CH8 3040

Which of the following items does NOT usually appear in a National Post common stock quote?

Capital gains rate.

The rate at which the stock price is expected to appreciate (or depreciate) is the:

Capital gains yield.

A cumulative dividend is defined as a dividend that is:

Carried forward as an arrearage if not paid.

Which of the following terms is typically associated with BOTH preferred stock and common stock?

Dividend yield.

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.

increase by 5%

The owner of preferred stock:

is entitled to a distribution of income prior to the common shareholders.

Given a price at year 5, the dividend in the dividend growth model would be defined as:

The annual dividend in year 6.

The required return is defined as:

The capital gains yield plus the dividend yield.

The dividend growth model:

considers both the dividend yield and the capital gains yield.

The dividend yield on a common stock is most similar to which yield on a bond?

current yield

Next year's annual dividend divided by the current stock price is called the:

dividend yield.

The capital gains yield as used in the dividend growth model is defined as:

g.

An asset characterized by cash flows that increase at a constant rate forever is called a:

growing perpetuity

Cumulative voting is the procedure whereby a shareholder

may cast all of his or her votes for one candidate for the board of directors

Equity with priority for dividends and in the event of bankruptcy is called:

Preferred stock.

The term __________ is usually applied to stock that has no special preference either in paying dividends or in bankruptcy.

common stock

You are attempting to value a stock in an industry where firms are generating exceptional dividend growth, but this growth is expected to slow to an equilibrium growth rate in about five years. Of the stock valuation models studied, the most appropriate is the _______________.

Supernormal growth model.

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).

I only

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.

I, II, III, and IV

Which of the following is (are) true? I. The dividend growth model only holds if, at some point in time, the dividend growth rate exceeds the stock's required return. II. A decrease in the dividend growth rate will increase a stock's market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same

III only

Which of the following is NEVER a right of an owner of a share of preferred stock? I. The right to share proportionately in preferred dividends paid. II. The right to share proportionately in remaining assets from a liquidation. III. The right to vote for directors.

III only

Which of the following statements is (are) correct concerning preferred stock? I. A missed dividend payment never has to be paid if the preferred stock is cumulative. II. All preferred stock has an obligatory sinking fund. III. Preferred stock has a stated liquidation value. IV. Preferred stock is never callable.

III only

As a common shareholder in a firm, which of the following allows you to share proportionately in any new stock sold?

Preemptive right.

Which of the following is NOT a right of an owner of a share of common stock?

Preference over preferred shareholders in the payment of dividends.

Which one of the following statements concerning preferred stock is correct?

Preferred shareholders may be granted voting rights and seats on the board if preferred dividend payments remain unpaid

A grant of authority by a shareholder allowing for another individual to vote his/her shares is a _____________.

Proxy.

Which one of the following statements is correct concerning the differences between preferred and common stock?

Common shareholders generally have more control over a corporation than preferred shareholders.

You just voted against a merger proposal made by another corporation. You must own:

Common stock.

The primary reason for creating dual or multiple classes of stock has to do with:

Control of the firm.

Which of the following typically applies to preferred stock but NOT to common stock?

Cumulative dividends.

The procedure which has the effect of permitting minority participation in voting is called ____ voting

Cumulative.

Which of the following is NOT usually a right of a common stockholder?

Right of first refusal to buy new preferred stock, when issued.

Over the past four years, a company has paid dividends of $1.00, $1.10, $1.20, and $1.30, respectively. This pattern is expected to continue into the future. This is an example of a company paying a:

Dividend that grows at a decreasing rate.

As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a ________________.

Dividend yield and a capital gains yield.

"Preemptive rights" refers to:

The right of shareholders to share proportionately in any new stock issues sold.

Which of the following common shareholder rights kicks in when a merger is proposed?

The right to vote on shareholder matters of great importance.

A stock whose price can be computed by dividing the annual dividend amount by the required rate of return is called a _______ growth stock.

Zero.

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:

market values of all stocks to decrease, all else constant

Which of the following statements about dividends is false?

A corporation can be sued for not paying undeclared dividends.

