Chapter 9 & 11 Multiple Choice Questions

Which of the following has a right to vote in the election of the board of directors of a company?

Common stockholders

Which one of the following markets is a type of secondary market for securities in the US?

Dealer

In which of the following types of security markets do sellers often rely primarily on word of mouth communication to find interested buyers?

Direct search

Which of the following is a characteristic of common stock?

Limited liability for owners

What is an example of the OTC market

NASDAQ

The reason we cannot apply the constant growth dividend model in the cash where the growth rate, g, is greater than or equal to the required rate R is because it would result in the value of the stock becoming:

Negative

For the constant growth rate dividend model to work, which of the following assumptions must hold?

The growth rate must be less than the required rate of return

Cash flows used for analyzing capital budgeting proposals differ from those included in the accounting statement of cash flows in which of the following ways?

They are forward looking, while accounting cash flows are historical

Which of the following is a major role of secondary markets

To provide good marketability for securities

The bid price is the price that a dealer pays for a security

True

The dealer's selling price of a given stock is also known as the ask price

True

The value of a firm's equity is calculated as the sum of the present value of all expected future cash flows

True

If a person finds a buyer for the 100 shares of a company he owns, this is

a direct search market transaction

deprecation expense ____

decrease taxable income and decreases taxes

cash flows over a project's life should include

depreciation expense

which of the following steps is necessary when computing the value of a common stock?

determining the required rate of return based on the riskiness of the cash flows

Which of the following is a simplyifing assumption that is made when applying the dividend discount model to common stock valuation?

dividend growth rate is not equal to the require rate of return

Growth stocks are defined as the stocks of companies whose

earnings are growing at above-average rates

Preferred stock is legally a form of debt of a corporation

false

The value of a share of stock depends on

how often it will pay a dividend

A project's salvage value is likely to be ignored in the

payback period technique

Preferred stock resembles a bond because

preferred stock pays fixed dividends which is similar to the interest paid on bonds

preferred stock is considered to be a special type of debt rather than equity because

preferred stockholders received a fixed dividend

Growth stocks usually do not pay dividends. Therefore the stock value increase because the firms:

reinvests earnings to provide dividends in the future

Which statement below best describes how fixed costs and variable costs impact operating cash flows?

As output increases, fixed costs do not increase; variable costs increase.