Fin 3320 - Chap 7

c. cumulative dividends

A protective feature on a preferred stock that requires preferred dividends that were not paid in previous years to be disbursed before any common stock dividends can be paid is called _____. a. a sinking fund b. par value c. cumulative dividends d. voting rights e. a preemptive right

d. Euro stock

Excluding stocks traded in the United States, a stock that is traded in a country other than the issuing company's home country is called a ________. a. Preferred stock b. Global classified equity c. Class B stock d. Euro stock e. Yankee stock

c. Yankee stock

If a German company sells its stock in the United States, it is called a(n) _____. a. income stock b. founders' stock c. Yankee stock d. growth stock e. Euro stock

e. Liquidation value

What is another name for the par value of a preferred stock? a. Hybrid value b. Cumulative value c. Interest d. Preference value e. Liquidation value

e. conversion price

A convertible preferred stock can be exchanged for a certain number of shares of common stock at the _____. a. discount rate b. capital gain rate c. par value d. premium price e. conversion price

e. If the share is purchased for $10, the stockholders are obligated to contribute $5 per share to the firm.

A firm has 1,000 shares of common stock outstanding with a par value of $15 per share. Upon liquidation, the firm has insufficient funds and requires an additional $5,000 to repay its creditors. Which of the following statements is true about the common shareholders' financial obligation? a. If the share is purchased for $20, the stockholders are obligated to pay interest equal to $15 per share to the firm. b. If the share is purchased for $8, the stockholders are obligated to pay $2 per share to the creditors. c. If the share is purchased for $15, the stockholders are obligated to pay $15 per share to the bondholders. d. If the share is purchased for $18, the stockholders are obligated to pay a dividend of $3 per share to the firm. e. If the share is purchased for $10, the stockholders are obligated to contribute $5 per share to the firm.

a. the firm has a large amount of cash and a number of good investment opportunities that will grow the firm

A firm most likely will repurchase shares of its common stock in the financial markets when _______. a. the firm has a large amount of cash and a number of good investment opportunities that will grow the firm b. the price of the firm's stock is overvalued c. management wants to increase the ownership control of the outside investors d. common stockholders are the last to receive proceeds from liquidation e. the returns on the firm's stock is generated by solely by capital gains

d. economic value added (EVA)

A firm's _____ is determined by subtracting the costs associated with both the debt and the equity that the firm uses from its after-tax operating income? a. intrinsic value of stock b. price earnings ratio (P/E) c. expected capital gains yield d. economic value added (EVA) e. nonconstant growth of stock

a. 10%

A share of a preferred stock pays a dividend of $0.50 each quarter. If you are willing to pay $20.00 for this preferred stock, what is the simple (not effective) annual rate of return? a. 10% b. 6% c. 12% d. 14% e. 8%

a. $3.00

A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent. If you require a 14 percent rate of return, what is the current dividend (D0) on this stock? a. $3.00 b. $2.00 c. $6.00 d. $3.30 e. $4.00

d. $50.00

A share of preferred stock pays an annual dividend of $6 per share. If investors require a 12 percent rate of return, what should be the price of this preferred stock? a. $55.00 b. $40.00 c. $60.00 d. $50.00 e. $45.00

e. proxy

A shareholder can transfer the right to vote to another person by means of an instrument known as _____. a. rationing b. arbitrage c. consortium d. allotment e. proxy

b. 7.5%

Alpha's preferred stock currently has a market price equal to $80 per share. If the dividend paid on this stock is $6 per share, what is the required rate of return investors are demanding from Alpha's preferred stock? a. 13.3% b. 7.5% c. 3.7% d. 13.3% e. 4.2%

c. It would take 10 years for an investor to recover his or her initial investment.

