Deck 8: Stock Valuation

Question 1

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.

Answer 1

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

Question 2

A forward PE is based on:

A) the last four quarterly dividend payments.
B) the last dividend payment multiplied by 2.
C) historical earnings.
D) estimated future earnings.
E) industry averages.

Answer 2

estimated future earnings.

Question 3

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.

Answer 3

a decrease in all stock values.

Question 4

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.

Question 5

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?

A) Maximal-growth model
B) Constant-growth model
C) Capital pricing model
D) Realized-earnings model
E) Realized-growth model

Question 6

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.

Question 7

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

Question 8

The annual dividend yield is computed by dividing ________ annual dividend by the current stock price.

A) this year's
B) last year's
C) next year's
D) the past 5-year average
E) the next 5-year average

Question 9

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

Question 10

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 total number of dividends is less than infinite
C) Dividend growth rate
D) Discount rate
E) Both the discount rate and the dividend growth rate

Question 11

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.

Question 12

Which one of the following represents the capital gains yield as used in the dividend growth model?

A) D₁
B) D₁/P₀
C) P₀
D) g
E) g/P₀

Question 13

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

Question 14

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.

Question 15

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 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 capital gains yield must be zero.
D) The required rate of return for this stock increased over the year.
E) The firm is experiencing supernormal growth.

Question 16

Which one of the following statements is correct?

A) Stocks can only be assigned one dividend growth rate.
B) Preferred stocks generally have variable 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.

Question 17

When using the two-stage dividend growth model:

A) g₁ cannot be negative.
B) Pt = Dt/R.
C) g₁ must be greater than g₂.
D) g₁ can be greater than R.
E) R must be less than g₁ but greater than g₂.

Question 18

The dividend growth model:

A) assumes dividends increase at a decreasing rate.
B) only values stocks at Time 0.
C) cannot be used to value constant dividend stocks.
D) can be used to value both dividend-paying and non-dividend-paying stocks.
E) requires the growth rate to be less than the required return.

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

Browning, Inc. owns 50,000 shares of preferred stock in Omega, Inc. What percentage, if any, of the dividend income received by Browning, Inc. from this investment is excluded from federal income taxation in 2018?

A) 0 percent
B) 100 percent
C) 25 percent
D) 70 percent
E) 50 percent

Question 25

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

Question 26

The secondary market is best defined as the market:

A) in which subordinated shares are issued and resold.
B) conducted solely by brokers.
C) dominated by dealers.
D) where outstanding shares of stock are resold.
E) where warrants are offered and sold.

Question 27

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.

Question 28

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

A) designated market maker.
B) dealer.
C) specialist.
D) supplemental liquidity provider.
E) floor broker.

Question 29

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

Question 30

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 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) incurs a liability that must be paid at a later date should the company miss paying an annual dividend payment.

Question 31

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.

Question 32

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

Question 33

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

Question 34

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

A) broker.
B) trader.
C) capitalist.
D) principal.
E) dealer.

Question 35

The owner of a trading license for the NYSE is called a:

A) broker.
B) member.
C) agent.
D) specialist.
E) dealer.

Question 36

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

Question 37

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.

Question 38

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?

A) Private
B) Auction
C) Tertiary
D) Secondary
E) Primary

Question 39

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

A) broker.
B) floor trader.
C) capitalist.
D) principal.
E) dealer.

Question 40

A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a:

A) floor trader.
B) floor post.
C) designated market maker.
D) floor broker.
E) commission broker.

Question 41

Which one of the following statements applies to NASDAQ?

A) Composed of four separate markets
B) Exchange floor located in Chicago
C) Provides two levels of information access
D) Designated market maker system
E) Multiple market maker system

Question 42

Yummy Bakery just paid an annual dividend of $3.40 a share and is expected to increase that amount by 2.2 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 14.8 percent at the time of your purchase?

A) $29.89
B) $27.58
C) $29.83
D) $28.18
E) $27.20

Question 43

NASDAQ has:

A) an electronic network that transmits orders directly to the trading floor.
B) both floor and commission brokers.
C) three separate markets.
D) a single designated market maker for each listed stock.
E) level 3 data available online for easy access by all investors.

Question 44

The stream of customer orders coming in to the NYSE trading floor is called the:

A) paper trail.
B) trading volume.
C) order flow.
D) bid-ask spread.
E) commission trail.

