Test bank corporate finance 8e ros chap008

Chapter 008 Stock Valuation Multiple Choice Questions The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _ model a zero growth B dividend growth c capital pricing d earnings capitalization e discounted dividend SECTION: 8.1 TOPIC: DIVIDEND GROWTH MODEL TYPE: DEFINITIONS Next year's annual dividend divided by the current stock price is called the: a yield to maturity b total yield C dividend yield d capital gains yield e earnings yield SECTION: 8.1 TOPIC: DIVIDEND YIELD TYPE: DEFINITIONS The rate at which a stock's price is expected to appreciate (or depreciate) is called the _ yield a current b total c dividend D capital gains e earnings SECTION: 8.1 TOPIC: CAPITAL GAINS YIELD TYPE: DEFINITIONS 8-1 Chapter 008 Stock Valuation A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _ stock a dual class b cumulative c deferred d preferred E common SECTION: 8.2 TOPIC: COMMON STOCK TYPE: DEFINITIONS The voting procedure whereby shareholders may cast all of their votes for one member of the board is called _ voting a democratic B cumulative c straight d deferred e proxy SECTION: 8.2 TOPIC: CUMULATIVE VOTING TYPE: DEFINITIONS The voting procedure where you must own fifty percent plus one of the outstanding shares of stock to guarantee that you will win a seat on the board of directors is called _ voting a democratic b cumulative C straight d deferred e proxy SECTION: 8.2 TOPIC: STRAIGHT VOTING TYPE: DEFINITIONS 8-2 Chapter 008 Stock Valuation The voting procedure where a shareholder grants authority to another individual to vote his or her shares is called _ voting a democratic b cumulative c straight d deferred E proxy SECTION: 8.2 TOPIC: PROXY TYPE: DEFINITIONS Payments made by a corporation to its shareholders in the form of either cash or shares of stock are called: a retained earnings b net income C dividends d redistributions e infused equity SECTION: 8.2 TOPIC: DIVIDENDS TYPE: DEFINITIONS A _ is a form of equity security that has a stated liquidating value a bond b debenture c proxy d common stock E preferred stock SECTION: 8.2 TOPIC: PREFERRED STOCK TYPE: DEFINITIONS 8-3 Chapter 008 Stock Valuation 10 The market in which new securities are originally sold to investors is called the _ market a dealer b auction c over-the-counter d secondary E primary SECTION: 8.3 TOPIC: PRIMARY MARKET TYPE: DEFINITIONS 11 The market in which previously issued securities are traded among investors is called the _ market a dealer b auction c over-the-counter D secondary e primary SECTION: 8.3 TOPIC: SECONDARY MARKET TYPE: DEFINITIONS 12 An agent who buys and sells securities from inventory is called a: a broker b trader c capitalist d principal E dealer SECTION: 8.3 TOPIC: DEALER TYPE: DEFINITIONS 8-4 Chapter 008 Stock Valuation 13 An agent who arranges a trade between a buyer and a seller is called a: A broker b trader c capitalist d principal e dealer SECTION: 8.3 TOPIC: BROKER TYPE: DEFINITIONS 14 The owner of a NYSE trading license is called a(n) _ of the exchange a friend B member c agent d trustee e dealer SECTION: 8.3 TOPIC: NYSE MEMBER TYPE: DEFINITIONS 15 A member of the New York Stock Exchange who executes buy and sell orders from customers once transmitted to the exchange floor is called a: a floor trader b dealer c specialist d floor broker E commission broker SECTION: 8.3 TOPIC: COMMISSION BROKER TYPE: DEFINITIONS 8-5 Chapter 008 Stock Valuation 16 A member of the NYSE acting as a dealer in one or more securities on the exchange floor is called a: a floor trader b floor post C specialist d floor broker e commission broker SECTION: 8.3 TOPIC: SPECIALIST TYPE: DEFINITIONS 17 A floor broker is a NYSE member who: a supervises the commission brokers for a financial firm b trades for his or her personal inventory C executes orders on behalf of a commission broker d maintains an inventory and acts on behalf of a specialist e is charged with maintaining a liquid, orderly market SECTION: 8.3 TOPIC: FLOOR BROKER TYPE: DEFINITIONS 18 A member of the NYSE who tries to anticipate price fluctuations and buys and sells accordingly for his or her personal account is called a(n): A floor trader b exchange customer c specialist d floor broker e commission broker SECTION: 8.3 TOPIC: FLOOR TRADER TYPE: DEFINITIONS 8-6 Chapter 008 Stock Valuation 19 The electronic system used by the NYSE which enables orders to be transmitted directly to a specialist is called the _ system a NASDAQ B SuperDOT c Instinet d Internet e brokerage SECTION: 8.3 TOPIC: SUPERDOT SYSTEM TYPE: DEFINITIONS 20 The stream of customer buy and sell orders for securities is referred to as the: a paper trail b trading volume C order flow d bid-ask spread e commission trail SECTION: 8.3 TOPIC: ORDER FLOW TYPE: DEFINITIONS 21 The specific location on the trading floor of the NYSE where a particular stock is traded is commonly referred to as the: a spread b hot spot c broker's