Financial management Ch. 7 Quiz

An agent who buys and sells securities from inventory is called an: a. floor trader b. dealer c. commission broker d. broker e. floor broker

Dealer

Newly issued securities are sold to investors in which one of the following markets? a. proxy b. stated value c. inside d. secondary e. primary

Primary

The common stock of Eddie's Engines, Inc. sells for $38.03 a share. The stock is expected to pay $4.00 per share next year. Eddie's has established a pattern of increasing their dividends by 6.1 percent annually and expects to continue doing so. What is the market rate of return on this stock?

r = Expected pay / Share price + Dividends r = 4 / 38.03 + .061 = 16.62%

Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following? a. non-dividend-paying stock b. stock with a constant dividend c. stock with irregular dividends d. stock with a constant growth dividend e. stock with growing dividends for a limited period of time

Stock with a constant growth dividend

Which one of the following will occur when the internal rate of return equals the required return?

The profitability index will equal 1.0.

Dividends are best defined as: a. cash payments to shareholders b. cash payments to either bondholders or shareholders c. cash or stock payments to shareholders d. cash or stock payments to either bondholders or shareholders e. distributions of stock to current shareholders

Cash or stock payments to shareholders

Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred? a. cumulative common b. noncumulative common c. noncumulative preferred d. cumulative preferred e. senior common

Cumulative preferred

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of charge in the annual dividend amount? a. Stock pricing model b. Equity pricing model c. Capital gain model d. Dividend growth model e. Present value model

Dividend growth model

Michael's, Inc. just paid $1.80 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.00 percent. If you require a rate of return of 8.2 percent, how much are you willing to pay today to purchase one share of Michael's stock?

P/0 = D0 ( 1 + g ) / R-g P/0 = 1.80 (1 + .04) / .082 - .04 =$44.57

The Red Bud Co. pays a constant dividend of $2.50 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.1 percent?

P/0 = D1 / ( 1 + Required Rate of Return) + ( D1 / 1 + RRR^2) P/0 = (2.50 / 1.081) + (2.50 / 1.081^2) = $4.45