Question 45

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

A) Auction
B) Private
C) Over-the-counter
D) Regional
E) Insider

Question 46

Dee's made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.58 a share. Secondly, all dividends after that will decrease by 1.15 percent annually. What is the value of this stock at a discount rate of 15.5 percent?

A) $9.49
B) $10.10
C) $9.82
D) $10.51
E) $11.01

Question 47

How much are you willing to pay for one share of LBM stock if the company just paid an annual dividend of $2.24, the dividends increase by 2.3 percent annually, and you require a return of 14.8 percent?

A) $19.29
B) $19.33
C) $18.33
D) $18.21
E) $17.59

Question 48

The average time for a trade on the NYSE Arca is best defined as less than:

A) five minutes.
B) ten minutes.
C) one minute.
D) one second.
E) fifteen minutes.

Question 49

Future Motors is expected to pay an annual dividend next year of $3.10 a share. Dividends are expected to increase by 1.85 percent annually. What is one share of this stock worth at a required rate of return of 15 percent?

A) $24.01
B) $26.30
C) $24.56
D) $23.57
E) $24.59

Question 50

Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today?

A) $11.23
B) $10.82
C) $10.68
D) $9.68
E) $11.57

Question 51

The common stock of Water Town Mills pays a constant annual dividend of $2.25 a share. What is one share of this stock worth at a discount rate of 16.2 percent?

A) $13.89
B) $14.01
C) $14.56
D) $13.79
E) $13.28

Question 52

Which one of the following best describes NASDAQ?

A) Largest U.S. stock market in terms of dollar trading volume
B) Market where dealers buy at the asked price
C) Market where the designated market makers are located at posts
D) Computer network of securities dealers
E) Market with three physical trading floors

Question 53

GEO Inc. has paid annual dividends of $.41, $.47, and $.53 a share over the past three years, respectively. The company expects to now maintain a constant dividend. At a discount rate of 14.4 percent, what is the current value per share?

A) $2.85
B) $3.68
C) $2.43
D) $3.09
E) $3.18

Question 54

Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers?

A) Garage order flow
B) Pillar system
C) Big Room system
D) SLP network
E) Order NET

Question 55

Which one of the following transactions occurs in the primary market?

A) Purchase of 500 shares of GE stock from a current shareholder
B) Gift of 100 outstanding shares to a charitable organization
C) Gift of 200 shares of stock by a mother to her daughter
D) A purchase of newly issued stock from the issuer
E) IBM's purchase of GE stock from a dealer

Question 56

Who can access Level 3 of NASDAQ's information?

A) Anyone with internet access
B) Only NASDAQ regulators
C) Customers who pay an access fee
D) NASDAQ market makers
E) There is no Level 3

Question 57

Which one of the following statements related to the NYSE is correct?

A) Exchange members must purchase trading licenses.
B) NYSE shareholders currently own "seats" on the exchange.
C) Designated market makers buy at the asked price.
D) The NYSE is privately owned by an investment firm.
E) Electronic trading has increased the demand for floor brokers.

Question 58

A floor broker on the NYSE does which one of the following?

A) Supervises the commission brokers of a specific financial firm
B) Trades for his or her own personal inventory
C) Executes orders on behalf of customers
D) Maintains an inventory and assumes the role of a market maker
E) Is charged with maintaining a liquid, orderly market

Question 59

NYSE designated market makers:

A) execute trades on behalf of their clients.
B) are guaranteed a profit on every stock purchased and resold.
C) act as dealers.
D) provide a one-sided market.
E) are also referred to as "$2 brokers."

Question 60

An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:

A) floor trader.
B) exchange customer.
C) specialist.
D) floor broker.
E) market maker.

Question 61

The common stock of Dayton Repair sells for $47.92 a 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?

A) 4.84 percent
B) 6.41 percent
C) 9.92 percent
D) 6.14 percent
E) 7.28 percent

Question 62

Global Tek plans on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 2.5 percent per year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 17.4 percent?

A) $1.82
B) $2.18
C) $2.03
D) $2.71
E) $3.05

Question 63

Global Logistics just announced it is increasing its annual dividend to $1.68 next year and will increase that dividend by 1.85 percent annually thereafter. How much will one share of this stock be worth ten years from now if the required rate of return is 12.8 percent?

A) $18.43
B) $18.26
C) $18.09
D) $19.12
E) $18.77

Question 64

Arcs and Triangles paid an annual dividend of $1.47 a share last month. The company is planning on paying $1.52, $1.58, and $1.60 a share over the next three years, respectively. After that, the dividend will be constant at $1.65 per share per year. What is the market price of this stock if the market rate of return is 12 percent?

