Chapter 8

Which one of the following statements related to corporate dividends is correct?

Corporate shareholders may receive a tax break on a portion of their dividend income.

Which one of the following is an underlying assumption of the dividend growth model?

A stock's value is equal to the discounted present value of the future cash flows which it generates.

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

The dividend growth model:

assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zero-growth stocks. IV. requires the growth rate to be less than the required return

The secondary market is best defined by which one of the following?

market where outstanding shares of stock are resold

National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

priced the same as a $1 perpetuity.

Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets?

primary

Which one of following is the rate at which a stock's price is expected to appreciate?

capital gains yield

An increase in which of the following will increase the current value of a stock according to the dividend growth model?

dividend amount discount rate dividend growth rate

What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

dividend growth

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter

What are the distributions to shareholders by a corporation called?

dividends

Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 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.

Which one of these statements related to preferred stock is correct?

Cumulative preferred shares are more valuable than comparable non-cumulative shares.

You want to be on the board of directors of Wisely Foods. Since you are the only shareholder that will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected under these conditions?

Straight

Which one of the following statements is correct?

The capital gains yield is the annual rate of change in a stock's price.

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

a decrease in all stock values.

High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders.

capital gains yield.

A company has two open seats, Seat A and Seat B, on its board of directors. There are 6 candidates vying for these 2 positions. There will be a single election to determine the winner of both open seats. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 200 of your votes for a single candidate. What is this type of voting called?

cumulative

Which one of the following rights is never directly granted to all shareholders of a publicly-held corporation?

determining the amount of the dividend to be paid per share

Which one of the following is computed by dividing next year's annual dividend by the current stock price?

dividend yield

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

Supernormal growth is a growth rate that:

is unsustainable over the long term.

A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market?

over-the-counter

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?

preferred stock