Assume that a firm distributes all of its earnings as dividends. Which of the following is indicated by a price-earnings (P/E) ratio of 10? a. The stock's value will increase by 10 percent every year. b. The value of the stock will be 10 times the initial investment at the time of maturity. c. It would take 10 years for an investor to recover his or her initial investment. d. The firm will pay a dividend of $10 per share. e. An investor would receive 10 percent of the total earnings of the firm at the time of liquidation.

c. American depository receipts

Certificates that represent ownership in stocks of foreign companies and are held in trusts at banks located in the countries where the stocks are traded are called _____. . Euro stocks b. Samurai mutual funds c. American depository receipts d. foreign stock funds e. certificates of ownership

e. electing board members who can replace the management

Common shareholders can exert control of the management of the firm by _____. a. buying shares in an initial public offering (IPO) at a discounted price b. buying shares in a second firm at a substantially reduced price c. requiring the firm to unionize d. directly replacing management with themselves e. electing board members who can replace the management

c. vote for the changes in a firm's charter

Common stockholders have the right to _____. a. receive the par value of shares on liquidation b. receive cumulative dividends c. vote for the changes in a firm's charter d. receive the cash distributions before preferred stockholders e. convert their stock into bonds

a. EVA > 0

Considering the economic value added (EVA) of a firm, which of the following should increase the firm's value? a. EVA > 0 b. Price-earnings ratio (P/E) ratio > EVA c. EVA >Earnings per share (EPS) d. EVA < 0 e. EVA = 0

a. By including a call provision

How can a firm effectively incorporate a maturity provision within a preferred stock issue? a. By including a call provision b. By including a voting provision c. By including a participating provision d. By including a preemptive right e. By including a cumulative dividends provision

a. incorporate a call provision in the preferred stock issue

If a firm wants to be able to redeem some of its preferred stock at some date after issue, it must _____. a. incorporate a call provision in the preferred stock issue b. issue the stock at par value at the time of issue c. include a preemptive right in the preferred stock issue d. provide voting rights to preferred stockholders e. pay accumulated dividends to the common stockholders

e. stock is a good buy

If the expected rate of return on a stock exceeds the required rate, it means that the _____. a. stock should be sold b. dividends are not declared c. company is not trying to maximize the price per share d. stock is experiencing an abnormal growth pattern e. stock is a good buy

d. average cost of invested capital

In the economic value added (EVA) equation, the _____ is subtracted from the after-tax operating income to determine the EVA. a. current intrinsic value b. operating cash flows c. total capital invested d. average cost of invested capital e. marginal tax

b. -$0.85

Nahanni Treasures Corporation is planning a new common stock issue of five million shares to fund a new project. The increase in shares will bring the number of shares outstanding to 25 million. Nahanni's long-term growth rate is 6 percent, and its current required rate of return is 12.6 percent. The firm just paid a $1.00 dividend, and the stock sells for $16.06 in the market. On the announcement of the new equity issue, the firm's stock price dropped. Nahanni estimates that the company's growth rate will increase to 6.5 percent with the new project, but as the project is riskier than average, the firm's required return on stock will increase to 13.5 percent. Using the constant growth dividend discount model, what is the change in the equilibrium stock price? a. -$0.08 b. -$0.85 c. -$0.66 d. -$1.06 e. -$1.77

b. 14.78%

On January 1 of the current year, the price of a stock is $42.50, whereas on December 31 of the current year, the price of the stock is $48.78. Determine the capital gain yield of the stock. a. 17.49% b. 14.78% c. 13.25% d. 16.33% e. 15.14%

e. An increased rate of return

On January 3 of the current year, the per-share stock price of a firm was $25, and on January 4 of the current year, it was $19. Which of the following is a probable reason for the decrease in the stock price? a. Higher future dividends b. An increase in the firm's growth rate c. A boom in the economy d. A reduction in the cost of debt e. An increased rate of return

e. income stocks

Stocks that produce returns that are based primarily on dividends are traditionally called _____. a. preemptive stocks b. classified stocks c. founders' stocks d. growth stocks e. income stocks

d. call premium

The amount in excess of par value that a company must pay when it repurchases a security is known as the _____. a. growth stock b. preemptive price c. cumulative dividend d. call premium e. participating dividend

b. The stock price will decrease as a result of the higher rate of return demanded by investors.

