FIN 3403 Chapter 8 Quiz

The counter area on the floor of the NYSE where a designated market maker operates is called a:

Post.

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

Primary.

Next year, Jensen's will pay an annual dividend of $2.75 per share. The company has been reducing the dividends by 10 percent annually. How much are you willing to pay today to purchase stock in this company if your required rate of return is 11.5 percent?

$12.79 P0 = $2.75 / (.115 + .10) = $12.79

Jensen Shipping currently has an EPS of $5.29, a benchmark PE of 19.5, and an earnings growth rate of 4.3 percent. What is the target share price 4 years from now?

$122.08 P4 = $5.29 × (1 + .043)4 × 19.5 = $122.08

Three Corners Markets paid an annual dividend of $1.37 a share last month. Today, the company announced that future dividends will be increasing by 2.8 percent annually. If you require a return of 11.6 percent, how much are you willing to pay to purchase one share of this stock today?

$16.00 P0 = [$1.37 × (1 + .028)] / (.116 - .028) = $16.00

Flo's Flowers pays an annual dividend that is expected to increase by 2.1 percent per year. The stock commands a market rate of return of 13.8 percent and sells for $19.06 a share. What is the expected amount of the next dividend?

$2.23 $19.06 = D1 / (.138 - .021) D1 = $2.23

Currently, a firm has an EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8 percent annually. What is the estimated current stock price?

$41.66 P0 = $2.54 × 16.4 = $41.66

A firm has a current EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8 percent annually. What is the target stock price in one year?

$43.24 P1 = $2.54 × (1 + .038) × 16.4 = $43.24

You want to purchase some shares of JJ Farms stock but need a 14.5 percent rate of return to compensate for the perceived risk. What is the maximum you are willing to spend per share to buy this stock if the company pays a constant $1.25 annual dividend per share?

$8.62 P0 = $1.25 / .145 = $8.62

The typical range for the price-sales ratio is ________ but younger, faster-growing firms may have ratios that are much ________.

2.0 - 3.5; lower .8 - 2.0; higher WRONG x .5 - 1.5; higher 1.8 - 3.0; higher 1.8 - 2.5; lower

Currently, a firm has a benchmark PE of 18.7 and an EPS of $4.18. Earnings are expected to grow 3.2 percent annually. What is the implicit stock return?

3.20 percent P0 = $4.18 × 18.7 = $78.17 P1 = $4.18 × (1 + .032) × 18.7 = $80.67 R = ($80.67 - 78.17) / $78.17 = .0320, or 3.20 percent

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

A decrease in all stock values.

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

Commission broker.

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?

Cumulative.

An agent who maintains an inventory from which he or she buys and sells securities is called a:

Dealer.

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share.

A floor broker on the NYSE does which one of the following?

Executes orders on behalf of a commission broker.

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

Over-the-counter.

You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected?

Straight.

Preferred stock may have all of the following characteristics in common with bonds with the exception of:

Tax-deductible payments.