Chapter 8 Stock Valuation
The person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called: a- Commission broker b- Specialist c- Floor trader d- Trading agent
a- Commission broker
Which of the following is true regarding the free cash flow valuation models? I- They are most suitable for firms that do not have a clearly defined dividend policy. II- They are more appropriate from the perspective of controlling shareholders. III- They still can be applied when the firm is experiencing negative free cash flows. IV-The quality of the accounting data is irrelevant to application of the free cash flow valuation models. a- I and II b- I, II and III c- II and III d- II, III and IV
a- I and II
The procedure in which a shareholder may cast all votes for one member of the board of directors is called: a- cumulative voting b- straight voting c- common voting d- consistent voting
a- cumulative voting
The capital gains yield equals the ............. because the rate at which the price of a constant growth stock increases equals the dividend growth rate. a- dividend growth rate b- rate of return c- dividend yield d- maturity yield
a- dividend growth rate
The value of a share of common stock equals the present value of future.............. plus the present value of the future .................... value of a share. a- dividends; market b- coupon payment; accounting c- dividends; principal d- earnings; market
a- dividends; market
The market make who deals on average in two or three securities on the exchange floor is called the: a- specialist b- commission broker c- floor dealer d- fee dealer
a- specialist
The total return on a share of stock has two components: the dividend yield and the capital gains yield. a- true b- false
a- true
Kennesaw Holding, Inc. common stock had a 22 percent rate of return last year. The current dividend amount was $2.5 a share which represents a dividend yield of 7 percent. What was the rate of stock price appreciation for the year? a- 7 percent b- 15 percent c- 22 percent d- 29 percent
b- 15 percent
The shareholders control the firm by electing ....................., the latter are in charge of hiring the .................... a- management; directors b- directors; management c- management; stakeholders d- directors; stakeholders
b- directors; management
Which one of the following is computed by dividing the next year expected annual dividend by the current stock price? a- capital gain yield b- dividend yield c- total yield d- yield to maturity
b- dividend yield
The members of the NYSE who execute orders on a fee basis for the commission brokers are referred to as: a- fee brokers b- floor brokers c- fee specialists d- dealers
b- floor brokers
The model used for evaluating a perpetual preferred stock or any other perpetuity is also used to find the price of a: a- constant growth in dividend stock b- zero growth in dividend stock c- non-constant growth in dividends stock d- bonds
b- zero growth in dividend stock
Dividends are paid at the discretion of the: a- Shareholders b- Chief executive officer c- Board of directors d- Audit committee
c- Board of directors
35- ABC Corp. is a steadily growing firm in the retail and distribution business. The firm has planned some capital investments in the future and the business is generating enough cash flows to finance future growth. Therefore, the free cash flows to the firm are expected to be positive. ABC Corp. has restrained from paying a dividend for the last two years, and it's not planning to reinitiate a dividend any time soon. The firm is known among the investment community for the quality of its financial reporting and the high degree of transparency. What valuation models would be appropriate to value the stock of ABC? a- Dividend discount and free cash flows b- Dividend discount and residual income c- Free cash flows and residual income d- Dividend discount, free cash flows, and residual income
c- Free cash flows and residual income
Which of the following is true regarding the dividend growth model? I- the dividend growth model assumes that the dividend growth rate is less than the stock's required return. II- the dividend growth model can be used to get the stock price at any point in time III- the dividend growth model assumes different growth rates a- I only b- II only c- I and II only d- I , II , and III
c- I and II only
Which of the following is true regarding the residual income valuation model? I- Can be applied to any firm regardless of the dividend policy. II- They can only be applied to firm with positive free cash flows III- Valuation with residual income models is relatively less sensitive to terminal value estimates. IV-These models focus on accounting profitability rather than just economic profitability a- I and II b- II, III and IV c- I and III d- All of the above
c- I and III
Which of the following is a reason why the valuation of stocks is harder than the valuation of bonds: I- dividend payments are not fixed over time and can change substantially over time II- a share of common stock has neither a maturity date nor a maturity value III- common stock markets are relatively less transparent than bond markets IV- future cash flows on stocks are not known in advance and the valuation is sensitive to estimates in dividend growth rate. a- I and II only b- I , II and III only c- I, II and IV only d- I , II , III, and IV
c- I, II and IV only
Which of the following statement about free cash flow valuation models is correct? a- The FCFF is the cash flow available to the firm before any cash investment in working capital and long-term assets b- The FCFF is discounted using the required rate of return on equity; while, the FCFE is discounted using the WACC. c- The FCFE includes any cash flows from net new borrowings d- The sum of the FCFF and the FCFE is equal to the market value of debt.