The current expected value of a stock is $32. If investors demand a higher rate of return of 10 percent instead of the 8 percent rate of return, what will the impact on the stock price of the firm be? a. The stock price will reduce to zero. b. The stock price will decrease as a result of the higher rate of return demanded by investors. c. The stock price will increase to $35. d. The stock price will not be affected by the change in the rate of return. e. The stock price will increase by 10 percent.

d. $2.25

The economic value added (EVA) of a firm is $6.25 million, and the firm has 2.78 million outstanding shares. What is the maximum amount of dividend that can be paid to shareholders without threatening the firm's current value? a. $1.65 b. $4.41 c. $3.89 d. $2.25 e. $3.12

b. $44.00

The last dividend on Spirex Corporation's common stock was $4.00, and the expected growth rate is 10 percent. If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock? a. $50.00 b. $44.00 c. $40.00 d. $45.00 e. $38.00

a. per share par value

The preferred dividend is generally stated as a percentage of the preferred stock's _____. a. per share par value b. sinking fund c. earnings per share d. market value per share e. call premium per share

c. the payback period of a stock

The price-earnings (P/E) ratio gives an indication of _____. a. a firm's debt position b. the par value of a stock c. the payback period of a stock d. a stock's dividend yield e. the maturity value of a stock

d. g = 0

When using the dividend discount model, assuming that growth (g) will remain constant, under which of the following circumstances will the dividend yield be equal to the required return on a common stock (rs)? a. g < 0 b. g > rs c. g = rs d. g = 0 e. g > 0

b. Repurchase shares of common stock

Which action would the management take if it wants to gain more ownership control of the firm? a. Issue more common stock to the public b. Repurchase shares of common stock c. Issue more growth stocks d. Repay portions of its loans e. Pay cumulative dividends to preferred stocks

d. Current market price per share ÷ Earnings per share

Which of the following formulas calculates price-earnings (P/E) ratio? a. Common dividends ÷ Number of shares b. Earnings available to common stockholders (EAC) ÷ Number of shares c. Average cost of funds × Invested capital d. Current market price per share ÷ Earnings per share e. Current market price per share ÷ Book value per share

d. It generally pays little or no dividends because the firm retains most of its earnings to fund developmental opportunities.

Which of the following is true about a growth stock? a. It pays cumulative dividends at the time of maturity. b. It pays large and relatively constant dividends each year. c. It has voting rights and generally pays a fixed amount of interest each year until maturity. d. It generally pays little or no dividends because the firm retains most of its earnings to fund developmental opportunities. e. It pays a fixed amount of dividends every year.

a. If investors demand higher returns to invest in stocks, then stock prices should fall.

Which of the following is true about the change in a stock price? a. If investors demand higher returns to invest in stocks, then stock prices should fall. b. If investors demand lower returns to invest in stocks, then stock prices should fall. c. If investors expect their investments to generate lower future cash flows, then stock prices should increase. d. If investors expect their investments to generate higher future cash flows, then stock prices should fall. e. If investors demand higher returns to invest in stocks, then stock prices should increase.

c. The appropriate value of P/E ratio is multiplied by the earnings per share (EPS) to estimate the appropriate stock price.

Which of the following is true about the price-earnings (P/E) ratio of a firm? a. If the firm's P/E ratio is too low relative to that of similar firms, it means that the market has overvalued its current earnings. b. If a company's P/E ratio is too high relative to that of similar firms, its earnings have not been fully captured in the existing stock value. c. The appropriate value of P/E ratio is multiplied by the earnings per share (EPS) to estimate the appropriate stock price. d. The higher the P/E ratio, the less investors are willing to pay for each dollar earned by the firm. e. If a firm's P/E ratio is 8, then, it would take 8 years for an investor to double his or her initial investment.

e. American depository receipts provide U.S. investors with the ability to invest in foreign companies with less complexity and difficulty than might otherwise be possible.

