Homework 4

[Ch.8] An investor has a 38 percent ordinary income tax rate and a 20 percent long-term capital gains tax rate. The investor holds stock in a firm that could pay its usual $1 per share dividend or reinvest the cash in the firm. The stock price is currently $30 per share. If the firm does not pay the dividend, the share price will rise. If it pays the dividend, the share price will stay the same. By how much must the share price rise if the dividend is not paid in order to make the investor indifferent between receiving the dividend or not? Note: You have to compare between the after-tax $1 dividend at 38% tax rate, with the after-tax ? capital gain at 20% tax rate and find the capital gain that matches the two below. After-tax dividend = Dividend * (1 - Ordinary income tax rate) After-tax capital gain = Before-tax capital gain * (1 - Long-term capital gain tax rate) $1.00 $0.59 $0.78 $0.97

$0.78

[Ch.8] What price would you expect to pay for a stock with 13% required rate of return, 4% rate of dividend growth, and an annual dividend of $2.50 which was paid yesterday? Formula: Price = D0*(1+g) / (r-g) Financial Calculator: N = 999 (infinite), I = r -g, PV = Price, PMT = D1 = D0*(1+g), FV = 0 (perpetuity) $27.78 $30.28 $31.10 $28.89

$28.89

[Ch.8] If next year's dividend is forecast to be $5.00, the constant-growth rate is 4%, and the discount rate is 16%, then the current stock price should be: Formula: Price = D1/ (r-g) Financial Calculator: N = 999 (infinite), I = r -g, PV = Price, PMT = D1 = D0*(1+g), FV = 0 (perpetuity) $31.25 $40.00 $41.67 $43.33

$41.67

[Ch.8] What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? Formula: Price = D1/ (r-g) Financial Calculator: N = 999 (infinite), I = r -g, PV = Price, PMT = D1 = D0*(1+g), FV = 0 (perpetuity) $22.86 $28.00 $42.00 $43.75

$43.75

Which of the following statements is true for a stock that sells now for $59, pays an annual dividend of $3.90, and experienced a 15% return on investment over the past year? Its price one year ago was: Formula: HPR = (Div + P1 - P0)/P0 Financial Calculator: N = 1 (holding period), CPT I = ?, PV = -P0, PMT = D1, FV = P1 $50.15 $54.70 $53.47 $46.84

$54.70

What is the percentage return on a stock that was purchased for $43.40, paid no dividend after one year, and was then sold for $40.70? Formula: HPR = (Div + P1 - P0)/P0 Financial Calculator: N = 1 (holding period), CPT I = ?, PV = -P0, PMT = D1, FV = P1 6.22% 18.66% -6.22% 12.44%

-6.22%

[Ch.8] Today, Stock A is worth $20 and has 1,000 shares outstanding. Stock B costs $30 and has 500 shares outstanding. Stock C is priced at $50 per share and has 1,200 shares outstanding. If tomorrow Stock A is priced at $22, Stock B at $35, and Stock C is worth $48, what would the value-weighted index amount equal? (The index has a base period value of 100.) Formula: Value-weighted index = [ (Price1A * # A) + (Price1B * # B) + (Price1 C * # C) ] / [ (Price0 A * # A) + (Price0B * # B) + (Price0C * # C) ] * Index base value 105.00 108.44 101.45 102.21

102.21

[Ch.8] What is the required return for a stock that has a 6% constant-growth rate, a price of $25, and an expected dividend of $2? Formula: Price = D1/ (r-g) Financial Calculator: N = 999 (infinite), I = r -g, PV = Price, PMT = D1 = D0*(1+g), FV = 0 (perpetuity) 5% 10% 14% 22%

14%

[Ch.8] The age group that held the least stock from 2009 through 2017 was the ____________ group. 18-29 30-49 50-64 65 and older

18-29

[Ch.8] The most commonly quoted index is the Dow Jones Industrial Average (DJIA), an index based on the performance of the stocks of ________ large companies. 25 30 35 40

30

[Ch.8] You buy a stock for $34 per share and sell it for $36 after you collect a $1.00 per share dividend. Your pretax capital gain yield is ________________ and your pretax dividend yield is ________________. Formula: CGY = (P1 - P0) / P0 and DY = D1 / P0 8.82% and 0.00% 5.88% and 2.94% 5.56% and 2.78% 4.65% and 3.17%

5.88% and 2.94%

[Ch.8] What constant-growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 13%? Formula: Price = D1/ (r-g) Financial Calculator: N = 999 (infinite), I = r -g, PV = Price, PMT = D1 = D0*(1+g), FV = 0 (perpetuity) 5.00% 6.25% 6.75% 15.38%

6.75%

[Ch.8] Suppose you own 500,000 shares of common stock in a firm with 40 million total shares outstanding. The firm announces a plan to sell an additional 5 million shares through a rights offering. The market value of the stock is $32.5 before the rights offering and the new shares are being offered to existing shareholders at a $2.50 discount. If you exercise your preemptive rights, how many of the new shares can you purchase? Note: Existing shareholders can buy up to the proportion of their current ownership. Existing ownership proportion = # shares owned / Total # shares # shares could be purchased = Existing ownership proportion * # new shares to be issued 100,000 shares 50,000 shares 62,500 shares 45,000 shares

62,500 shares ??