seat D specialist's post e DOT SECTION: 8.3 TOPIC: SPECIALIST'S POST TYPE: DEFINITIONS 8-7 Chapter 008 Stock Valuation 22 A securities market primarily comprised of dealers who buy and sell for their own inventories is generally referred to as a(n) _ market a auction b private C over-the-counter d regional e electronic network SECTION: 8.3 TOPIC: OVER-THE-COUNTER MARKET TYPE: DEFINITIONS 23 An ECN is best described as: a an electronic network which sends orders directly to the floor of the NYSE b the network used in the primary market for selling newly issued shares c the international trading network of the NYSE D a website which allows investors to trade directly with one another e a computerized network used by independent brokers SECTION: 8.3 TOPIC: ELECTRONIC COMMUNICATIONS NETWORK (ECN) TYPE: DEFINITIONS 24 The inside quotes for a security are the: a first posted bid and ask quotes of the trading day b price quotes which apply only on the floor of the exchange C highest bid quote and the lowest asked quote d lowest bid quote and the highest asked quote e averages of all the bid and ask quotes listed in the specialist's order book SECTION: 8.3 TOPIC: INSIDE QUOTES TYPE: DEFINITIONS 8-8 Chapter 008 Stock Valuation 25 The Great Northern Fish Co pays an annual dividend of $2 per share on its common stock This dividend amount has been constant for the past ten years and is expected to remain constant Given this, one share of the firm's stock: a is basically worthless as it offers no growth potential b has a market value equal to the present value of $2 paid one year from today C is valued as if the dividend paid is a perpetuity d is valued with an assumed growth rate of one percent e has a market value of $2 a share SECTION: 8.1 TOPIC: VALUATION OF ZERO GROWTH STOCK TYPE: CONCEPTS 26 The common stock of Ruby Janes pays a constant annual dividend Thus, the market price of Ruby Janes stock will: a also remain constant b increase over time c decrease over time d increase when the market rate of return increases E decrease when the market rate of return increases SECTION: 8.1 TOPIC: VALUATION OF ZERO GROWTH STOCK TYPE: CONCEPTS 27 Billings Enterprises currently pays an annual dividend of $1.64 and plans on increasing that amount by percent each year Chester's Fried Chicken currently pays an annual dividend of $1.75 and plans on increasing their dividend by percent annually Given this, it can be stated with certainty that the _ of Billings Enterprises stock is greater than the _ of Chester's Fried Chicken stock a market price; market price b dividend yield; dividend yield C rate of capital gain; rate of capital gain d total return; total return e capital gains; dividend yield SECTION: 8.1 TOPIC: DIVIDEND YIELD VS CAPITAL GAINS YIELD TYPE: CONCEPTS 8-9 Chapter 008 Stock Valuation 28 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 states that the market price of a stock is only affected by the amount of the dividend IV considers capital gains but ignores the dividend yield a I only b II only c III and IV only D I and II only e I, II, and III only SECTION: 8.1 TOPIC: DIVIDEND GROWTH MODEL TYPE: CONCEPTS 29 The underlying assumption of the dividend growth model is that a stock is worth: a the same amount to every investor regardless of the investor's desired rate of return B the present value of the future cash flows which it generates c an amount computed as the next annual dividend divided by the market rate of return d the same amount as any other stock that pays the same current dividend and has the same required rate of return e an amount computed as the next annual dividend divided by the required rate of return SECTION: 8.1 TOPIC: DIVIDEND GROWTH MODEL TYPE: CONCEPTS 30 Assume you are using the dividend growth model to value stocks If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the: a market values of all stocks to increase, all else constant b market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate C market values of all stocks to decrease d dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value e dividend growth rates to increase to offset this change SECTION: 8.1 TOPIC: DIVIDEND GROWTH MODEL TYPE: CONCEPTS 8-10 Chapter 008 Stock Valuation 75 You have decided you would like to own some shares of the Clean Coal Company but need a 16 percent rate of return to compensate for the perceived risk of such ownership What is the maximum you are willing to spend per share to buy this stock if the company pays a constant $1.75 annual dividend per share? a $9.19 B $10.94 c $12.69 d $18.60 e $22.81 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: CONSTANT DIVIDEND TYPE: PROBLEMS 76 The Herb Garden common stock sells for $43.70 a share and has a market rate of return of 11.6 percent The company just paid an annual dividend of $1.42 per share What is the dividend growth rate? a 5.32 percent b 5.73 percent c 7.82 percent D 8.09 percent e 8.14 