Chapter 6

A stock quote shows a last price of 32.13, a P/E of 17, and a net change of -.23. Based on this information, which one of the following statements is correct? The closing price on the previous trading day was $.23 lower than today's closing price. A dealer can purchase the stock for $.23 less than an investor can. The earnings per share decreased by $.23 a share this year. The earnings per share have increased by 17 percent this year. The earnings per share are equal to 1/17th of $32.13.

The earnings per share are equal to 1/17th of $32.13.

Corporate dividends: are a source of tax-free income for individual investors. reduce the taxable income of the payer. are only 70 percent taxable to corporate shareholders. are paid out of pre-tax income and thus are taxed at the personal level. are taxed at the personal level even though they are paid from aftertax income.

are taxed at the personal level even though they are paid from aftertax income.

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield. current capital gains dividend total earnings

capital gains

The owner of preferred stock: owns shares that generally have a stated liquidating value of $1,000 per share. has the right to veto the outcome of an election held by the common shareholders. has the right to collect payment on any unpaid dividends as long as the stock is non-cumulative preferred. is entitled to a distribution of income prior to the common shareholders. is guaranteed voting rights similar to a common shareholder.

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

Alto stock pays an annual dividend of $1.10 a share and has done so for the past six years. No changes in the dividend amount are expected. The relevant market rate of return is 7.8 percent. Given this, one share of this stock: is basically worthless as it offers no growth potential. is valued as a constant growth stock. is valued as a perpetuity. is valued as a differential growth stock. has a current market value of $1.10.

is valued as a perpetuity.

The voting procedure where a shareholder grants authority to another individual to vote his/her shares is called _____ voting. proxy deferred straight cumulative democratic

proxy

The total return on a stock is equal to: the annual dividend divided by the current stock price. the difference between the capital gains yield and the dividend yield. the capital gains yield plus the dividend yield. (1 + Dividend yield ) × (1 + Inflation rate). (1 + Capital gains yield) × (1 + Dividend yield).

the capital gains yield plus the dividend yield.

The underlying assumption of the dividend growth model is that a stock is worth: the present value of the future income provided by that stock. the same amount to every investor. an amount computed as the next annual dividend divided by the market rate of return. an amount computed as the last annual dividend divided by the required rate of return. the same amount as any other stock that paid the same dividend this year.

the present value of the future income provided by that stock.