[Ch.8] Suppose a firm has 10 million shares of common stock outstanding and seven candidates are up for election to three seats on the board of directors. If the firm uses cumulative voting to elect its board, what is the minimum number of votes needed to ensure election to the board? Note: The formula for cumulative voting is Cumulative votes = Total number of shares * Number of seats To guarantee a seat, the formula is at least 1 share above the average votes Minimum votes = Cumulative votes / (Number of seats + 1) + 1 Minimum votes = Total number of shares * Number of seats / (Number of seats + 1) + 1 3,000,000 4,285,715 5,000,000 7,500,001

7,500,001

[Ch.8] A firm is using cumulative voting and four director spots are up for election. There are 3.6 million shares outstanding. How many shares must a minority owner own or control to ensure that he or she can gain control of one seat on the board of directors? Note: The formula for cumulative voting is Cumulative votes = Total number of shares * Number of seats To guarantee a seat, the formula is at least 1 share above the average votes Minimum votes = Cumulative votes / (Number of seats + 1) + 1 Minimum votes = Total number of shares * Number of seats / (Number of seats + 1) + 1 Group of answer choices 900,001 880,001 720,001 1,750,001

720,001

[Ch.8] You buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate is 28 percent and your capital gains tax rate is 20 percent. Your after-tax rate of return is ___________________. Note: Dividend income will be taxed with ordinary income. Capital gain will be taxed separately and the rate will depend on how long the stock was held (higher for short-term, lower for long-term). After-tax dividend = Dividend * (1 - ordinary income tax rate) After-tax capital gain = Capital gain * (1 - capital gain tax rate) After-tax total gain = After-tax dividend + After-tax capital gain After-tax rate of return = After-tax total gain / Investment 8.00% 10.25% 12.50% 9.80%

9.80%

[Ch.8] Which of the following describes a seasoned offering? An IPO of common stock for a well-known firm. An IPO that is offered during the best buying season. An additional equity issue from a publicly traded firm. Any shares traded in the secondary market are seasoned offerings.

An additional equity issue from a publicly traded firm

Ch.8] Which of the following is correct? A share of common stock in a firm represents an ownership interest in that firm. A share of preferred stock is as much like a bond as it is like common stock. Both a and b. Neither a or b.

Both a and b.

[Ch.8] Which of the following indexes is not value-weighted? NYSE Composite S&P 500 NASDAQ Composite Dow Jones Industrial Average

Dow Jones Industrial Average

[Ch.8] Computerized markets that automatically match orders between buyers and sellers and are used primarily by institutional traders are called: OTC bulletin boards. SPDR. ECNs. specialists.

ECNs

[Ch.8] In 2007 the NYSE merged with _________________. NASDAQ Euronext American Exchange Chicago Mercantile Exchange

Euronext

[Ch.8] Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn abnormal returns from using the firm's publicly-available financial information to forecast growth in earnings and dividends. This would be evidence that the markets are not: I. weak form efficient. II. semi-strong form efficient. III. strong form efficient. I only I and II only III only II and III only

I and II only

[Ch.8] What is the primary disadvantage of an ETF? ETFs tend to have lower management fees than comparable index mutual bonds. ETFs usually have no minimum investment amount. Investors have to pay a broker commission each time they buy or sell shares. They are listed and traded as individual stocks on a stock exchange.

Investors have to pay a broker commission each time they buy or sell shares

[Ch.8] Which of the following ADRs is considered the most risky type of ADR? Level I ADR Level II ADR Level III ADR Level IV ADR

Level I ADR

[Ch.8] As of December 2005, trading licenses are required to conduct trades on the floor of the NYSE. Which of the following statements about these trading licenses is correct? Licenses are auctioned off in a special type of auction called a Dutch auction. A non-member organization of the NYSE is eligible to bid for a trading license. The SEC determines the maximum bid price. Trading licenses are good for 10 years.

Licenses are auctioned off in a special type of auction called a Dutch auction

[Ch.8] In terms of volume of trading and market value of firms traded, the _____________ is the largest U.S. stock market. In terms of number of firms traded, the ___________ is the largest in the United States. NYSE; NYSE NYSE; AMEX NYSE; NASDAQ NASDAQ; AMEX

NYSE; NASDAQ

[Ch.8] The electronic-based market for less actively traded U.S. securities is the: ADR market. OTC bulletin board. Pink Sheet stocks. ECN Market.