percent AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: GROWTH DIVIDEND TYPE: PROBLEMS 8-30 Chapter 008 Stock Valuation 77 KB Adventures will pay an annual dividend of $3.15 a share on their common stock next week Last year, the company paid a dividend of $3.00 a share The company adheres to a constant rate of growth dividend policy What will one share of this common stock be worth ten years from now if the applicable discount rate is 12.5 percent? a $42.00 b $56.78 c $65.16 D $68.41 e $71.83 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: GROWTH DIVIDEND TYPE: PROBLEMS 78 Tom's Health Clinic just paid a $4.40 annual dividend The company has a policy of increasing the dividend by percent annually You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to so for another two years If you require a 14 percent rate of return, how much will you be willing to pay for the 100 shares when you can afford to make this investment? a $4,400 B $4,949 c $4,576 d $4,674 e $4,759 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: GROWTH DIVIDEND TYPE: PROBLEMS 8-31 Chapter 008 Stock Valuation 79 Franktown Meats just announced that they are increasing the annual dividend to $1.75 and establishing a policy whereby the dividend will increase by percent annually thereafter How much will one share of this stock be worth six years from now if the required rate of return is 14.5 percent? a $14.00 b $14.28 c $14.84 D $15.77 e $16.08 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: GROWTH DIVIDEND TYPE: PROBLEMS 80 Shares of Do Naught common stock are currently selling for $46.90 The last dividend paid was $2.21 per share and the market rate of return is 15.8 percent At what rate is the dividend growing? a 7.69 percent b 9.73 percent C 10.59 percent d 11.09 percent e 11.39 percent AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: GROWTH RATE TYPE: PROBLEMS 8-32 Chapter 008 Stock Valuation 81 Cellular Talk is a new firm in a rapidly growing industry The company is planning on increasing its annual dividend by 25 percent a year for the next three years and then decreasing the growth rate to percent per year The company just paid its annual dividend in the amount of $0.80 per share What is the current value of one share of this stock if the required rate of return is 17 percent? a $11.17 B $12.14 c $12.94 d $14.27 e $15.06 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: SUPERNORMAL GROWTH TYPE: PROBLEMS 82 J&J Exporters paid a $1.80 per share annual dividend last month The company is planning on paying $2.00, $2.50, $2.75, and $3.00 a share over the next four years, respectively After that the dividend will be constant at $3.20 per share per year What is the market price of this stock if the market rate of return is 13 percent? a $7.47 b $15.96 c $20.73 D $22.57 e $24.37 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: SUPERNORMAL GROWTH TYPE: PROBLEMS 8-33 Chapter 008 Stock Valuation 8-34 Chapter 008 Stock Valuation 83 Nu-Tek, Inc is preparing to pay their first dividend They are going to pay $0.60, $1.20, and $1.50 a share over the next three years, respectively After that, the company has stated that the annual dividend will be $2 per share indefinitely What is this stock worth to you per share if you demand a 16 percent rate of return on stocks of this type? a $2.37 b $3.65 c $5.10 d $9.42 E $10.38 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: SUPERNORMAL GROWTH TYPE: PROBLEMS 84 The Slim Waist announced today that they will begin paying annual dividends The first dividend will be paid next year in the amount of $.35 a share The following dividends will be $.40, $.55, and $.70 a share annually for the following three years, respectively After that, dividends are projected to increase by 2.5 percent per year How much are you willing to pay to buy one share of this stock if your desired rate of return is 12 percent? a $5.47 b $5.82 c $5.92 d $6.03 E $6.27 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NONCONSTANT DIVIDENDS TYPE: PROBLEMS 8-35 Chapter 008 Stock Valuation 85 Gloria's Boutique recently paid $1.65 as an annual dividend Future dividends are projected at $1.68, $1.72, $1.76, and $1.80 over the next four years, respectively Beginning five years from now, the dividend is expected to increase by 2.5 percent annually What is one share of this stock worth to you if you require an 11 percent rate of return on similar investments? a $18.49 B $19.68 c $21.33 d $24.33 e $25.90 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NONCONSTANT DIVIDENDS TYPE: PROBLEMS 86 Su Lee's Cookware pays a constant dividend of $0.75 a share The company announced today that they will continue to pay this for another years after which time they will discontinue operations What is one share of this stock worth today if the required rate of return is 18 percent? A $1.63 b $2.02 c $2.59 d $3.11 e $4.17 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NONCONSTANT