c- The FCFE includes any cash flows from net new borrowings
The ......................... is the rate at which the stock price is expected to grow. a- capital return b- maturity yield c- capital gains yield d- dividend yield
c- capital gains yield
Straight voting is defined as the process where the directors are elected: a- for a single year only b- through the use of proxy only c- one at a time d- simultaneously
c- one at a time
A zero growth stock with a constant dividend can be regarded as: a- annuity b- coupon payments c- perpetuity d- proxy
c- perpetuity
The required rate of return: a- tends to be low for a firm with rapid growth expectations. b- is based on the assumption that the dividend will grow at a constant rate c- provides an estimate of the return an investor might expect if he or she purchases a stock at today's market price. d- places more emphasis on the capital gains yield than on the dividend yield
c- provides an estimate of the return an investor might expect if he or she purchases a stock at today's market price.
A dealer in the stock market or bond market earns profit from a- charging a flat fee for each trade b- Charging a bid price higher than the ask price c- retaining the spread d - Charging commission for each transaction
c- retaining the spread
A common stock of Saluki, Inc pays a constant annual dividend of $1.25 per share. If you have a 14% required rate of return, how much are you willing to pay for the stock? a- $5.18 b- $6.23 c- $7.89 d- $8.93
d- $8.93
The dividend growth model: I- can be used to value zero-growth stocks II- requires the growth rate to be higher than the required return III- assumes that dividends are growing at a constant growth rate IV- can be used to compute the stock price at any point in time a- I and II b- II and IV c- II, III and IV d- I, III and IV
d- I, III and IV
Which of the following statement about residual income valuation model is incorrect? a- The residual income valuation requires significant adjustments to the firm accounting data. b- The accuracy of the residual income valuation depends on the quality of financial reporting and the transparency of the firm. c- The residual income reflects the economic profit of the firm d- Residual income valuation cannot be applied in case of negative cash flows from operations.
d- Residual income valuation cannot be applied in case of negative cash flows from operations.
The market maker who acts as a dealer in one or more securities on the trading floor of the NYSE is called: a- Commission broker b- Floor broker c- Floor trader d- Specialist
d- Specialist
The ........................ is the next year's expected annual dividend divided by the current stock price. a- capital return b- required return c- capital gains yield d- dividend yield
d- dividend yield
The grant of authority by a shareholder allowing another individual to vote that shareholder's shares is called a: a- straight vote b- cumulative vote c- common vote d- proxy
d- proxy
Unlike the valuation of bonds, the valuation of common stocks is difficult because: a- there are voting rights associated with common stocks b- common stocks are sold and bought on a more transparent market c- the cash flows associated with common stocks are easier to predict d- the cash flows from common stocks have more uncertainty and variability associated with them.
d- the cash flows from common stocks have more uncertainty and variability associated with them.
The preemptive right given to shareholders is the right: a- to receive additional voting privileges b- to choose between receiving dividends in cash or in additional shares of stocks. c- to replace management and elect board of directors d- to purchase any new shares of stocks that are issues in order to maintain proportional ownership
d- to purchase any new shares of stocks that are issues in order to maintain proportional ownership
The individual who owns a trading license to buy and sell on the NYSE floor for his or her personal account is called: a- Commission broker b- Floor broker c- Floor trader d- Specialist
c- Floor trader
When using the dividend growth model, all else the same: I- the higher the required rate of return, the lower the stock price II- the higher the dividend growth rate, the higher the stock price III- the lower the next year expected dividend, the higher the stock price a- I only b- II only c- I and II only d- I, II, and III
c- I and II only
According the dividend growth model, an increase in which of the following will increase the current stock price I- dividend growth rate II- required rate of return III- current dividend IV- number of future dividends a- I and II b- I, II and III c- I, III, and IV d- II, III and IV
c- I, III, and IV
A stock that is assumed to pay a constant dividend for ever is called a .................... stock. a- regular b- constant c- zero growth d- fixed
c- zero growth
You authorize another shareholder to vote on your behalf since you cannot attend the shareholder's meeting. The granting of this authority is called: a- Cumulative voting b- Straight voting c- Debenture agreement d- Proxy voting
d- Proxy voting
The stock valuation method that determines the price of a stock by dividing the next period's dividend by the discount rate less the dividend growth rate is called the: a- stock pricing formula b- capital gain model c- zero growth model d- dividend growth model
d- dividend growth model
