FIN3403 Exam 2
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.
Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer?
A. default risk
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 negative capital gains yield
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.
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
a discount; less than
You want to buy a bond from a dealer. Which one of the following prices will you pay?
asked price
A bond that is payable to whomever has physical possession of the bond is said to be in:
bearer form
Which one of the following is the price a dealer will pay to purchase a bond?
bid price
A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following?
call premium
A call-protected bond is a bond that:
cannot be called during a certain period of time.
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 bond is quoted at a price of $989. This price is referred to as which one of the following?
clean price
The interest rate risk premium is the:
compensation investors demand for accepting interest rate risk.
Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?
face value
Which one of the following represents the capital gains yield as used in the dividend growth model?
g
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.
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.
Interest rates that include an inflation premium are referred to as:
nominal rates.
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
A deferred call provision is which one of the following?
prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date
The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:
protective covenants.
The Fisher effect is defined as the relationship between which of the following variables?
real rates, inflation rates, and nominal rates
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:
spread.
The pure time value of money is known as the:
term structure of interest rates.
An indenture is:
the legal agreement between the bond issuer and the bondholders.
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?
voting by proxy
A bond's coupon rate is equal to the annual interest divided by which one of the following?
face value
A Treasury yield curve plots Treasury interest rates relative to which one of the following?
maturity
Which one of the following statements related to corporate dividends is correct? A. Dividends are nontaxable income to shareholders. B. Dividends reduce the taxable income of the corporation. C. The Chief Executive Officer of a corporation is responsible for declaring dividends. D. The Chief Financial Officer of a corporation determines the amount of dividend to be paid. E. Corporate shareholders may receive a tax break on a portion of their dividend income.
Corporate shareholders may receive a tax break on a portion of their dividend income.
Which one of these statements related to preferred stock is correct? A. Preferred shareholders normally receive one vote per share of stock owned. B. Preferred shareholders determine the outcome of any election that involves a proxy fight. C. Preferred shareholders are considered to be the residual owners of a corporation. D. Preferred stock normally has a stated liquidating value of $1,000 per share. E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.
Cumulative preferred shares are more valuable than comparable non-cumulative shares.
Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount. B. The call price must equal the par value. C. An increase in market rates increases the market price of a bond. D. Decreasing the time to maturity increases the price of a discount bond, all else constant. E. Increasing the coupon rate decreases the current yield, all else constant.
Decreasing the time to maturity increases the price of a discount bond, all else constant.
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
Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management?
E. proxy fight for control of the board
Which one of the following statements is correct concerning the two-stage dividend growth model?
G1 can be greater than R.
Hardy Lumber has a capital structure which includes bonds, preferred stock, and common stock. Which of the following rights have most likely been granted to the preferred shareholders? I. right to share in company profits prior to other shareholders II. right to elect the corporate directors III. right to vote on proposed mergers IV. right to all residual income after the common dividends have been paid
I only
Which of the following defines a note? I. secured II. unsecured III. maturity less than 10 years IV. maturity in excess of 10 years
II and III only
Which one of the following statements is correct?
The capital gains yield is the annual rate of change in a stock's price.
Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?
Yield to maturity
The taxability risk premium compensates bond holders for which one of the following?
a bond's unfavorable tax status
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
The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?
debenture
The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond?
decrease the market price
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
Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the:
dirty price.
What are the distributions to shareholders by a corporation called?
dividends
Real rates are defined as nominal rates that have been adjusted for which of the following?
inflation
Which one of the following premiums is compensation for expected future inflation?
inflation
Supernormal growth is a growth rate that:
is unsustainable over the long term.
The current yield is defined as the annual interest on a bond divided by which one of the following?
market price
The secondary market is best defined by which one of the following?
market where outstanding shares of stock are resold
Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return?
14.60%
Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return?
$11.29
Free Motion Enterprises paid a $2.20 per share annual dividend last week. Dividends are expected to increase by 3.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 15 percent?
$20.29
Show Boat Dinner Theatres has paid annual dividends of $0.32, $0.52, and $0.60 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively flat. Given the lack of future growth, you will only buy this stock if you can earn at least a 19 percent rate of return. What is the maximum amount you are willing to pay for one share of this stock today?
$3.16
Miller Brothers Hardware paid an annual dividend of $0.95 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 13 percent rate of return, how much are you willing to pay to purchase one share of this stock today?
$9.37
How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 2.5 percent annually, and you require a 10 percent rate of return?
$9.57
The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return?
13.75
You own one share of a cumulative preferred stock which pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid.
3
Upper Crust Bakers just paid an annual dividend of $3.10 a share and is expected to increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 12 percent at the time of your purchase?
41.91
The Blue Marlin is owned by a group of 5 shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?
50 percent plus one vote
The current dividend yield on Clayton's Metals common stock is 3.2 percent. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 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?
7.25 %
Denver Shoppes will pay an annual dividend of $1.46 a share next year with future dividends increasing by 4.2 percent annually. What is the market rate of return if the stock is currently selling for $42.10 a share?
7.67%
The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock?
7.79%
Which of the following features do preferred shareholders and bondholders frequently have in common? I. lack of voting rights II. conversion option into common stock III. annuity payments IV. fixed liquidation value
I, II, III, and IV
An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate
I, II, and IV only
Which of the following apply to a specialist who trades on the floor of the NYSE? I. provides liquidity for an individual security II. partially being replaced by SuperDOT III. pays an annual fee for a trading license IV. acts as a dealer
I, III, and IV only
The dividend growth model: I. 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.
I,II,III,and IV
Which of the following are characteristics of a premium bond? I. coupon rate < yield-to-maturity II. coupon rate > yield-to-maturity III. coupon rate < current yield IV. coupon rate > current yield
II and IV
Which of the following relationships apply to a par value bond? I. coupon rate < yield-to-maturity II. current yield = yield-to-maturity III. market price = call price IV. market price = face value
II and IV only
Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?
If cumulative voting applies, Jen is assured one seat on the board.
A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following?
callable
Which one of following is the rate at which a stock price is expected to appreciate?
capital gains yield
Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?
common
Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?
coupon
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
Which one of the following is computed by dividing next years annual dividend by the current stock price?
dividend yield
A sinking fund is managed by a trustee for which one of the following purposes?
early bond redemption
Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
in registered form.
The specified date on which the principal amount of a bond is payable is referred to as which one of the following?
maturity
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
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
The liquidity premium is compensation to investors for:
the lack of an active market wherein a bond can be sold for its actual value.
A bond that has only one payment, which occurs at maturity, defines which one of the following?
zero coupon