DIVIDENDS TYPE: PROBLEMS 8-36 Chapter 008 Stock Valuation 87 Bliley Plumbers pays no dividend at the present time The company plans to start paying an annual dividend in the amount of $0.20 a share for three years commencing three years from today After that time, the company plans on paying a constant $1 a share dividend indefinitely How much are you willing to pay to buy a share of this stock if your required return is 15 percent? A $3.66 b $3.94 c $4.37 d $4.71 e $4.84 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NONCONSTANT DIVIDENDS TYPE: PROBLEMS 88 The Coal Bin is in a downsizing mode The company paid a $1.40 annual dividend last year The company has announced plans to lower the dividend by $.20 a year Once the dividend amount becomes zero, the company will cease all dividends and go out of business You have a required rate of return of 18 percent on this particular stock given the company's situation What is the minimum price you would like to receive if you were to sell your shares in this firm today? a $.70 b $1.54 C $2.78 d $3.87 e $4.18 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NONCONSTANT DIVIDENDS TYPE: PROBLEMS 8-37 Chapter 008 Stock Valuation 89 Simplicity is a relatively new firm that appears to be on the road to great success The company paid their first annual dividend yesterday in the amount of $0.15 a share The company plans to double each annual dividend payment for the next four years After that time, they are planning on paying a constant dividend of $2.50 per share indefinitely What is one share of this stock worth today if the market rate of return on similar securities is 13.45 percent? a $12.32 b $12.77 c $13.77 D $14.22 e $14.37 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NONCONSTANT DIVIDENDS TYPE: PROBLEMS 90 The Music Hut just paid an annual dividend of $1.05 a share The projected dividends for the next five years are $1.07, $1.10, $1.15, $1.20, and $1.25, respectively After that time, the dividends will be held constant at $1.40 per share What is this stock worth today at a 12.5 percent discount rate? a $9.59 B $10.29 c $11.34 d $12.67 e $13.19 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NONCONSTANT DIVIDENDS TYPE: PROBLEMS 8-38 Chapter 008 Stock Valuation 91 Home Builders, Inc is a very cyclical type of business which is reflected in their dividend policy The firm pays a $3.50 per share dividend every other year The last dividend was paid last year Four years from now, the company plans to pay a $77 liquidating dividend per share What is the current market value of this stock if the market rate of return is 18.5 percent? a $41.54 b $43.32 C $44.11 d $46.59 e $48.37 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NONCONSTANT DIVIDENDS TYPE: PROBLEMS 92 Last week, Northern Railways paid an annual dividend of $2.44 per share The company has been reducing the dividends by 15 percent each year How much are you willing to pay to purchase stock in this company if your required rate of return is 16 percent? A $6.69 b $7.87 c $36.60 d $244.00 e $280.06 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NEGATIVE GROWTH TYPE: PROBLEMS 8-39 Chapter 008 Stock Valuation 93 Super Sounds is expecting a period of intense growth and has decided to retain more of their earnings to help finance that growth As a result, they are going to reduce the annual dividend by 20 percent a year for the next three years After that they will maintain a constant dividend of $1 a share Last year, the company paid $2.25 as the annual dividend per share What is the market value of this stock if the required rate of return is 16 percent? a $6.63 B $7.36 c $8.08 d $9.61 e $11.23 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NEGATIVE GROWTH TYPE: PROBLEMS 94 Shirley's Cool Treats is expecting their ice cream sales to decline due to the increased interest in healthy eating Thus, the company has announced that they will be reducing their annual dividend by percent a year for the next four years After that, they will maintain a constant dividend of $1 a share Last year, the company paid $1.80 per share What is this stock worth to you if you require a 12 percent rate of return? a $9.29 B $10.27 c $11.30 d $12.07 e $13.10 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: NEGATIVE GROWTH TYPE: PROBLEMS 8-40 Chapter 008 Stock Valuation 95 Wenton & Straus wants to issue preferred stock that pays an annual dividend of $6 a share The company has determined that stocks with similar characteristics provide a 14.8 percent rate of return What should the offer price be? a $35.23 b $36.00 C $40.54 d $46.54 e $88.80 P = $6.00 / 148 = $40.54 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: PREFERRED STOCK TYPE: PROBLEMS 96 The preferred stock of West Coast Limited pays an annual dividend of $5.50 and sells for $52 a share What is the rate of return on this security? a 9.45 percent b 9.83 percent c 10.48 