Ch 10
(b) 39. What is the value of a stock expected to pay a constant $5 dividend each year forever, if the market required rate of return is 18%?
$28
(a ) 57. Paul is examining a common stock of Cino Oil Co. that currently has a beta of 1.3. The risk-free rate, which is 90-day Treasury Bill yield, is an annual rate of 6%, and the market return, which is S&P 500 index change, is an annual rate of 12%. This stock is expected to generate a constant dividend of $5.20. However, a toxic spill of Cino Oil Co. results in an international lawsuit and potential finds, and the beta of the stock jumps to 1.6. What will the new equilibrium price of the stock be?
$33.33
(d) 56. The current price of Fukushima Power Co. stock is $32.50 per share. Earnings next year should be $2.5 per share and it should pay a $ 1 dividend. The P/E multiple is 15 times on average in this industry. What price would you expect for the firm's stock in the future if you believe the P/E multiple approach is correct?
$37.50
(b) 42. What is the estimated value of a stock, which paid a $5 dividend this year, expects dividends to grow at 6 per cent, and requires a 20 per cent return?
$37.86
(d) 40. A stock just paid an annual dividend of $2. The dividends are expected to grow at 20% per year over each of the next three years and 5% per year thereafter. What is the value of the stock if the required rate of return is 12%?
$43.80
(d) 60. Suppose Zina & Co. has an expected dividend next year of $5.6 per share, a growth rate of dividends of 10 percent, and a required return of 20%. The value of a share of common stock is.
$56.00
(b) 55. Suppose MBI Co. recently paid $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually. Based on this information, how much should the company's common stock sell for today if the required return is 10.5%?
$59.22
(a) 18. Sampson Corporation, through its investment banker, First Ohio Securities, recently sold 200,000 shares of common stock to the public, grossing $7.4 million. Issuing expenses paid by Sampson totaled $200,000, and the underwriter's spread was $3 per share. How much net financing did Sampson Corporation raise in the deal?
$6.6 million
(d) 44. If the risk-free rate is 7%, the return on the market portfolio is 15%, and the beta is 1.5, what is the value of the stock if the current dividend (D0) is $1.20 and it is expected to grow at a constant rate of 6% per year?
$9.80
(a) 54. The current dividend yield, which is the recent dividend divided by the current stock price, on common stock of Formosan Freedom Co. is 4.8 %. The company just paid a $2.10 dividend. The dividend will be $2.205 in next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on stock of Formosan Freedom Co.?
10.04 percent
(c) 52. Stocks XX, YY, and ZZ, initially priced at $35, $65, and $72, respectively, comprise a price-weighted index with a base value of 100. One year later the stocks above were valued at $40, $69, and $87, respectively. What was the value of the index at the end of year one?
114
(d) 51. At the beginning of year one, the stock market index had a value of 225.4. Two years later the value was 298. What was the average annual rate of return on the index portfolio?
15.0%
(a) 45. A stock currently trading at $50 expects to pay a $4.50 dividend this year. The dividends and stock price has been growing at 8% per year for 10 years. What is the expected total return on the stock this year?
17%
(b) 43. What is the required rate of return on a stock if the risk-free rate is 7%, the return on the market portfolio is 15%, and the beta is 1.5?
19%
(c) 14. A stock purchased at $40 at the beginning of the year paid $10 in dividends and was sold for a net price of $42 at the end of the year. The total annual return is
30%
(c) 41. Ace Corporation preferred stock pays an 8% dividend on a par value of $50 and is currently selling at $47.50. What is required rate of return on the stock?
8.4%
(c) 33. An order to the New York Stock Exchange to buy or sell at the best price available is called
a market order.
(c) 15. The sale of securities to the public via an investment banker by a new corporation raising funds is called
an initial public offering.
(c) 6. The term shareholder equity means
an ownership claim.
(d) 24. Which of the four types of secondary markets listed below has low search costs, price risk, and the expense of a bid/ask spread?
auction
(d) 20. The New York Stock Exchange is a(n) ________ market.
auction exchange secondary all of the above
(c) 29. Which of the following is not associated with the over-the-counter market for stocks?
auction market
(d) 16. Which of the following terms is associated with secondary equity markets?
bid-ask spread
(b) 22. Which of the four types of secondary markets listed below achieves economies of scale in search costs but does not guarantee that orders will be executed promptly?
brokered
(c) 31. The daily pink sheets of the OTC market were replaced
by the NASDAQ system.
(c) 1. Which of the following is not an example of capital market securities?
commercial paper
(d) 58. Since your grandmother supports your tuition at college, she wants to make sure it is worthy to invest in your education. She is wondering if you can tell her the key differences between common stock and bonds. Which of the following is NOT accurate?
common stockholders have a senior claim on assets and income relative to bondholders.
(a) 7. Which of the following terms is not associated with common stock?
contractual
(b) 3. Investors with 30 per cent of the voting stock of a corporation, interested in a seat on the board of directors, had better have __________ voting privileges.
cumulative
(c) 2. Which of the following is not associated with characteristics of common stock?
cumulative dividends
(d) 12. Which of the following statements is not true?
Electronically linking equity dealers and exchange markets is slowly leading toward a national market system. Electronically linking international markets has created 24-hour trading opportunities for some stocks. U. S. stock exchanges have extended (after hours) their normal trading hours in which shares are traded electronically, linking U. S. with the hours of international markets. All of the above statements are true.
