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1、 CHAPTER 6 Stock Valuation I. DEFINITIONS GROWING PERPETUITY a 1. An asset characterized by cash flows that increase at a constant rate forever is called a: a. growing perpetuity. b. growing annuity. c. common annuity. d. perpetuity due. e. preferred stock. Difficulty le

2、vel: Easy DIVIDEND GROWTH MODEL b 2. 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 prici

3、ng d. earnings capitalization e. discounted dividend Difficulty level: Easy DIVIDEND YIELD c 3. 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.

4、 Difficulty level: Easy CAPITAL GAINS YIELD d 4. 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 Difficulty level: Easy PREFERRED STOCK d 5. A form of equity wh

5、ich receives preferential treatment in the payment of dividends is called _____ stock. a. dual class b. cumulative c. deferred d. preferred e. common Difficulty level: Easy PREFERRED STOCK e 6. A _____ is a form of equity security that has a stated liquidating value. a. bond b

6、. debenture c. proxy d. common stock e. preferred stock Difficulty level: Medium COMMON STOCK e 7. 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. de

7、ferred d. preferred e. common Difficulty level: Easy CUMULATIVE VOTING b 8. 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 Difficulty lev

8、el: Easy STRAIGHT VOTING c 9. The voting procedure where you must own 50% 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 Difficulty lev

9、el: Easy PROXY VOTING e 10. The voting procedure where a shareholder grants authority to another individual to vote his/her shares is called _____ voting. a. democratic b. cumulative c. straight d. deferred e. proxy Difficulty level: Easy PREEMPTIVE RIGHTS b 11. Preemptive ri

10、ghts refer to the right of shareholders to: a. share proportionately in dividends paid. b. share proportionately in any new stock issues sold. c. share proportionately in liquidated assets. d. vote at annual shareholder meetings. e. override the votes of other shareholders. Difficulty

11、level: Medium DIVIDENDS c 12. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called: a. retained earnings. b. net income. c. dividends. d. redistributions. e. infused equity. Difficulty level: Easy PRIMARY MARKET

12、 e 13. 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 Difficulty level: Easy SECONDARY MARKET d 14. The market in which previously issued securities are traded among i

13、nvestors is called the _____ market. a. dealer b. auction c. over-the-counter d. secondary e. primary Difficulty level: Easy DEALER e 15. An agent who buys and sells securities from inventory is called a: a. broker. b. trader. c. capitalist. d. principal. e. dealer.

14、Difficulty level: Easy BROKER a 16. An agent who arranges security transactions among investors is called a: a. broker. b. trader. c. capitalist. d. principal. e. dealer. Difficulty level: Easy NYSE MEMBER b 17. The owner of a seat on the New York Stock Exchange is called a(n

15、) _____ of the exchange. a. friend b. member c. agent d. trustee e. dealer Difficulty level: Easy SPECIALIST c 18. A member of the New York Stock Exchange acting as a dealer in one or more securities on the exchange floor is called a: a. floor trader. b. floor post. c. speci

16、alist. d. floor broker. e. commission broker. Difficulty level: Easy FLOOR BROKER d 19. A member of the New York Stock Exchange who executes orders for commission brokers on a fee basis is a: a. floor trader. b. dealer. c. specialist. d. floor broker. e. floor agent. Diffi

17、culty level: Easy COMMISSION BROKER e 20. 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. Difficulty level:

18、 Easy FLOOR TRADER a 21. A member of the New York Stock Exchange who trades for his or her own account, trying to anticipate temporary price fluctuations, is called a(n): a. floor trader. b. exchange customer. c. specialist. d. floor broker. e. commission broker. Difficulty level:

19、 Easy SUPERDOT SYSTEM b 22. The electronic system used by the New York Stock Exchange which enables orders to be transmitted directly to a specialist is called the ______ system.. a. NASDAQ b. SuperDOT c. Instinet d. Internet e. brokerage. Difficulty level: Easy ORDER FLOW c

20、23. The ________ has a multiple market maker system rather than a specialist system. a. NYSE. b. AMEX. c. NASDAQ. d. NIKKEI e. None of the above. Difficulty level: Easy OVER-THE-COUNTER MARKET c 24. A securities market primarily comprised of dealers who buy and sell for their own

21、 inventories is generally referred to as a(n) ______ market. a. auction b. private c. over-the-counter d. regional e. electronic network Difficulty level: Easy ECNs d 25. Electronic communications networks, or ECNs, act to: a. increase liquidity. b. increase competition. c

22、. increase the cost to invest. d. A & B. e. A & C. Difficulty level: Medium II. CONCEPTS VALUATION OF ZERO GROWTH STOCK c 26. The James River Co. pays an annual dividend of $1.50 per share on its common stock. This dividend amount has been constant for the past 15 years and is ex

23、pected to remain constant. Given this, one share of James River Co. stock: a. is basically worthless as it offers no growth potential. b. has a market value equal to the present value of $1.50 paid one year from today. c. is valued as if the dividend paid is a perpetuity. d. is valued wi