Which of the following is a true statement regarding publicly traded stocks and bonds?

A share of preferred stock is generally easier to value than a share of common stock.

It is more difficult to value a stock than it is to value a bond because:

Equity securities have no maturity date

D1 in the dividend growth model is associated with which of the following words when solving for P0?

Next, expected, future.

The voting procedure where shareholders grant authority to another individual to vote their shares is called:

Proxy voting.

The voting procedure where shareholders may cast all of their votes for each member of the board is:

Straight voting.

____________ can freeze out minority shareholders.

Straight voting.

There are three seats open on the board of directors of ABC, Inc. Ann owns voting shares of ABC common stock. If ABC uses cumulative voting, the maximum number of shares that Ann can vote for any one position is equal to:

The number of seats open times the number of shares owned.

The short alphabetic abbreviation for an exchange-listed stock by which the issue is identified in the market is called the stock's _____________.

Ticker symbol.

Often, a firm creates a second class of stock that has ___________ as compared with the first class.

Unequal voting rights

You are attempting to value the shares of a new, high-technology firm in a developing industry. You would MOST likely

Use the non-constant growth dividend model.

You are considering investing in a firm and wish to place a value on the common stock. The dividend on the firm's stock has not changed in the last five years. Absent any information suggesting future changes in the dividend rate, the most appropriate stock valuation model would be the ___________ model.

Zero growth

Common stockholders have the right to:

vote on any proposed acquisition or merger

Equity without priority for dividends or in the event of bankruptcy is called:

Common stock.

Which of the following would be considered a violation of the rights of one or more classes of a firm's stakeholders

Common dividends are paid even though preferred dividends are in arrears.

Given constant earnings per share, an increase in dividends will generally:

Decrease the growth rate of the corporation and increase the current yield.

The stock valuation model that determines the current stock price as the next dividend divided by the (discount rate less the dividend growth rate) is called the:

Dividend growth model

An asset characterized by cash flows that increase at a constant rate forever is called a

Growing perpetuity.

If two stocks have the same earnings per share and required rate of return, differences in the ____________ of the two companies can account for different stock prices.

Growth opportunities.

A supernormal growth stock generally:

Has high growth dividends only for a limited number of years.

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can calculate ____________. I. The price today. II. The price five years from now. III. The dividend that is expected to be paid 10 years from now.

I, II, and III

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield

capital gains

Martin Industries pays a constant $2.50 a share annual dividend. The market price of this stock will:

decrease if the required return increases.

The common stock of the Kenwith Co. pays a constant annual dividend. Thus, the market price of Kenwith stock will:

decrease when the market rate of return increases.

Currently, you own 5% of the common stock of Alberta Industries. The right which grants you the ability to maintain your current level of ownership should the company opt to issue additional shares of stock is called the _____ right.

preemptive

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.

straight

The underlying assumption of the dividend growth model is that a stock is worth:

the present value of the future income which the stock generates.

Shareholders of convertible preferred stock generally have the:

Right to convert their shares into shares of common stock.

Preferred stock is a type of _______ growth stock

Zero.

The capital gain yield:

Is the rate at which the price of the stock grows.

Which of the following does NOT correctly complete this sentence: Preferred stock is much like debt in that ______________.

Both payments are subject to the same tax treatment for the issuing firm

Equity with differential voting rights and/or dividend payment claims is called:

Dual class stock

The voting procedure where shareholders may cast all of their votes for one member of the board is:

Cumulative voting.

A stock's next expected dividend divided by the current stock price is the:

Dividend yield.

Payments made by a corporation to its shareholders, in the form of either cash, stock, or payments in kind, are called:

Dividends.

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%.

I and III only

All else constant, which of the following will increase the dividend yield of a stock? I. an increase in the dividend amount II. a decrease in the dividend amount III. an increase in the stock price IV. a decrease in the stock price

I and IV only

Dividends on common stock:

must be declared to become a liability of the firm

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?

If cumulative voting applies, Jack is assured one seat on the board

The dividend growth model assumes that:

The rate of growth is constant.

