FIN 300 exam 2 ch. 8 practice

d. discount rate

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? a. dividend amount b. number of future dividends, provided the total number of dividends is less than infinite c. dividend growth rate d. discount rate e. both the discount rate and dividend growth rate

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

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?

c. designated market maker

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

e. floor broker

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

c. over the counter

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? a. auction b. private c. over the counter d. regional e. insider

$76.41 P0 = [$1.60(1.30)/(0.13 - 0.30)][1 - (1.30/1.13)^7] + [(1.30)/(1.13)]^7[$1.60(1.05)/(0.13 - 0.05)] P0 = $76.41

A7X Corp. just paid a dividend of $1.60 per share. The dividends are expected to grow at 30 percent for the next 7 years and then level off to a growth rate of 5 percent indefinitely. If the required return is 13 percent, what is the price of the stock today?

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

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?

a. broker

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

d. dealer

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

$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

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?

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

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?

$114.10 The price of a share of preferred stock is the dividend payment divided by the required return. We know the dividend payment in Year 8, so we can find the price of the stock in Year 7, one year before the first dividend payment. Doing so, we get: P7 = $13/0.06 P7 = $216.67 The price of the stock today is the PV of the stock price in the future, so the price today will be: P0 = $216.67/(1.06)^7 P0 = $144.10

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $13 in perpetuity, beginning 8 years from now. If the market requires a 6 percent return on this investment, how much does a share of preferred stock cost today?

e. primary

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? a. private b. auction c. tertiary d. secondary e. primary

10.95% $36.84 = [$1.61(1 + g)/(.158 − g) g = .1095, or 10.95%

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?

$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

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?

c. act as dealers

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

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

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?

$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

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?

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

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?

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

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

(D1+p0)+g

The next dividend payment by Savitz, Inc., will be $1.72 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. If the stock currently sells for $33 per share, what is the required return?

d. where outstanding shares of stock are resold

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

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

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?

d. computer network of securities dealers

Which one of the following best describes NASDAQ? a. largest US market in terms of dollar trading volume b. market where dealers buy at the asked price c. market where the designated market makers are located at posts d. computer network of security dealers e. market with three physical trading floors

b. pillar system

Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers? a. garage order flow b. Pillar system c.Big room system d. SLP network e. order NET

g

Which one of the following represents the capital gains yield as used in the dividend growth model? a. D1 b. D1/P0 c. P0 d. g e. g/P0

d. determining the amount of dividend to be paid per share

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? a. electing the board of directors b. receiving a distribution of company profits c. voting either for or against a proposed merger or aquisition d. determining the amount of dividend to be paid per share e. having first chance to purchase any new equity shares hat may be offered

d. purchase of newly used stock from the issuer

Which one of the following transactions occurs in the primary market? a. purchase of 500 shares of GE stock from a current shareholder b. gift of 100 outstanding shares to a charitable organization c. gift of 200 shares of stock by a mother to her daughter d. a purchase of newly issued stock from the issuer e. IMB's purchase of GE stock from a dealer

b. the stock has a negative capital gains yield

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? a. the dividend must be constant b. the stock has a negative capital gains yield c. the capital gains yield must be zero d. the required rate of return for this stock increased over the year e. the firm is experiencing supernormal growth

e. voting by proxy

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? a. alternative voting b. cumulative voting c. straight voting d. indenture voting e. voting by proxy

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

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?