24、th an assumed growth rate of 3%. e. has a market value of $15.00. Difficulty level: Easy VALUATION OF ZERO GROWTH STOCK e 27. The common stock of the Kenwith Co. pays a constant annual dividend. Thus, the market price of Kenwith stock will: a. also remain constant. b. increase over ti

25、me. c. decrease over time. d. increase when the market rate of return increases. e. decrease when the market rate of return increases. Difficulty level: Easy DIVIDEND YIELD VS. CAPITAL GAINS YIELD c 28. The Koster Co. currently pays an annual dividend of $1.00 and plans on increasing

26、that amount by 5% each year. The Keyser Co. currently pays an annual dividend of $1.00 and plans on increasing their dividend by 3% annually. Given this, it can be stated with certainty that the _____ of the Koster Co. stock is greater than the _____ of the Keyser Co. stock. a. market price; marke

27、t 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 Difficulty level: Medium DIVIDEND GROWTH MODEL d 29. The dividend growth model: I. assumes that dividends increase at a constant r

28、ate forever. II. can be used to compute a stock price at any point of 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

29、 e. I, II, and III only Difficulty level: Medium DIVIDEND GROWTH MODEL b 30. The underlying assumption of the dividend growth model is that a stock is worth: a. the same amount to every investor regardless of their desired rate of return. b. the present value of the future income which

30、 the stock 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 req

31、uired rate of return. Difficulty level: Medium DIVIDEND GROWTH MODEL c 31. Assume that 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

32、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, all else constant. d. stocks that do not pay dividends to decrease in price while t

33、he dividend-paying stocks maintain a constant price. e. dividend growth rates to increase to offset this change. Difficulty level: Medium DIFFERENTIAL GROWTH c 32. Latcher’s Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining al

34、l of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from tod

35、ay before determining today’s value. a. 4 b. 5 c. 6 d. 7 e. 8 Difficulty level: Medium DIFFERENTIAL GROWTH d 33. The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6 years, respectively. A

36、fter that, the company anticipates increasing the dividend by 4% annually. The first step in computing the value of this stock today, is to compute the value of the stock when it reaches constant growth in year: a. 3. b. 4. c. 5. d. 6. e. 7. Difficulty level: Medium DIFFERENTIAL

37、GROWTH b 34. Supernormal growth refers to a firm that increases its dividend by: a. three or more% per year. b. a rate which is most likely not sustainable over an extended period of time. c. a constant rate of 2 or more% per year. d. $.10 or more per year. e. an amount in excess of $.10

38、a year. Difficulty level: Medium DIVIDEND YIELD AND CAPITAL GAINS e 35. The total rate of return earned on a stock is comprised of which two of the following? I. current yield II. yield to maturity III. dividend yield IV. capital gains yield a. I and II only b. I and IV only c

39、. II and III only d. II and IV only e. III and IV only Difficulty level: Medium DIVIDEND YIELD c 36. The total rate of return on a stock can be positive even when the price of the stock depreciates because of the: a. capital appreciation. b. interest yield. c. dividend yield. d.

40、 supernormal growth. e. real rate of return. Difficulty level: Medium DIVIDEND YIELD AND CAPITAL GAINS c 37. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price

41、of ABC stock needs to _____ if Fred is to achieve his 10% rate of return. a. remain constant b. decrease by 5% c. increase by 5% d. increase by 10% e. increase by 15% Difficulty level: Medium DIVIDEND GROWTH MODEL d 38. Which one of the following correctly defines the dividend con

42、stant growth model? a. P0 = D0 (R-g) b. D = P0 (R-g) c. R = (P0 D0) + g d. R = (D1 P0) + g e. P0 = (D1 R) + g Difficulty level: Medium SHAREHOLDER RIGHTS a 39. Shareholders generally have the right to: I. elect the corporate directors. II. select the senior management of

43、the firm. III. elect the chief executive officer (CEO). IV. elect the chief operating officer (COO). a. I only b. I and III only c. II only d. I and II only e. III and IV only Difficulty level: Medium CUMULATIVE VOTING c 40. Jack owns 35 shares of stock in Beta, Inc. and wants

44、 to exercise as much control as possible over the company. Beta, Inc. has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect two new directors. Which one of the following statements must be true given this information? a. If straight

45、 voting applies, Jack is assured one seat on the board. b. If straight voting applies, Jack can control both open seats. c. If cumulative voting applies, Jack is assured one seat on the board. d. If cumulative voting applies, Jack can control both open seats. e. Regardless of the type of vot

46、ing employed, Jack does not own enough shares to control any of the seats. Difficulty level: Medium STRAIGHT VOTING a 41. ABC Co. is owned by a group of shareholders who all vote independently and who all want personal control over the firm. If straight voting is utilized, a shareholder:

47、a. must either own enough shares to totally control the elections or else he/she has no control whatsoever. b. will be able to elect at least one director as long as there are at least three open positions and the shareholder owns at least 25% plus one of the outstanding shares. c. must own at l

