Question 1

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?

Accepted Answer

The given model is known as the dividend growth model. It calculates the present value or intrinsic value of a stock based on the assumption that the stock's current market price is equal to the sum of all its future cash flows discounted at the required rate of return. The model estimates the future dividend payments and the expected rate of change in the dividend payment, and dividing the estimated next year's dividend payment by the difference between the discount rate and the expected growth rate provides the present value of the stock.

Question 2

The Australian Securities Exchange (ASX):

Accepted Answer

The statement "is one of the world's top 10 listed exchange groups, measured by its market capitalisation" accurately describes the ASX. The other options are incorrect. The Reserve Bank of Australia does not principally own the ASX. The ASX consists of a primary and secondary market. The ASX is not solely for small and medium enterprises. Finally, the ASX is an electronic exchange with no trading floor.

Question 3

Next year's expected annual dividend divided by today's stock price is called the stock's:

Accepted Answer

The expected annual dividend divided by today's stock price is known as the dividend yield. Therefore, the correct answer is E. The other options are incorrect - the required return is the rate of return that investors demand for undertaking an investment, the capital gains yield is the percentage increase in the value of the stock, the maturity yield applies to fixed-income securities, and capital return is not a commonly used term in finance.

Question 4

Tellite Ltd,a telecommunication company,did not pay a dividend in the last financial year.However,the company has indicated that it expects to earn $1 per share in this financial year and to pay out 20% of these earnings in dividends.Financial analysts expect that Tellite's earnings per share and dividend per share will grow at a rate of 10% a year.The rate of return required by investors has been estimated at 12% per annum.Estimate the present value of the share.

Accepted Answer

We can use the dividend discount model to estimate the present value of the share, which is based on the assumption that the price of a share is the present value of all future dividends.

First, we need to calculate the expected dividend per share in the next financial year:

Expected earnings per share = $1
Expected dividend payout ratio = 20%
Expected dividend per share = Expected earnings per share × Expected payout ratio = $1 × 20% = $0.20

Next, we can estimate the expected earnings and dividend growth rate:

Expected growth rate = 10%

Using these values, we can now calculate the present value of the share as follows:

PV = D1/(r-g)

where: 
PV = present value
D1 = expected dividend per share in the next financial year
r = rate of return required by investors
g = expected growth rate

PV = $0.20/(0.12-0.10) = $10

Therefore, the present value of the share is $10, which is option B.

Question 5

The stock valuation process which determines the price of a stock by dividing the next period's dividend by the discount rate less the dividend growth rate is called the:

Accepted Answer

The described formula is commonly known as the Dividend Growth Model, where the price of a stock is calculated by dividing the next period's dividend by the difference between the required rate of return (discount rate) and the expected growth rate of dividends.

Question 6

What is true about a preference share?

Accepted Answer

All of the given answers are true, so option A is the correct choice. Holders of preference shares usually do not have voting rights, making it different from ordinary shares. However, from a legal standpoint, it can be considered a form of equity. Unpaid dividends on preference shares are not debts of the company, and preference shares are given preference over ordinary shares when it comes to dividend payments.

Question 7

Marble Books,Inc.is expected to pay an annual dividend of $1.80 per share next year.The required return is 16 per cent and the growth rate is 4 per cent.What is the expected value of this stock five years from now?

Accepted Answer

The answer of Marble Books,Inc.is expected to pay an annual...

Question 8

The company share market price is $25,its next-period expected dividend is $1 and investors in that market require a rate of return at 14% per annum.What is the implied rate of growth in dividends at this time?

Accepted Answer

The answer of The company share market price is $25,its...

Question 9

The common stock of Wetmore Industries is valued at $10.08 a share.The company increases their dividend by 3.5 per cent annually and expects their next dividend to be $1.24.What is the required rate of return on this stock?

Accepted Answer

The answer of The common stock of Wetmore Industries is...

Question 10

The market in which new securities are originally sold to investors is called the _____ market.

Accepted Answer

The primary market is where new securities are issued and sold to the public for the first time. This is also known as the IPO (Initial Public Offering) market. The other choices are not correct as they refer to different markets. The secondary market is where securities are bought and sold after their initial offering, the open market is a term used to describe trading in publicly listed securities, and the free market is a broader term used to describe the overall economic system.

Question 11

The rate at which the value of an investment grows is called the:

Accepted Answer

The rate at which the value of an investment grows is referred to as the capital gains yield. This answer choice accurately depicts that definition. The other choices (required return, capital return, maturity yield, and dividend yield) do not refer specifically to the growth rate of an investment.

Question 12

Fujian Tea company shares have a current price of $20 per share and paid a dividend of $1.40 per share during the year.Compute the dividend yield.

Accepted Answer

The answer of Fujian Tea company shares have a current...

Question 13

The current price of a share is based:

Accepted Answer

The current price of a share is determined by the present value of all the future cash flows expected from holding that stock, which includes future dividends as well as the expected price at which shares can be sold in the future. Therefore, option B, which states that the current stock price is based on the present value of all the future cash flows from that stock, is the most accurate choice.

Question 14

The market where one shareholder sells shares to another shareholder is called the _____ market.

Accepted Answer

The secondary market is where investors buy and sell securities from other investors, rather than directly from the issuing company. This includes the buying and selling of shares between shareholders. The other options (B) dealer market, (C) free market, (D) open market, and (E) primary market do not accurately describe the market where one shareholder sells shares to another shareholder.

Question 15

A dealer is an agent who:

Accepted Answer

A dealer is someone who buys and sells securities from their own inventory. They make money from the difference between the price they bought the securities for and the price they sell them for, rather than earning a commission for executing trades for clients like a broker would.

Question 16

The required return:

Accepted Answer

The required return provides an estimate of the return an investor might expect if he or she purchases a share at today's market price. It considers both the dividend yield and capital gains yield, as well as the risk associated with the investment. It is not based on the assumption that a share will maintain a constant dividend or on the projected dividend and share price for next year. The required return can vary based on factors such as market conditions and company performance. The required return may also be higher for a firm experiencing rapid growth, as there may be a higher level of risk and uncertainty associated with the investment.

Question 17

An agent who arranges security transactions among investors is a called a:

Accepted Answer

A broker is an intermediary who arranges security transactions between buyers and sellers. They typically receive a commission for their services and do not hold inventory of the securities they trade, distinguishing them from dealers who buy and sell securities from their own inventory. Specialists, members, and floor traders are all specific categories of market participants who work on the trading floor of an exchange.

Question 18

The authority granted by a shareholder that permits another individual to vote that shareholder's shares is called a:

Accepted Answer

A proxy allows a shareholder to grant another individual the authority to vote on their behalf.

Question 19

The common stock of Connor,Inc.is selling for $16 a share and has a dividend yield of 3.5 per cent.What is the dividend amount?

Accepted Answer

The dividend yield is calculated as the annual dividend divided by the stock price. Therefore, the dividend amount is 3.5% of $16, which is $0.56.

Question 20

If shareholders are granted a preemptive right they will be:

Accepted Answer

Preemptive rights give shareholders the first opportunity to purchase any new shares that are issued by the company. This allows them to maintain their proportionate ownership in the company and prevent dilution of their shares.

Quiz 7: Equity Markets and Stock Valuation