A) $13.98
B) $14.07
C) $13.54
D) $14.16
E) $15.01

Question 65

Over the next three years, Distant Groves will pay annual dividends of $.65, $.70, and $.75 a share, respectively. After that, dividends are projected to increase by 2 percent per year. What is one share of this stock worth today at a required return of 14.5 percent?

A) $5.49
B) $5.94
C) $5.68
D) $5.55
E) $5.86

Question 66

Flo's Flowers pays an annual dividend that increases by 1.8 percent per year, commands a market rate of return of 13.8 percent, and sells for $19.08 a share. What is the expected amount of the next dividend?

A) $2.24
B) $2.29
C) $2.37
D) $2.32
E) $2.17

Question 67

Roy's Welding common stock sells for $58.49 a 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?

A) $6.60
B) $5.86
C) $6.52
D) $6.98
E) $5.64

Question 68

You want to purchase some shares of JJ Farms stock but need a rate of return of 17.5 percent to compensate for the perceived risk. What is the maximum you are willing to pay per share for this stock if the company pays a constant $2.43 annual dividend per share?

A) $11.11
B) $13.89
C) $9.26
D) $7.20
E) $8.47

Question 69

Southern Markets 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 a share. What is the market rate of return?

A) 13.88 percent
B) 14.07 percent
C) 14.21 percent
D) 14.37 percent
E) 13.47 percent

Question 70

Gee-Gee's is going to pay an annual dividend of $2.05 a share next year. This year, the company paid a dividend of $2 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth six years from now if the applicable discount rate is 11.2 percent?

A) $26.94
B) $28.00
C) $26.28
D) $27.33
E) $26.66

Question 71

The Uptowner will pay an annual dividend of $3.26 a share next year with future dividends increasing by 2.8 percent annually. What is the market rate of return if the stock is currently selling for $49.10 a share?

A) 9.63 percent
B) 9.13 percent
C) 8.46 percent
D) 9.44 percent
E) 6.83 percent

Question 72

Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate?

A) 11.43 percent
B) 11.06 percent
C) 10.87 percent
D) 11.18 percent
E) 10.95 percent

Question 73

The UpTowner just paid an annual dividend of $4.12. The company has a policy of increasing the dividend by 2.5 percent annually. You would like to purchase shares of stock in this firm but realize that you will not have the funds to do so for another four years. If you require a rate of return of 16.7 percent, how much will you be willing to pay per share when you can afford to make this investment?

A) $32.03
B) $32.83
C) $33.12
D) $33.65
E) $32.47

Question 74

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent?

A) $11.22
B) $12.21
C) $12.32
D) $11.47
E) $12.03

Question 75

Hot Teas common stock is currently selling for $38.97. The last annual dividend paid was $1.26 per share and the market rate of return is 13.2 percent. At what rate is the dividend growing?

A) 9.65 percent
B) 10.67 percent
C) 12.79 percent
D) 11.08 percent
E) 12.10 percent

Question 76

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

A) 10.86 percent
B) 15.82 percent
C) 9.08 percent
D) 13.39 percent
E) 12.75 percent

Question 77

The Garden Shoppe has adopted a policy of increasing its annual dividend at a constant rate of 1.35 percent annually. The company just paid its annual dividend of $1.84. What will the dividend be nine years from now?

A) $2.10
B) $2.05
C) $2.08
D) $2.02
E) $2.15

Question 78

Home Services common stock offers an expected total return of 14.56 percent. The last annual dividend was $2.27 a share. Dividends increase at a constant 2.1 percent per year. What is the dividend yield?

A) 16.66 percent
B) 16.48 percent
C) 13.35 percent
D) 14.20 percent
E) 12.46 percent

Question 79

Gee-Gee common stock returned a nifty 21.6 percent rate of return last year. The dividend amount was $.25 a share which equated to a dividend yield of 1.01 percent. What was the rate of price appreciation for the year?

A) 20.59 percent
B) 21.38 percent
C) 23.60 percent
D) 22.87 percent
E) 21.52 percent

Question 80

AB Co. stock pays a constant annual dividend, sells for $56.07 a share, and has a market rate of return of 12.2 percent. What is the amount of the next annual dividend?

A) $5.67
B) $5.94
C) $6.21
D) $6.84
E) $7.30