FINChap 8

A forward PE is based on: A. the last dividend payment multiplied by 2. B. historical earnings. . C. estimated future earnings. D. industry averages. E. the last four quarterly dividend payments.

C. estimated future earnings.

The typical range for the price-sales ratio is ___ but younger, faster-growing firms may have ratios that are much _____. A. 1.8 - 2.5; lower B. 2.0 - 3.5; lower C. .5 - 1.5; higher D. .8 - 2.0; higher E. 1.8 - 3.0; higher

D. .8 - 2.0; higher

You own one share of a cumulative preferred stock that 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

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? 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

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

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.

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? A. Dividend amount. B. Number of future dividends, provided the number is less than infinite. C. Dividend growth rate. D. Discount rate. E. Both the discount rate and the dividend growth rate.

D. Discount rate

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.

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.

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

Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders? A. Right to share in company profits prior to other shareholders. B. Right to elect the corporate directors. C. Right to vote on proposed mergers. D. Right to all residual income after the common dividends have been paid. E. Right to a permanent seat on the board of directors.

A. Right to share in company profits prior to other shareholders.

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 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

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

Which one of the following applies to the dividend growth model? A. An individual stock has the same value to every investor. B. Even if the dividend amount and growth rate remain constant, the value of a stock can vary. C. Zero-growth stocks have no market value. D. Stocks that pay the same annual dividend will have equal market values. E. The dividend growth rate is inversely related to a stock's market price.

B. Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

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.

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.

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 remain constant in value.

C. A decrease in all stock values

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South. A. Market price. B. Dividend yield. C. Capital gains yield. D. Total return. E. Real return.

C. Capital gains yield

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

What are the distributions of either cash or stock to shareholders by a corporation called? A. Coupon payments. B. Retained earnings. C. Dividends. D. Capital payments. E. Diluted profits.

C. Dividends

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

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: A. Basically worthless as it offers no growth potential. B. Equal in value to the present value of $1 paid one year from today. C. Priced the same as a $1 perpetuity. D. Valued at an assumed growth rate of 1 percent. E. Worth $1 a share in the current market.

C. Priced the same as a $1 perpetuity.

You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who 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? A. Democratic. B. Cumulative. C. Straight. D. Deferred. E. Proxy.

C. Straight

The dividend growth model: A. Only values stocks at Time 0. B. Cannot be used to value constant dividend stocks. C. Can be used to value both dividend-paying and non-dividend-paying stocks. D. Requires the growth rate to be less than the required return. E. Assumes dividends increase at a decreasing rate.

D. Requires the growth rate to be less than the required return.

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.

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 noncumulative shares.

E. Cumulative preferred shares are more valuable than comparable noncumulative shares.

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 five years, then increasing dividends forever B. $1 per share annual dividend for two years, then $1.25 annual dividends forever C. Decreasing dividends for six years followed by one final liquidating dividend payment D. Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter E. Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

E. Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

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

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.

Which one of the following statements is correct? A. Stocks can only be assigned one dividend growth rate. B. Preferred stocks generally have constant growth rates. C. Dividend growth rates must be either zero or positive. D. All stocks can be valued using the dividend discount models. E. Stocks can have negative growth rates.

E. Stocks can have negative growth rates.

Preferred stock may have all of the following characteristics in common with bonds with the exception of: A. The lack of voting rights. B. A possible conversion option into common stock. C. Annuity payments. D. A fixed liquidation value. E. Tax-deductible payments.

E. Tax-deductible payments.

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. Alternative voting. B. Cumulative voting. C. Straight voting. D. Indenture voting. E. Voting by proxy.

E. Voting by proxy