Preferred shareholders are generally granted the right to:

first priority for any dividend distributions

ABC Co. is owned by a group of shareholders, all of whom vote independently and all of whom want personal control over the firm. If straight voting is used, a shareholder:

must either own enough shares to totally control the elections or else he/she has no control whatsoever.

A form of equity which receives preferential treatment in the payment of dividends is called _____ stock.

preferred

A _____ is a form of equity security that has a stated liquidating value

preferred stock

You own 100 shares of XY Corporation. There are several key items which will be voted on at the next board meeting. You are unable to physically attend the meeting but would like your votes cast so your opinion counts. The procedure by which you can cast your votes without attending the meeting is called _____ voting.

proxy

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:

proxy fight for control of the firm.

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 its 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

rate of capital gain; rate of capital gain

Supernormal growth refers to a firm that increases its dividend by:

rate which is most likely not sustainable over an extended period of time

You wish to be on the board of directors of a company. If you wish to buy as low a percentage of the total outstanding shares as is necessary to guarantee yourself a seat on the board, you should look for a firm that has ____________.

Cumulative voting common stock.

It is easier for an outsider to gain control over a corporation when:

Cumulative voting is used.

III. D0 × (1 + g)/(r - g) Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P4) is: I. D5/(r - g) II. P0 × (1 + g)^4

I and II only

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.

I and II only

The dividends paid by a corporation: I. to an individual becomes 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.

I and IV only

Which of the following statements concerning dividends is (are) correct? I. Dividends become a liability of the corporation at the time they are declared. II. The stockholders determine the amount of dividend to be paid. III. Dividends are a tax deductible expense. IV. Common stock dividends can be either cumulative or non-cumulative.

I only

Which of the following is a legitimate reason the valuation of common stock is generally harder than the valuation of bonds? I. Future cash flows on stocks are not known in advance. II. Common stocks don't have a maturity date. III. Common stock valuation is sensitive to estimates of the dividend growth rate

I, II, and III

Which of the following rights are granted to shareholders of common stock? I. Election of corporate directors II. Selection of all senior management executives III. The option of voting by proxy IV. The right to share in any remaining assets in a liquidation

I, III, and IV only

Which of the following is (are) true? I. The dividend yield on a stock is the annual dividend divided by the par value. II. When the constant dividend growth model holds, g = capital gains yield. III. The total return on a share of stock = dividend yield + capital gains yield.

II and III only

Which of the following is/are true about common stock dividends? I. Payment of dividends is a tax deductible business expense for a corporation. II. Dividends that have been declared but are not yet paid are liabilities of the corporation. III. Dividends received by both individuals and corporations are fully taxable.

II only

Deep Pockets Mining unexpectedly discovered an extremely rich vein of gold. Which of the following types of shareholders will benefit from the increased profits that will be generated from this find? I. Preferred shareholders II. Convertible preferred shareholders III. Non-voting common shareholders IV. Common shareholders

II, III, and IV only

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

III and IV only

Which of the following is true about the differences between debt and common stock?

Interest payments are promised while dividend payments are not.

If the management of a corporation wants to raise equity capital while maintaining control over the corporation and limiting their cash outflows, they should issue shares of:

Non-voting common stock.

Which of the following is true of non-voting common stock

Non-voting shares must receive dividends no lower than dividends on voting shares.

The ABC Co. has paid annual dividends of $0.30, $0.64, $1.20, and $1.45 over the past four years. Dividends in the future are expected to grow at a constant rate of 3.5%. Which one of the following formulas should be used to compute the value of the stock today?

P0 = D1/(r - g)

Which one of the following correctly defines the dividend growth model?

R = (D1 P0) + g

Given no change in required returns, the price of a stock whose dividend is constant will:

Remain unchanged.

If the required rate of return used in the dividend growth model is increased, then:

The current value of the stock will decrease.

A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.

common

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.

dividend growth

The total rate of return on a stock can be positive even when the price of the stock depreciates because of the:

dividend yield.

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?

earnings per share are equal to 1/26th of $22.87.

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:

is valued as if the dividend paid is a perpetuity

The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

must still declare each dividend before it becomes an actual company liability