Fin 3716 Ch. 8

26. High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders. A. market price B. dividend yield C. capital gains yield D. total return E. The answer cannot be determined based on the information provided.

C. capital gains yield

2. 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

30. Which one of the following statements is correct concerning the two-stage dividend growth model? A. G1 cannot be negative. B. Pt = Dt/R. C. G1 must be greater than G2. D. G1 can be greater than R. E. R must be less than G1 but greater than G2.

D. G1 can be greater than R.

3. 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

33. Which one of the following represents the capital gains yield as used in the dividend growth model? A. D1 B. D1/P0 C. P0 D. g E. g/P0

D. g

44. Which one of these statements related to preferred stock is correct? A. Preferred shareholders normally receive one vote per share of stock owned. B. Preferred shareholders determine the outcome of any election that involves a proxy fight. C. Preferred shareholders are considered to be the residual owners of a corporation. D. Preferred stock normally has a stated liquidating value of $1,000 per share. E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.

E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.

28. 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 same annual 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.

8. What are the distributions to shareholders by a corporation called? A. retained earnings B. net income C. dividends D. capital payments E. diluted profits

C. dividends

32. 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.

41. 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

31. Which one of the following statements is correct? A. The capital gains yield is the annual rate of change in a stock's price. B. Preferred stocks have constant growth dividends. C. A constant dividend stock cannot be valued using the dividend growth model. D. The dividend growth model can be used to compute the current value of any stock. E. An increase in the required return will decrease the capital gains yield.

A. The capital gains yield is the annual rate of change in a stock's price.

1. What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A. zero growth B. dividend growth C. capital pricing D. earnings capitalization E. discounted dividend

B. dividend growth

34. Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true? A. The dividend must be constant. B. The stock has a negative capital gains yield. C. The dividend yield must be zero. D. The required rate of return for this stock increased over the year. E. The firm is experiencing supernormal growth.

B. The stock has a negative capital gains yield.

5. 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

42. Boston Free Press 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. The company: A. must always show a current liability of $2,400, ($2.40 1,000), for dividends payable. B. must still declare each dividend before it becomes an actual company liability. C. is obligated to pay $2.40 per share each year in perpetuity. D. will be declared in default if it does not pay at least $2.40 per share per year on a timely basis. E. has a liability that must be paid at a later date should the company miss paying an annual dividend payment.

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

29. 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. an increase in all stock values. B. all stock values to remain constant. C. a decrease in all stock values. D. dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. E. dividend-paying stocks to increase in price while non-dividend paying stocks decrease in value.

C. a decrease in all stock values.

6. You want to be on the board of directors of Wisely Foods. Since you are the only shareholder that 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 under these conditions? A. democratic B. cumulative C. straight D. deferred E. proxy

C. straight

45. You own one share of a cumulative preferred stock which pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid. A. 0 B. 1 C. 2 D. 3 E. either 1, 2, or 3

D. 3

39. The Blue Marlin is owned by a group of 5 shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? A. 17 percent B. 20 percent plus one vote C. 25 percent plus one vote D. 50 percent plus one vote E. 51 percent

D. 50 percent plus one vote

25. An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate

D. I, II, and IV only

38. 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.

37. 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

35. The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: A. pay an increasing dividend for a period of time and then cease paying dividends altogether. B. increase the dividend amount every other year. C. pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. D. grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. E. pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

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

43. Which one of the following statements related to corporate dividends is correct? A. Dividends are nontaxable income to shareholders. B. Dividends reduce the taxable income of the corporation. C. The Chief Executive Officer of a corporation is responsible for declaring dividends. D. The Chief Financial Officer of a corporation determines the amount of dividend to be paid. E. Corporate shareholders may receive a tax break on a portion of their dividend income.

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

27. 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.

E. I, II, III, and IV

46. 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

E. I, II, III, and IV

4. 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. dual class B. cumulative C. non-cumulative D. preferred E. common

E. common

36. 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? A. no dividends for 5 years, then increasing dividends forever B. $1 per share annual dividend for 2 years, then $1.25 annual dividends forever C. decreasing dividends for 6 years followed by one final liquidating dividend payment D. dividends payments which increase by 2, 3, and 4 percent respectively for 3 years followed by a constant dividend thereafter E. dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter

E. dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter

9. Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities? A. senior bond B. debenture C. warrant D. common stock E. preferred stock

E. preferred stock

40. Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management? A. negotiated settlement where each side is granted control over one of the open seats B. protracted legal battle over control of the board of directors C. arbitrated settlement where the arbitrator determines who will be elected to the board D. control of the board decided without your influence E. proxy fight for control of the board

E. proxy fight for control of the board

7. 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