13. Preferred stockholders have the same voting rights as common shareholders.
F
15. The market rate of return on a $100 par value preferred stock, priced at $90, paying an $8.00 annual dividend, is 8 per cent.
F
16. A publicly traded company issuing additional shares of common stock does it through an IPO.
F
18. Shelf registration permits a corporation to register several types of security issues and sell them at once.
F
2. The NASDAQ is a stock exchange.
F
20. Systematic risk can be significantly reduced through diversification.
F
21. Equity capital can be raised through the money market and the NYSE bond market.
F
23. Preferred stockholders have a claim junior to common stock but senior to bondholders.
F
3. The secondary market for capital market securities is important because it provides funds directly to deficit spending units.
F
4. Primary capital market securities provide marketability and possibilities for investors to alter the riskiness of their portfolios.
F
5. Stock with betas less than one tend to have more price variability than the market.
F
6. Limited liability of stockholders protects them from losses on their stock portfolio.
F
(c) 23. Which of the four types of secondary markets listed below minimizes price risk, but search costs are often high?
dealer
(b) 30. The NASDAQ system provides price input capability for
dealers
(a) 21. Which of the four types of secondary markets listed below involves considerable costs and no third party?
direct search
(d) 13. The household sector is the largest surplus sector and invests in the capital market
directly by purchasing stocks and bonds. indirectly through mutual funds and pension funds
(b) 19. The underwriter's spread (%) is
directly related to the riskiness of the issue.
(c) 36. In response to competition from foreign stock exchanges, U.S. stock exchanges have
expanded electronic after-hour trading for stocks.
(b) 4. In a board of directors election for five directors and straight voting, a majority group of shareholders will elect
five directors.
(d) 5. The capital market is allocationally efficient if
funds are channeled to their most productive use. only if informational and operational market efficiencies are high.
(c) 47. Stocks with beta values of one
has had return variability similar to the market.
(d) 28. Which of the following is not a reason for not listing a stock on an exchange?
having a large number of public shareholders
(a) 34. Which of the following is not a result of advances in technology and competition in equity markets?
higher transaction costs
(b) 10. A shareholder in a troubled corporation is not likely to lose his/her
house
(b) 8. Security exchanges provide a valuable function in that they
increase the marketability of securities.
1. The Dow Jones Industrial Average is a price-weighted index.
T
10. Diversification attempts to lower or eliminate the unsystematic risk of a portfolio of securities.
T
11. A market with breadth has a large number of diverse investors.
T
12. The underwriter's spread is inversely related to the size of the primary offering.
T
14. A stock which is expected to pay a $4 dividend next year, growing constantly at 6%, and is priced to yield a required return of 18% must be selling for $33.33.
T
17. Convertible preferred stock can be exchanged into common stock at a predetermined ratio.
T
19. Among financial institutions, mutual funds are the largest holders of corporate equity securities.
T
22. A proxy is an absentee ballot that allows a representative to vote on behalf of the stockholder.
T
24. If the stock markets are semi-strong efficient, stock prices reflect all historic and current public information about a firm but prices do not reflect inside information.
T
7. The New York Stock Exchange is an example of a secondary market.
T
8. A wide spread between the bid and ask quotes of a security dealer may represent weak operational market efficiency.
T
9. At NYSE, limit orders are usually entered into the specialist's limit order book.
T
(b) 25. The percentage bid-ask spread for equity securities
is large for very small and very large transactions.
a) 26. The bid-ask spread for equity securities tends to be _______ for more frequently traded stocks and _______ for stocks which have more traders with inside information.
less; more
(b) 32. Which of the following is not one of three major sources of active bids and offerings in a stock issue at a stock trading post on an exchange?
limit price orders held by floor brokers.
(b) 38. The federal legislation that made the Securities and Exchange Commission responsible for the broad oversight of securities markets was
The Securities Exchange Act of 1934.
(a) 53. Which of the followings statements is correct?
The stock market does a poor job of predicting economic recessions.
(c) 27. The over-the-counter market trades ______ stocks than exchanges, and exchanges tend to list ________ companies.
more; larger
(c) 46. Investors in well diversified stock portfolios are concerned about ________ risk.
systematic
(c ) 59. All of the following features may be characteristics of preferred stock EXCEPT
tax-deductible dividends
(e) 37. The primary federal regulator of stock markets is
the Securities and Exchange Commission.
(a) 49. The slope of the security market line is
the market risk premium.
(b) 48. The security market line shows
the return for each level of risk.
(b) 50. When constructing a stock market index, which two items are needed to start the index?
the starting date and the base index value.
(d) 9. Regulators provide a valuable function for the capital markets because they
try to keep the market participants honest. try to prevent excessive speculation from destabilizing the market. make sure all pertinent information about publicly traded securities is disclosed. all of the above
(c) 17. Which of the following market participants functions in the primary equity markets?
underwriter
(d) 11. Which of the following is not true about American Depository Receipts (ADRs)?
An ADR decreases the foreign firm's U.S. liquidity (and potentially total global issuer liquidity).
(e) 35. Which of the following statements is true about secondary markets?
A buyer may incur search costs and find a seller on their own through a direct search. A broker may bring buyers and sellers together, charging a commission. A dealer may sell and buy securities using his inventory, therefore reducing search costs. The dealer's return is the bid/ask spread. An auction market allocates the selling shares to the highest bidder. All of the above statements are true.