finance chapter 8

Which one of the following best describes Nasdaq?

Computer network of securities dealers

Nasdaq has:

three separate markets

The secondary market is best defined as the market:

where outstanding shares of stock are resold.

Galloway, Incorporated, just paid a dividend of $3 per share and has announced that it will increase its dividend by $1 per share for each of the next 4 years, and then never pay another dividend. What is the current per share value at a required return of 12.7 percent?

$16.02 P0 = $4/1.127 + $5/1.1272 + $6/1.1273 + $7/1.1274P0 = $16.02

Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 per share in Year 3. At a discount rate of 18 percent, what should one share sell for today?

$33.54 P0 = $4/1.18 + $3/1.182 + $46/1.183P0 = $33.54

Citrus Support is a young start-up company that is currently retaining all of its earnings. The company plans to pay a $2 per share dividend in Year 7 and increase that dividend by 2.2 percent per year thereafter. What is the current share price if the required return is 16 percent?

$5.95 P6 = $2/(.16 − .022)P6 = $14.49 P0 = $14.49/1.166P0 = $5.95

Petropoulos Resorts common stock sells for $58.49 per share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid?

$6.52 $58.49 = [D0(1.013)]/(.126 − .013)D0 = $6.52

Electric Utilities preferred stock will pay an annual dividend of $12 per share in perpetuity beginning 8 years from now. What is one share of this stock worth today if the market requires a return of 9.5 percent?

$66.92 P7 = $12/.095P7 = $126.32 P0 = $126.32/1.0957P0 = $66.92

McCarty Corporation recently paid an annual dividend of $2.62 on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $28.12 per share. What is the market rate of return?

13.47% R = [$2.62(1.038)]/$28.12 + .038R = .1347, or 13.47%

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

Dividends

Ledgestone Corporation common stock returned a 10.25 percent rate of return last year. The annual dividend amount was $.65 per share which equated to a dividend yield of 1.7 percent. What was the rate of price appreciation for the year?

8.55% g = .1025 − .017g = .0855, or 8.55%

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 these statements related to preferred stock is correct?

Cumulative preferred shares are more valuable than comparable noncumulative shares.

Ernst & 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

Which one of the following statements is correct?

Stocks can have negative growth rates.

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?

Voting by proxy

A preferred stock pays an annual dividend of $7.95 and sells for $48.89 per share. What is the rate of return?

16.26% R = $7.95/$48.89R = .1626, or 16.26%

The Blue Marlin is owned by a group of five 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?

50 percent plus one vote

The common stock of Shepard Auto sells for $47.92 per share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?

6.41% R = $2.28/$47.92 + .0165R = .0641, or 6.41%

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

dealer.