares are owned by the firm's founders is called founder's shares. With founders' shares, shareholders generally have more votes per share than with other classes of common stock. True False
True
The marginal investor determines the price at which a new issue of stock will trade when it is brought to market. True False
true
When stockholders assign their right to vote to another party, this is called -A proxy. -A preemptive right. -A privilege. -An ex right. -A takeover.
A proxy
Which of the following statements is correct? -If investors become less risk averse, the slope of the Security Market Line will increase. -The slope of the SML is determined by the value of beta. -The SML relates required returns to firms' market risk. The slope and intercept of this line can be controlled by the financial manager. -If you plotted the returns of a given stock against those of the market, and if you found that the slope of the regression line was negative, then the CAPM would indicate that the risk-free rate of return on the stock should be less than the required rate of return for a well-diversified investor, assuming that the observed relationship is expected to continue on into the future. -Both the SML and a company's position on it change over time due to changes in interest rates, investors' aversion to risk, and individual companies' betas.
Both the SML and a company's position on it change over time due to changes in interest rates, investors' aversion to risk, and individual companies' betas.
The preemptive right is important to shareholders because it: -Is included in every corporate charter. -Allows managers to buy additional shares below the current market price. -Enables the firm to issue debt with a relatively low -interest rate because the bondholders are protected. -Will result in higher dividends per share. -Protects the current shareholders against a dilution of their ownership interests.
Protects the current shareholders against a dilution of their ownership interests.
To find the firm's total corporate value, discount projected free cash flows at the firm's weighted average cost of capital. True False
True
Two investors each hold a portfolio, which is their only asset. Mr. Luca's portfolio has a beta of minus 2.0, while Ms. Johnson's portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then Mr. Luca and Ms. Johnson face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some "normal" stocks with beta = 1.0. True False
True