Which of the following is true of American depository receipts? a.American depository receipts are pools of stocks of different American companies issued by foreign companies that are traded in international stock markets. b.With the exception of stocks traded in the United States, stocks that are traded in a country other than the issuing company's home country are called American depository receipts. c. If a Japanese company sells its stocks in the United States, the transaction is termed an American depository receipt. d. An American depository receipt is the stock of an American company that is traded in foreign countries. e.American depository receipts provide U.S. investors with the ability to invest in foreign companies with less complexity and difficulty than might otherwise be possible.

a. Dividends must be paid on preferred stock before they can be paid on common stock.

Which of the following is true of common stock? a. Dividends must be paid on preferred stock before they can be paid on common stock. b. Most common stock traditionally pays a constant income called interest. c. Common stock is often referred to as a hybrid security. d. Common stock often contains some of the same characteristics as bonds.

d. Founders' shares are stocks owned by the creators of a company that have sole voting rights but generally pay out only restricted (if any) dividends for a specified number of years.

Which of the following is true of founders' shares? a. The terms founders' shares and Euro stocks are used interchangeably. b. Founders' shares are certificates that represent ownership in stocks of foreign companies held in trust by the bank that created the founders' shares. c. With the exception of shares traded in the United States, any shares that are traded in a country other than the issuing company's home country are called founders' shares. d. Founders' shares are stocks owned by the creators of a company that have sole voting rights but generally pay out only restricted (if any) dividends for a specified number of years. e. Founders' shares are issued by foreign companies and traded in the United States.

b. The call provision gives the issuing firm right to redeem its preferred stock by incorporating a maturity option in the issue.

Which of the following is true of the call provision found in preferred stocks? a. The call provision gives preferred stockholders priority over common stockholders with regard to ownership of the assets of the firm. b. The call provision gives the issuing firm right to redeem its preferred stock by incorporating a maturity option in the issue. c. The call provision gives preferred stockholders the right to both elect the members of the board of directors and call for votes on corporate issues. d. The call provision gives preferred stockholders the right to receive preferred dividends that were not paid in previous years before any common stock dividends can be paid. e. The call provision gives preferred stock the right to participate with the common stock in a firm's earnings.

b. The par value of the common stock

Which of the following represents the minimum legal financial obligation of a common stockholder if a firm is liquidated and additional funds are needed to repay its debt? a. The earnings per share of the common stock b. The par value of the common stock c. The interest obligation per share of the common stock d. The market value per share of the common stock e. The redemption value of the common stock

c. Corporate bonds

Which of the following securities has the highest priority with regard to the distribution of both earnings and proceeds from the liquidation of assets of a firm? a. American depository receipts (ADRs) b. Common stock c. Corporate bonds d. Preferred stock e. Foreign stocks

e. Preferred stock

Which of the following securities is eligible for a cumulative dividend? a. Debenture bonds b. Common stock c. Classified stock d. Founders' stock e. Preferred stock

c. Preferred stock

Which of the following stocks is a nonvoting stock and is referred to as hybrid stock? a. Founders' shares b. Common stock c. Preferred stock d. Preemptive stock e. Growth stock

c. Preferred stocks

Which of the following types of stock generally pays a fixed amount of dividends each year? a. Common stocks b. Preemptive stocks c. Preferred stocks d. Founders' shares e. Growth stocks

e. A German company selling stock in Japan

Which of the following would be considered a Euro stock? a. A U.S. company selling stock in U.S. b. A Japanese company selling stock in the United States c. A German company selling stock in the United States d. A Japanese company selling stock in Japan e. A German company selling stock in Japan