Chapter 7

Which one of the following statements concerning dealers and brokers in the financial markets is correct? A. a broker never assumes ownership of the securities being traded. B. A dealer pays the ask price when purchasing securities. C. A broker earns income in the form of a bid-ask spread. D. A dealer in market securities arranges sales between buyers and sellers for a fee. E. A broker deals solely in the primary market.

A. a broker never assumes ownership of the securities being traded.

Based on the dividend growth model, an increase in investors required rate of return will A. cause the market values of all stocks to decrease, all else held constant. B. not affect overall stock market prices. C. cause dividend growth rates to increase to offset this change. D. cause non-dividend-paying stocks to decrease in price while dividend-paying stock prices remain constant. E. cause some stock prices to rise while others fall.

A. cause the market values of all stocks to decrease, all else constant

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

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

A stock that pays a constant annual dividend will have a market price that A. increases when the market rate of return increases. B. decreases when the market rate of return increases C. decreases over time. D. increases over time. E. always remains constant.

B. decreases when the market rate of return increases

Hentges Co. pays a constant annual dividend of $2.50 per share and has 1,000 shares of common stock outstanding. The company A. must always show a current liability on its balance sheet of $2,500 for dividends payable. B. must declare each annual dividend before it becomes an actual liability. C. is obligated to continue paying $2.50 a share each year. D. can deduct $2,500 per year as a business expense as a result of its dividend payment. E. can be forced into bankruptcy by its shareholders if

B. must declare each annual dividend before it becomes an actual liability

Which one of the following transactions occurs in the primary market? A. Alpha repurchased Alpha stock from Ann B. Brandy gave a tax-free gift of Beta stock to Bao C. Ginny sold Gamma stock to Gaurav D. Delta Inc. sold new Delta stock to David E. Emma transferred Epsilon stock to her son, Ezra

D. Delta Inc. sold new Delta stock to David

Kate, an individual investor, sold 500 shares of Hewn Furniture stock on Monday. Levy, another individual investor, purchased those shares, although he never met Kate. You know for certain that this trade occurred in which market? A. Primary market B. Dealer market C. Nasdaq D. Secondary Market E. NYSE

D. Secondary market

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

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

Corporate dividends A. are a source of tax-free income for individual investors. B. reduce the taxable income of the payer. C. are only 70 percent taxable to corporate shareholders. D. are paid out of pretax income and thus are taxed at the personal level. E. are taxed at the personal level even though they are paid from after-tax income.

E. are taxed at the personal level even though they are paid from after-tax income

Sophia owns shares of stock in Torrid Design and wants to be elected to the company's board of directors. There are 100,000 shares of stock outstanding and each share is granted one vote for each open position on the board. Presently, the company is voting to elect two new directors. Sophia can be assured of her election A. if straight voting applies and she owns at least 25 percent of the shares, plus one additional share. B. if straight voting applies and she owns at least one-third of the sh

E. if cumulative voting applies and she owns one-third of the shares, plus on additional share.