FIN 6406 Chapter 8 Quiz

A forward PE is based on:

estimated future earnings.

Supernormal growth is a growth rate that:

is unsustainable over the long term.

Which one of following is the rate at which a stock's price is expected to appreciate?

Capital gains yield

You cannot attend the shareholder's meeting for Athleap so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

The secondary market is best defined as the market:

where outstanding shares of stock are resold.

The Michael Scott Paper Company owns 50,000 shares of preferred stock in Serenity by Jan. What percentage, if any, of the dividend income received by The Michael Scott Paper Company from this investment is excluded from federal income taxation in 2018?

50 percent

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

Common

Which one of the following best describes NASDAQ?

Computer network of securities dealers

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Constant-growth model

Which one of the following statements related to corporate dividends is correct?

Corporate shareholders may receive a tax break on a portion of their dividend income.

Which one of these statements related to preferred stock is correct?

Cumulative preferred shares are more valuable than comparable noncumulative shares.

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 decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount rate

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

What are the distributions of either cash or stock to shareholders by a corporation called?

Dividends

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

Pam owns 30 shares of stock in Dunder-Mifflin and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?

If cumulative voting applies, Pam is assured one seat on the board.

When it comes to voting in elections, what are the differences between US political democracy and US corporate democracy? (This is taken from text and being Canadian/Malaysian I could also replace country reference with any other country...like Iceland...)

In a corporate election, you can buy votes (by buying shares), so money can be used to influence or even determine the outcome. Many would argue the same is true in any political elections, but, in principle at least, no one has more than one vote in political elections.

Some companies, such as Alphabet, have created classes of stock with no voting rights at all. Why would investors buy such stock?

Investors buy such stock because they want it, recognizing that the shares have no voting power. Presumably, investors pay a little less for such shares than they would otherwise.

Vance Refrigeration 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

The Michael Scott Paper Company has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders

Suppose a firm has a preferred stock issue. Both have a $2 dividend. Which do you think will have a higher price, a share of the preferred or a share of the common?

The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred. However, the preferred is less risky because of the dividend and liquidation preference, so it is possible the preferred could be worth more, depending on the circumstances.

Under what two assumptions can we use the dividend growth model presented in the chapter to determine the value of a share of stock? Comment on the reasonableness of these assumptions.

The general method for valuing a share of stock is to find the present value of all expected future dividends. The dividend growth model presented in the text is only valid (a) if dividends are expected to occur forever, that is, the stock provides dividends in perpetuity, and (b) if a constant growth rate of dividends occurs forever. An example of a violation of the first assumption might be a company that is expected to cease operations and dissolve itself some finite number of years from now. The stock of such a company would be valued by applying the general method of valuation explained in this chapter. An example of a violation of the second assumption might be a start-up firm that isn't currently paying any dividends but is expected to eventually start making dividend payments some number of years from now. This stock would also be valued by the general dividend valuation method explained in this chapter.

Why does the value of a share of stock depend on dividends?

The value of any investment depends on the present value of its cash flows; i.e., what investors/you will actually receive. The cash flows from a share of stock are the dividends.

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.

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

Serenity by Jan has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. Serenity by Jan:

must still declare each dividend before it becomes an actual company liability.

The annual dividend yield is computed by dividing ________ annual dividend by the current stock price.

next year's

Dunder-Mifflin has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

priced the same as a $1 perpetuity.

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

tax-deductible payments.