MC You Should Know

Suppose you know a company's stock currently sells for $85 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. What is the current dividend if it's the company's policy to always maintain a constant growth rate in its dividends? A. $3.18 B. $4.05 C. $4.37 D. $4.50 E. $4.64

B. $4.05

7) The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zero-growth stocks. IV. requires the growth rate to be less than the required return. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, andIV only E. I, II, III, and IV

E. I, II, III, and IV

8) Big Falls Tours just paid a dividend of $1.55 per share. The dividends are expected to grow at 30 percent for the next 8 years and then level off to a 6 percent growth rate indefinitely. What is the price of this stock today given a required return of 15 percent? A. $67.54 B. $69.90 C. $70.47 D. $71.07 E. $78.19

D. $71.07

Which one of following is the rate at which a stock's price is expected to appreciate? A. current yield B. total return C. dividend yield D. capital gains yield E. coupon rate

D. capital gains yield

4) Which of the following features do preferred shareholders and bondholders frequently have in common? I. lack of voting rights II. conversion option into common stock III. annuity payments IV. fixed liquidation value A. I and II only B. III and IV only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

3) Hardy Lumber has a capital structure which includes bonds, preferred stock, and common stock. Which of the following rights have most likely been granted to the preferred shareholders? I. right to share in company profits prior to other shareholders II. right to elect the corporate directors III. right to vote on proposed mergers IV. right to all residual income after the common dividends have been paid A. I only B. I and III only C. I and IV only D. II, III, and IV only E. I, II, III, and IV

A. I only

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called? A. net present value B. internal return C. payback value D. profitability index E. discounted payback

A. net present value

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? A. dualclass B. cumulative C. non-cumulative D. preferred E. common

E. common

Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets? A. private B. auction C. exchange floor D. secondary E. primary

E. primary

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A. altering B. cumulative voting C. straight voting D. indenture agreement E. voting by proxy

E. voting by proxy

Which one of the following is computed by dividing next year's annual dividend by the current stock price? A. yield to maturity B. total yield C. dividend yield D. capital gains yield E. growth rate

C. dividend yield

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: A. independent. B. interdependent. C. mutually exclusive. D. economically scaled. E. operationally distinct.

C. mutually exclusive.

Which two methods of project analysis are the most biased towards short‐term projects? A. net present value and internal rate of return B. internal rate of return and profitability index C. payback and discounted payback D. net present value and discounted payback E. discounted payback and profitability index

C. payback and discounted payback

7) Southern Utilities just issued some new preferred stock. The issue will pay a $19 annual dividend in perpetuity beginning 9 years from now. What is one share of this stock worth today if the market requires a 7 percent return on this investment? A. $157.97 B. $164.16 C. $189.08 D. $241.41 E. $271.43

A. $157.97

A project produces annual net income of $46,200, $51,800, and $62,900 over its 3‐year life, respectively. The initial cost of the project is $675,000. This cost is depreciated straight‐line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 14.5 percent? A. 15.89percent B. 16.67 percent C. 18.98 percent D. 20.25percent E. 23.84 percent

A. 15.89percent

Which one of the following statements is correct in relation to independent projects? A. The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows. B. A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return. C. A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return. D. The net present value profile is upsloping for projects with both investing and financing type cashflows. E. Projects with financing type cash flows are acceptable only when the internal rate of return is negative.

B. A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return.

9) A company has two open seats, Seat A and Seat B, on its board of directors. There are 6 candidates vying for these 2 positions. There will be a single election to determine the winner of both open seats. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 200 of your votes for a single candidate. What is this type of voting called? A. democratic B. cumulative C. straight D. deferred E. proxy

B. cumulative

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows? A. constant dividend growth model B. discounted cash flow valuation C. average accounting return D. expected earnings model E. internal rate of return

B. discounted cash flow valuation

6) The owner of one of the 1,366 trading licenses for the NYSE is called a: A. broker. B. member. C. agent. D. specialist. E. dealer.

B. member.

Which one of the following is an underlying assumption of the dividend growth model? A. A stock has the same value to every investor. B.A stock's value is equal to the discounted present value of the future cash flows which it generates. C. A stock's value changes in direct relation to the required return. D. Stocks that pay the semiannual dividend have equal market values. E. The dividend growth rate is inversely related to a stock's market price.

B.A stock's value is equal to the discounted present value of the future cash flows which it generates.

5) You are the sole shareholder of a small corporation. Presently, you wish to diversify your holdings and thus want to sell a portion of your shares but do not want to incur the costs associated with SEC filings. Which one of the following markets, if any, might be conducive to this sale? A. NASDAQ B. OTCBB C. Pink Sheets D. NYSE

C. Pink Sheets

10) Jen owns 30 shares of stock in Delta Fashions 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? A. Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board. B. If straight voting applies, Jen is assured a seat on the board. C. If straight voting applies, Jen can control all of the open seats. D. If cumulative voting applies, Jen is assured one seat on the board. E. If cumulative voting applies, Jen can control all of the open seats.

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

2) Which one of the following rights is never directly granted to all shareholders of a publicly-held corporation? A. electing the board of directors B. receiving a distribution of company profits C. voting either for or against a proposed merger or acquisition D. determining the amount of the dividend to be paid per share E. having first chance to purchase any new equity shares that may be offered

D. determining the amount of the dividend to be paid per share

The internal rate of return is defined as the: A. maximum rate of return a firm expects to earn on a project. B. rate of return a project will generate if the project in financed solely with internal funds. C. discount rate that equates the net cash inflows of a project to zero. D. discount rate which causes the net present value of a project to equal zero. E. discount rate that causes the profitability index for a project to equal zero.

D. discount rate which causes the net present value of a project to equal zero.

Which one of the following will decrease the net present value of a project? A. increasing the value of each of the project's discounted cash inflows B. moving each of the cash inflows forward to a sooner time period C. decreasing the required discount rate D. increasing the project's initial cost at time zero E. increasing the amount of the final cash inflow

D. increasing the project's initial cost at time zero

Which two methods of project analysis are the most widely used by CEO's? A. net present value and payback B. internal rate of return and payback C. net present value and average accounting return D. internal rate of return and net present value E. payback and average accounting return

D. internal rate of return and net present value

Supernormal growth is a growth rate that: A. is both positive and follows a year or more of negative growth. B. exceeds a firm's previous year's rate of growth. C. is generally constant for an infinite period of time. D. is unsustainable over the long term. E. applies to a single, abnormal year.

D. is unsustainable over the long term.

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions? A. discounted payback B. profitability index C. internal rate of return D. payback E. average accounting return

D. payback