Question 1

Which one of the following statements is correct concerning the two-stage dividend growth model?

Accepted Answer

The two-stage dividend growth model allows for different growth rates in different stages, and the growth rate in the first stage (G1) can indeed be greater than the required rate of return (R). This reflects a period of high growth that may exceed the investor's required return.

Question 2

Supernormal growth is a growth rate that:

Accepted Answer

Supernormal growth refers to a growth rate that is unusually high and not sustainable over the long term because it often exceeds the firm's capacity for growth or the market's ability to support it.

Question 3

The counter area on the floor of the NYSE where a specialist operates is called a:

Accepted Answer

The counter area on the floor of the NYSE where a specialist operates is called a post. The term "pit" is often used interchangeably with post, but technically refers to the area where open outcry trading occurs. Hot spot and DOT are not commonly used terms in reference to the NYSE, and a seat refers to the ownership of a membership on the exchange, rather than a physical area on the floor.

Question 4

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?

Accepted Answer

In straight voting, each shareholder gets one vote per share and Jen owns only 30 shares which is not enough to win a seat on the board. 
In cumulative voting, the total number of votes a shareholder can cast is equal to the number of shares they own multiplied by the number of directors being elected. In this case, since 3 directors are being elected, Jen has a total of 90 votes (30 shares x 3 directors). This means that Jen is assured of at least one seat on the board. Therefore, option D is true. Option E is not necessarily true as Jen may not be able to control all the open seats even in cumulative voting.

Question 5

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?

Accepted Answer

Total return includes both dividend yield and capital gains yield. A negative total return means the stock had a negative capital gains yield, which can offset the positive dividend yield, resulting in a negative total return. Dividend yield and required rate of return are not directly related, and supernormal growth cannot be determined from the information given. The dividend may or may not be constant.

Question 6

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:

Accepted Answer

According to the dividend growth model, an increase in the market rate of return would lead to a decrease in all stock values. This is because the required rate of return for investors would increase, and in order to maintain equilibrium, stock prices would have to decrease.

Question 7

Which one of the following rights is never directly granted to all shareholders of a publicly-held corporation?

Accepted Answer

The determination of the amount of dividend to be paid per share is a decision made by the board of directors and is not directly granted to all shareholders. Shareholders have the right to receive a portion of the company's profits through dividends, but the amount per share is not determined by them.

Question 8

An ECN is best described as:

Accepted Answer

ECN stands for Electronic Communication Network, which is a website that allows individual investors to trade directly with one another, bypassing traditional brokers or dealers. It is a computerized network used for electronic trading of securities. Options A, B, and C are incorrect as they refer to specific aspects of the NYSE, whereas an ECN is not exclusive to the NYSE. Option E is also incorrect as ECN is not specific to independent brokers.

Question 9

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.can be used to value zero-growth stocks.
IV.requires the growth rate to be less than the required return.

Accepted Answer

The dividend growth model indeed assumes dividends grow at a constant rate indefinitely (I), can be applied to calculate a stock's price at any given time (II), is applicable for valuing stocks that do not expect to see any growth in dividends (zero-growth stocks) by setting the growth rate to zero (III), and necessitates that the dividend growth rate be less than the required rate of return for the model to work properly (IV).

Question 10

An increase in which of the following will increase the current value of a stock according to the dividend growth model?
I.dividend amount
II.number of future dividends,provided the current number is less than infinite
III.discount rate
IV.dividend growth rate

Accepted Answer

According to the dividend growth model, the current value of a stock is directly proportional to the dividend amount and the number of future dividends. Therefore, options I and II are correct. The discount rate, which represents the required rate of return for investors, has an inverse relationship with the current value of the stock. Therefore, option III is incorrect. Lastly, the dividend growth rate, which represents the rate at which the dividend is expected to grow, also has a direct relationship with the current value of the stock. Therefore, option IV is correct. Thus, the best choice regarding the increase in the current value of a stock is option D, i.e., I, II, and IV only.

Question 11

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?

Accepted Answer

The two-stage growth model involves a period of high growth followed by a period of stable growth. Option E has a period of high growth with increasing dividends by 10% per year for 5 years, followed by a period of stable growth with increasing dividends by 3% annually. Options A, C, and D do not have a clear distinction between high growth and stable growth periods, and option B has only a minor increase in dividends, which does not fit the criteria for a two-stage growth model.

Question 12

Which one of the following statements is correct?

Accepted Answer

The capital gains yield is defined as the annual rate of change in a stock's price. The other statements are incorrect. Preferred stocks may have constant dividends, but they do not necessarily have constant growth dividends. A constant dividend stock can be valued using the dividend growth model, but it requires modifications to account for the constant dividend. The dividend growth model can only be used to value stocks that pay dividends, so it cannot be used for non-dividend-paying stocks. An increase in the required return will decrease the stock's price, which will in turn decrease the dividend yield but increase the capital gains yield.

Question 13

High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year.Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually.Given this information,you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders.

Accepted Answer

The answer of High Country Builders currently pays an annual...

Question 14

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

Accepted Answer

An over-the-counter market is primarily comprised of dealers who buy and sell for their own inventories. In this type of market, securities are traded directly between parties without the use of a centralized exchange.

Question 15

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

Accepted Answer

The two-stage dividend growth model assumes that a stock will grow at a fixed rate for a period of time (the first stage), after which it will grow at a different rate indefinitely (the second stage). This model is based on the idea that companies typically experience different growth rates during various stages of their development. This assumption is more realistic than the other options provided, which either assume a constant dividend or a discontinuation of dividends at some point.

Question 16

Which one of the following is an underlying assumption of the dividend growth model?

Accepted Answer

The underlying assumption of the dividend growth model is that a stock's value is equal to the discounted present value of the future cash flows which it generates. This means that the value of a stock is determined by the dividends it generates, and the expected growth rate of those dividends in the future. This assumption is the basis for the dividend growth model, and is used to calculate the intrinsic value of a stock based on its expected future cash flows.

Question 17

The Blue Marlin is owned by a group of 5 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?

Accepted Answer

In a straight voting system, to have personal control over the firm, a shareholder must own more than half of the outstanding shares. Therefore, owning 50 percent plus one vote is the minimum requirement to ensure control.

Question 18

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?

Accepted Answer

Since no single shareholder can personally control the outcome of the election, a proxy fight is the most likely scenario. This involves shareholders aligning themselves with different candidates and soliciting proxies from other shareholders in order to gain control of the board. The outcome will ultimately be decided by which candidates are able to secure the most votes.

Question 19

National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen 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:

Accepted Answer

Since National Trucking is expected to pay $1 per share in perpetuity, the stock can be valued as a perpetuity. Therefore, one share of the stock is priced the same as a $1 perpetuity.

Question 20

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

Accepted Answer

The capital gains yield represents the change in stock price divided by the original stock price, which is simply the growth rate (g) used in the dividend growth model.

Quiz 8: Stock Valuation