percent D 10.58 percent e 10.77 percent R = $5.50 / $52.00 = 10.58 percent AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: PREFERRED STOCK TYPE: PROBLEMS 8-41 Chapter 008 Stock Valuation 97 Stu owns shares of Markley preferred stock which he says provides him with a constant 13.6 percent rate of return The stock is currently priced at $51.47 a share What is the amount of the dividend per share? a $2.64 b $3.78 c $5.85 d $6.26 E $7.00 D = 136 $51.47 = $7.00 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: PREFERRED STOCK TYPE: PROBLEMS 98 Wilmington Importers preferred stock pays a $5 annual dividend What is the maximum price you are willing to pay for one share of this stock if your required return is 15.5 percent? A $32.26 b $35.48 c $72.68 d $77.50 e $79.81 P0 = $5.00 / 155 = $32.26 AACSB TOPIC: ANALYTIC SECTION: 8.1 TOPIC: PREFERRED STOCK TYPE: PROBLEMS 8-42 Chapter 008 Stock Valuation Essay Questions 99 What are the primary differences between NASDAQ and the NYSE? The NYSE has a physical trading floor in New York City, is a dealer market, relies on specialists and brokers, and utilizes the SuperDOT system NASDAQ is an electronic network of dealers and utilizes a multiple market maker system NASDAQ has no physical trading floor AACSB TOPIC: REFLECTIVE THINKING SECTION: 8.3 TOPIC: NASDAQ VS NYSE 100 What are the components of the total rate of return on a share of stock? Briefly explain each component The two components are the dividend yield and the capital gains yield The dividend yield is the percentage of the current stock price which is expected to be distributed next year as a dividend The dividend yield is expressed as Dt+1 / Pt The capital gains yield is the change in the stock price expressed as a percentage of the current stock value The capital gains yield is expressed as (Pt+1 Pt) / Pt AACSB TOPIC: REFLECTIVE THINKING SECTION: 8.1 TOPIC: REQUIRED RETURN 101 Briefly explain the differences between preferred and common stock Common stockholders have the right to vote on corporate matters and have the right to receive the residual value of the firm after all liabilities and preferred stockholders are paid in a liquidation Preferred stockholders have a promised dividend, may or may not have the right to collect dividends that have been passed, and typically will be rated much like bonds In a liquidation, preferred shareholders have a preference over common stockholders AACSB TOPIC: REFLECTIVE THINKING SECTION: 8.2 TOPIC: PREFERRED VS COMMON STOCK 8-43 Chapter 008 Stock Valuation 102 Explain whether it is easier to find the required return on a publicly traded stock or a publicly traded bond, and explain why Bonds, unlike stocks, have a final maturity date and promised payments at fixed periods of time Thus, once an appropriate discount rate is established, valuing a bond is relatively simple For stocks, the only valuation model we have up to this point in the text is the dividend growth model which requires estimation of a dividend growth rate and also requires that the growth rate be less than the required return Normally, all of the information required to find the yield on a publicly traded bond is publicly available while only the price and the most current dividend are available for stocks AACSB TOPIC: REFLECTIVE THINKING SECTION: 8.1 TOPIC: STOCKS VS BONDS 103 A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms How is this possible? Does this violate our basic principle of stock valuation? Explain The basic principle of stock valuation computes the value of a share of stock as the present value of all the expected dividends on the stock According to the dividend growth model, an asset that has no expected cash flows has a value of zero If investors are willing to purchase shares of stock in firms that pay no dividends, they must expect the firms will begin paying dividends at some point in the future AACSB TOPIC: REFLECTIVE THINKING SECTION: 8.1 TOPIC: ZERO-DIVIDEND STOCKS 104 Explain the primary change that occurred in the structure of the NYSE in 2006 and how that change affected the exchange members In 2006, the NYSE become a publicly owned corporation called NYSE Group, Inc Exchange members no longer purchase, or own, seats on the exchange Members now purchase trading licenses which grant their owners the right to transact trades on the floor of the exchange AACSB TOPIC: REFLECTIVE THINKING SECTION: 8.2 TOPIC: NYSE 8-44 ... the right to: a select the corporate vice-presidents b declare dividends C elect the corporate directors d issue corporate bonds e obtain all the corporate assets in a bankruptcy SECTION: 8.2 TOPIC:... are most to apt to have which of the following rights? I right to all the corporate profits II sole right to elect the corporate directors III right to vote on proposed mergers IV right to the... form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _ stock a dual class b cumulative c deferred d preferred E