FIN 300 CH Practice 6 (Spring 2020)

Which one of the following transactions occurs in the primary market? Purchase of 500 shares of GE stock from a current shareholder Gift of 100 outstanding shares to a charitable organization Gift of 200 shares of stock by a mother to her daughter A purchase of newly issued stock from the issuer IBM's purchase of GE stock from a dealer

A purchase of newly issued stock from the issuer

A7X Corp. just paid a dividend of $1.45 per share. The dividends are expected to grow at 30 percent for the next 9 years and then level off to a growth rate of 5 percent indefinitely. If the required return is 15 percent, what is the price of the stock today? $71.21 $69.79 $72.63 $2.97 $45.90

$71.21 We can use the two-stage dividend growth model for this problem, which is: P0 = [D0(1 + g1)/(R - g1)]{1 - [(1 + g1)/(1 + R)]^t}+ [(1 + g1)/(1 + R)]^t[D0(1 + g2)/(R - g2)] P0 = [$1.45(1.30)/(0.15 - 0.30)][1 - (1.30/1.15)^9] + [(1.30)/(1.15)]^9[$1.45(1.05)/(0.15 - 0.05)] P0 = $71.21

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock? 10.86 percent 15.82 percent 9.08 percent 13.39 percent 12.75 percent

10.86 percent R = .0189 + [($1.70 − 1.56)/$1.56] R = .1086, or 10.86%

Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate? 11.43 percent 11.06 percent 10.87 percent 11.18 percent 10.95 percent

10.95 percent

Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today? $11.23 $10.82 $10.68 $9.68 $11.57

$10.82 P0 = [$1.42(1.013)]/(.146 − .013) P0 = $10.82

Which one of the following best describes NASDAQ? Largest U.S. stock market in terms of dollar trading volume Market where dealers buy at the asked price Market where the designated market makers are located at posts Computer network of securities dealers Market with three physical trading floors

Computer network of securities dealers

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? Electing the board of directors Receiving a distribution of company profits Voting either for or against a proposed merger or acquisition Determining the amount of the dividend to be paid per share Having first chance to purchase any new equity shares that may be offered

Determining the amount of the dividend to be paid per share

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? Dividend amount Number of future dividends, provided the total number of dividends is less than infinite Dividend growth rate Discount rate Both the discount rate and the dividend growth rate

Discount rate

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? Alternative voting Cumulative voting Straight voting Indenture voting Voting by proxy

Voting by proxy

NYSE designated market makers: execute trades on behalf of their clients. are guaranteed a profit on every stock purchased and resold. act as dealers. provide a one-sided market. are also referred to as "$2 brokers."

act as dealers.

An agent who arranges a transaction between a buyer and a seller of equity securities is called a: broker. floor trader. capitalist. principal. dealer.

broker.

Which one of the following represents the capital gains yield as used in the dividend growth model? D1 D1/P0 P0 g g/P0

g

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n): designated market maker. dealer. specialist. supplemental liquidity provider. floor broker.

floor broker.

The dividend growth model: assumes dividends increase at a decreasing rate. only values stocks at Time 0. cannot be used to value constant dividend stocks. can be used to value both dividend-paying and non-dividend-paying stocks. requires the growth rate to be less than the required return.

requires the growth rate to be less than the required return.

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent? $11.22 $12.21 $12.32 $11.47 $12.03

$12.32 P3 = $1.90/.146 P3= $13.01 P0 = $1.48/1.146 + $1.60/1.146^2 + ($1.75 + 13.01)/1.146^3 P0 = $12.32

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a discount rate of 11.7 percent? $12.39 $13.30 $13.67 $12.79 $13.41

$13.41 P3 = $1.60/.117 P3 = $13.68 P0 = $1.45/1.117 + $1.50/1.117^2 + ($1.53 + 13.68)/1.117^3 P0 = $13.41

A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year? $19.57 $22.89 $19.07 $20.14 $21.08

$19.57 P1 = $1.63(1.026)(11.7) P1 = $19.57

Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price? $27.42 $27.09 $26.08 $26.42 $28.13

$26.42 P0 = $2.08(12.7) P0 = $26.42

Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in Year 3. At a discount rate of 18 percent, what should one share sell for today? $36.21 $31.48 $35.64 $39.09 $33.54

$33.54 P0 = $4/1.18 + $3/1.18^2 + $46/1.18^3 P0 = $33.54

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next three years, respectively. Beginning four years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth today at a discount rate of 12.5 percent? $42.92 $43.40 $45.12 $45.88 $46.50

$42.92 P3 = [$4.25(1.0325)]/(.125 − .0325) P3 = $47.44 P0 = $3.80/1.125 + $4.10/1.125^2 + ($4.25 + 47.44)/1.125^3 P0 = $42.92

Roy's Welding common stock sells for $58.49 a share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid? $6.60 $5.86 $6.52 $6.98 $5.64

$6.52 $58.49 = [D0(1.013)]/(.126 − .013) D0 = $6.52

AB Co. stock pays a constant annual dividend, sells for $56.07 a share, and has a market rate of return of 12.2 percent. What is the amount of the next annual dividend? $5.67 $5.94 $6.21 $6.84 $7.30

$6.84 D1 = .122($56.07) D1 = $6.84

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $7 in perpetuity, beginning 12 years from now. If the market requires a 6 percent return on this investment, how much does a share of preferred stock cost today? $64.53 $57.98 $116.67 $61.46 $58.39

$61.46 The price of a share of preferred stock is the dividend payment divided by the required return. We know the dividend payment in Year 12, so we can find the price of the stock in Year 11, one year before the first dividend payment. Doing so, we get: P11 = $7/0.06 P11 = $116.67 The price of the stock today is the PV of the stock price in the future, so the price today will be: P0 = $116.67/(1.06)^11 P0 = $61.46

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? Auction Private Over-the-counter Regional Insider

Over-the-counter

Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers? Garage order flow Pillar system Big Room system SLP network Order NET

Pillar system

Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? Private Auction Tertiary Secondary Primary

Primary

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true? The dividend must be constant. The stock has a negative capital gains yield. The capital gains yield must be zero. The required rate of return for this stock increased over the year. The firm is experiencing supernormal growth.

The stock has a negative capital gains yield.

An agent who maintains an inventory from which he or she buys and sells securities is called a: broker. trader. capitalist. principal. dealer.

dealer.

A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a: floor trader. floor post. designated market maker. floor broker. commission broker.

designated market maker.

The secondary market is best defined as the market: in which subordinated shares are issued and resold. conducted solely by brokers. dominated by dealers. where outstanding shares of stock are resold. where warrants are offered and sold.

where outstanding shares of stock are resold.