OTC bulletin board

[Ch.8] What stock price reaction would you expect from a firm that unexpectedly raises its dividend permanently and by a substantial amount? Price should rise, given dividend discount models. Price should decline, given discounted cash flow analysis. Price will remain constant, due to market efficiency. Price will remain constant, due to random-walk behavior.

Price should rise, given dividend discount models

[Ch.8] Which of the following is true about specialists? Investment banks generally can be specialists. Specialists are used by the NASDAQ system. Market and limit orders are transacted at specialist posts, but the specialist's own account orders are executed elsewhere. Specialists help maintain continuous trading.

Specialist help maintain continuous trading

[Ch.8] Which of the following information is not usually found in a Wall Street Journal stock quote? Dividend yield Closing price Stock rating Ticker symbol

Stock rating

[Ch.8] Common stocks typically have which of the following that bonds do not have? Voting rights Fixed cash flows Set maturity date Tax deductibility of cash flows to investors

Voting rights

[Ch.8] Which of the following is not an objective of the Securities and Exchange Commission? Maintain integrity of the securities markets Advise investors about which particular stocks are good buys Require firms to provide specific information to investors Regulate major participants in securities markets

advise investors about which particular stocks are goods buys

[Ch.8] NYSE listing has traditionally benefited a firm by: improving the stock's price. generating increased publicity for the firm. providing easier access to primary market capital. all of the above.

all of the above

[Ch.8] The NYSE specialists are charged with: trading for their own account. ensuring public limit orders are executed. facilitating the processing of public market orders. all of the above

all of the above

The preemptive right is designed to: allow management to diffuse stock ownership of any voting power. allow managers to preempt a stock offering if they do not like the terms of the deal. allow existing shareholders the right to sell their existing shares before the new offer. allow existing shareholders to buy shares of the new offering if they desire.

allow existing shareholders to buy shares of the new offering if they desire

[Ch.8] The expected return on a common stock is composed of: dividend yield. capital appreciation. both dividend yield and capital appreciation. capital appreciation minus the dividend yield.

both dividend yield and capital appreciation

[Ch.8] The riskiest capital market security is preferred stock common stock corporate bonds Treasury bonds

common stock

Preferred stockholders hold a claim on assets that has priority over the claims of both common stockholders and bondholders. neither common stockholders nor bondholders. common stockholders, but after that of bondholders. bondholders, but after that of common stockholders.

common stockholders, but after that of bondholders

[Ch.8] If all preferred dividend payments that have been missed must be paid before any common stock dividend can be paid, the preferred stock is called _____________ preferred stock. cumulative participating nonparticipating dual class

cumulative

[Ch.8] With ____________ voting, all directors up for election are voted on by the shareholders at the same time in one general election. straight participating non-participating cumulative

cumulative

[Ch.8] Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by buying stocks for inventory when investors want to sell. selling stocks from inventory when investors want to buy. doing both of the above. doing neither of the above.

doing both of the above

[Ch.8] On the NASDAQ system, the inside quotes are the: lowest ask and lowest bid. lowest bid and highest ask. highest bid and highest ask. highest bid and lowest ask.

highest bid and lowest ask

[Ch.8] The largest single type of holder of common stock (by dollar holding) is: pension funds. households. mutual funds. life insurance firms.

households

[Ch.8] In the calculation of rates of return on common stock, dividends are _____ and capital gains are ____. guaranteed; not guaranteed guaranteed; guaranteed not guaranteed; not guaranteed not guaranteed; guaranteed

not guaranteed; not guaranteed

[Ch.8] If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock: pays $1 quarterly, or an estimated $4 annually. pays $0.25 quarterly, or an estimated $1 annually. paid $1 during the past quarter, with no future dividends forecast. paid $1 during the past year, with no future dividends forecast.

pays $0.25 quarterly, or an estimated $1 annually

[Ch.8] According to the strong form of efficient market hypothesis: private information is of no help in earning abnormally high returns. using past price and volume information one can earn abnormally high returns from stocks. using insider information one can earn abnormally high returns from stocks. equity analysts are always correct in predicting the best stocks.

private information is of no help in earning abnormally high returns

[Ch.8] A share of preferred stock in a firm represents an ownership interest in that firm and allows stockholders to vote. receive fixed dividends. receive residual dividends. receive interest payments.

received fixed dividends ????

[Ch.8] The preliminary version of a security offer that is circulated to potential buyers before SEC approval (registration) is obtained is called a: final prospectus. shelf registration statement. waiting period offer. red herring prospectus.

red herring prospectus

[Ch.8] In a ____________ the firm preregisters with the SEC any securities it wishes to sell over the next two years. voting rights fully underwritten shelf registration best efforts

shelf registration

[Ch.8] The value of common stock will likely decrease if: the investment horizon decreases. the growth rate of dividends increases. the discount rate increases. dividends are discounted back to the present.

the discount rate increases