Chapter 7

If there are nine directors to be elected, what is the least number of shares you will need to guarantee a seat on the board under cumulative voting?

10 percent of the stock plus 1 share

Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?

Dividends are unknown and uncertain. The required rate of return is unobservable Stock has no set maturity.

True or false: All classes of stock issued by a firm must have equal voting rights.

False.

True or false: Common stock has a set maturity.

False. Common stock has no maturity.

What beneficial purpose does staggering serve?

It provides institutional memory.

A benchmark PE ratio can be determined using:

a company's own historical PEs. the PEs of similar companies.

Which of the following are cash flows to investors in stocks?

capital gains and dividends

Identify the two types of preferred dividends:

cumulative or noncumulative

D1

net expected dividend

P1

price in one year

Which of the following is true of classes of common stock?

-The classes of common stock often have unequal voting rights. -A primary reason for creating more than one class of stock is to maintain control.

Which of the following statements are true of cumulative preferred dividends? (Select all that apply.)

-They are carried forward as an arrearage. -Preferred shareholders receive no interest on the cumulated dividends.

Which of the following are true of dividends?

-They are paid at the discretion of the board of directors. -They are taxable to individual shareholders.

If there are nine directors that need to be elected, how many shares do you need to own in order to guarantee a seat on the board under straight voting?

50 percent of the stock + 1 share

True or false: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

False. Neither dividends nor capital gains are fixed or guaranteed.

What is the formula for the present value of a growing perpetuity, where C1 is the net cash flow, R is the required return, and g is the growth rate?

P = C1/(R − g)

When directors elected by common shareholders defer preferred dividends indefinitely, ______.

common shareholders must also forego dividends

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called ______ dividends.

cumulative

All else constant, the dividend yield will increase if the stock price ______.

decreases

When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:

one vote per share held

Preferred stock has preference over common stock in the:

payment of dividends and distribution of corporate assets.

P0

price today

A written authorization for one shareholder to vote the stock of another shareholder is called a(n) ______.

proxy

Under a _______ voting mechanism, the minimum number of votes required to acquire a seat on a board is _____% PLUS ________.

straight, 50, 1

The dividend yield is determined by dividing the expected dividend (D1) by:

the current price (P0).

Which of the following ratios might be used to estimate the value of a stock?

the price-earnings ratio

What right does a proxy give to a shareholder?

the right to vote on behalf of another shareholder

Initial public offerings of stock occur in the ______ market.

primary

Which of the following are rights of common stock holders?

-the right to share proportionally in any residual value in the event of liquidation. -the right to vote on matters of importance. -the right to share proportionally in any common dividends paid.

If you hold 50 shares of a particular corporation's common stock and there are 5 directors to be elected, how many votes will you be allowed to cast under cumulative voting?

250. 50 shares × 5 positions = 250 votes

R

discount rate

D0

dividend just paid

The constant growth model assumes that ______.

dividends change at a constant rate

Payments to shareholders that represent a return on the capital contributed to the corporation are referred to as _______

dividends.

The price of a share of common stock is equal to the present value of all ______ future dividends.

expected

In the dividend growth model, the expected return for investors comes from which two sources?

growth rate and dividend yield

The value of a firm is derived using the firm's ______ rate and its ______ rate.

growth, discount