48、east two-thirds of the shares, plus one, to exercise control over the elections. d. is only permitted to elect one director, regardless of the number of shares owned. e. who owns more shares than anyone else, regardless of the number of shares owned, will control the elections. Difficulty le

49、vel: Medium PROXY VOTING e 42. The Zilo Corp. has 1,000 shareholders and is preparing to elect three new board members. You do not own enough shares to control the elections but are determined to oust the current leadership. The most likely result of this situation is a: a. negotiated settlem

50、ent where you are granted control over one of the three open positions. b. legal battle for control of the firm based on your discontent as an individual shareholder. c. arbitrated settlement whereby you are granted control over one of the three open positions. d. total loss of power for you s

51、ince you are a minority shareholder. e. proxy fight for control of the firm. Difficulty level: Medium SHAREHOLDER RIGHTS e 43. Common stock shareholders are generally granted rights which include the right to: I. share in company profits. II. vote for company directors. III. vote on

52、 proposed mergers. IV. residual assets in a liquidation. a. I and II only b. II and III only c. I and IV only d. I, II, and IV only e. I, II, III, and IV Difficulty level: Medium DIVIDENDS e 44. The Scott Co. has a general dividend policy whereby they pay a constant annual divid

53、end of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company: a. must always show a current liability of $1,000 for dividends payable. b. is obligated to continue paying $1 per share per year. c. will be declared in default and can face bankruptcy if they do

54、 not pay $1 per year to each shareholder on a timely basis. d. has a liability which must be paid at a later date should the company miss paying an annual dividend payment. e. must still declare each dividend before it becomes an actual company liability. Difficulty level: Medium DIVIDEN

55、DS b 45. The dividends paid by a corporation: I. to an individual become taxable income of that individual. II. reduce the taxable income of the corporation. III. are declared by the chief financial officer of the corporation. IV. to another corporation may or may not represent taxable inco

56、me to the recipient. a. I only b. I and IV only c. II and III only d. I, II, and IV only e. I, III, and IV only Difficulty level: Medium PREFERRED STOCK a 46. The owner of preferred stock: a. is entitled to a distribution of income prior to the common shareholders. b. has the

57、right to veto the outcome of an election held by the common shareholders. c. has the right to declare the company bankrupt whenever there are insufficient funds to pay dividends to the common shareholders. d. receives tax-free dividends if they are an individual and own more than 20% of

58、the outstanding preferred shares. e. has the right to collect payment on any unpaid dividends as long as the stock is noncumulative preferred. Difficulty level: Medium PREFERRED STOCK b 47. A 6% preferred stock pays _____ a year in dividends per share. a. $3 b. $6 c. $12 d. $3

59、0 e. $60 Difficulty level: Easy PREFERRED STOCK e 48. Which one of the following statements concerning preferred stock is correct? a. Unpaid preferred dividends are a liability of the firm. b. Preferred dividends must be paid quarterly provided the firm has net income that exceeds the

60、 amount of the quarterly dividend. c. Preferred dividends must be paid timely each quarter or the unpaid dividends start accruing interest. d. All unpaid dividends on preferred stock, regardless of the type of preferred, must be paid before any income can be distributed to common shareholders.

61、 e. Preferred shareholders may be granted voting rights and seats on the board if preferred dividend payments remain unpaid. Difficulty level: Medium PREFERRED STOCK e 49. In a liquidation, each share of 5% preferred stock is generally entitled to a liquidation payment of _____ as long as t

62、here are sufficient funds available. a. $1 b. $5 c. $10 d. $50 e. $100 Difficulty level: Medium COMMON STOCK VALUES c 50. The value of common stock today depends on a. the expected future holding period and the discount rate. b. the expected future dividends and the capital

63、gains. c. the expected future dividends, capital gains and the discount rate. d. the expected future holding period and capital gains. e. None of the above. Difficulty level: Medium PRIMARY MARKET d 51. Which one of the following transactions occurs in the primary market? a. the

64、 sale of ABC stock by Fred Jones to Mary Smith b. the tax-free gift of DEF stock to Heather by Jennifer c. the repurchase of GHI stock from Tim by GHI d. the initial sale of JKL stock by JKL to Jamie e. the transfer of MNO stock from Tom to his son, Jon Difficulty level: Medium DEALE

65、RS AND BROKERS d 52. Which one of the following statements concerning dealers and brokers is correct? a. A dealer in market securities arranges sales between buyers and sellers for a fee. b. A dealer in market securities pays the asked price when purchasing securities. c. A broker in market

66、securities earns income in the form of a bid-ask spread. d. A broker does not take ownership of the securities being traded. e. A broker deals solely in the primary market. Difficulty level: Easy PERPETUITY FORMULA d 53. The formula Po = DIV/r represents a. the present value of a stream of zero growth dividends in perpetuity. b. the value of a no growth dividend stream. c. a lower value than if a growth element was included. d. All of the above. e. None of the ab