Deck 10: Equity Markets and Share Valuation

Question 1

Which one of the following statements is not true about secondary markets?

A)In Australia,most secondary equity market transactions take place on the ASX.
B)In terms of the number of companies listed and shares traded on a daily basis,the NYSE is larger than the ASX.
C)Companies listed on the NYSE tend to be,on average,larger in size and their shares trade more frequently than companies whose securities trade on ASX.
D)In terms of total volume of activity and total capitalisation of the companies listed,the ASX is the largest in the world and the NYSE is the second largest.

Answer 1

D

Question 2

Which of the following characteristics is not associated with ordinary shares?

A)Vote by proxy.
B)Limited liability.
C)Cumulative dividends.
D)Residual claim on income and assets.

Answer 2

A

Question 3

Which one of the following statements is true about dealer markets?

A)Dealers do not place capital at risk.
B)Dealers guarantee the sale or purchase of an order.
C)The NYSE is the best- known example of a dealer market.
D)A dealer market involves time-consuming search for a fair deal.

Answer 3

B

Question 4

The term shareholder equity implies:

A)a right to dividends.
B)an ownership claim.
C)a prior claim on income and assets.
D)a contractual relationship with a corporation.

Question 5

Which one of the following statements is true about secondary markets?

A)The presence of active brokers increases market inefficiency.
B)The ordinary shares of large companies often rely on word-of-mouth to find interested buyers.
C)Brokers bring buyers and sellers together to earn a fee.
D)A specialist is a specific location on the floor of a securities exchange at which auctions for a particular security take place.

Question 6

Which one of the following statements is true about secondary markets?

A)In secondary markets,outstanding shares are bought and sold among investors.
B)An active secondary market causes companies to sell their new debt or equity issues at a higher cost of funds.
C)For an investor,the function of secondary markets is to provide profitability for the shares of securities they own.
D)All of the above are true statements.

Question 7

Preference shares are sometimes regarded as a debt security because:

A)legally preference shares are a debt security.
B)preference shareholders receive a residual value and not a stated value.
C)preference dividends are paid out of before-tax income just like interest payments on bonds.
D)preference share dividend payments,like bond interest payments are considered fixed obligations for the company.

Question 8

Which of the following is not a correct statement about equity securities?

A)No fixed maturity date.
B)Ownership interests in an underlying entity.
C)Dividends are a tax-deductible expense for the issuer.
D)Shareholders pay lower taxes on dividends than they would on interest payments.

Question 9

Which one of the following statements is not true about brokered markets?

A)Brokers can guarantee an order because they have an inventory of securities.
B)Brokers bring buyers and sellers together to earn a fee,called a commission.
C)Investors have an incentive to hire a broker because they charge a commission that is less than the cost of direct search.
D)Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves.

Question 10

Which one of the following statements is true about ordinary shares?

A)Ordinary shareholders have unlimited liability.
B)Ordinary Shares are considered to have a fixed maturity.
D)Owners of ordinary shares are guaranteed dividend payment by the company.
D)Owners of ordinary shares have the lowest-priority claim on the company's assets in the event of insolvency.

Question 11

Direct search markets are characterised by:

A)a high level of efficiency.
B)complete price information.
C)extensive broker and dealer participation.
D)private placement transactions and sale of ordinary shares of small private companies.

Question 12

Traditional preference shares:

A)have a maturity date.
B)pay dividends of various amounts.
C)pay dividends at irregular intervals.
D)are often referred to as fixed-income investments.

Question 13

Which one of the following statements is not true about ordinary shares?

A)Ordinary shareholders have limited liability.
B)Ordinary shares are considered to have no fixed maturity.
C)Ordinary shareholders have the right to vote on the selection of the board of directors for the company.
D)Owners of ordinary shares are guaranteed dividend payments by the company.

Question 14

Which of the following statements is not correct? An ordinary shareholder in a troubled corporation:

A)may lose his/her house.
B)does not receive dividends.
C)records a decrease in the value of his/her assets.
D)receives the proceeds from the sale of the assets after the creditors and the preference shareholders are paid if the company goes bankrupt.

Question 15

The largest holders of equity securities are:

A)households.
B)managed funds.
C)foreign investors.
D)superannuation funds.

Question 16

The intrinsic value of a preference share is calculated in a similar way to:

A)coupon bonds.
B)annuities.
C)zero coupon bonds.
D)perpetuities.

Question 17

Which one of the following statements is not true about auction markets?

A)Auctioneers can also act as dealers in the NYSE.
B)The auction for a security can take place anywhere on the trading floor.
C)In an auction market,buyers and sellers face each other directly and bargain over price.
D)The New York Stock Exchange is the best-known example of an auction market.

Question 18

Which one of the following statements is not true about preference shares?

A)Owners of preference shares are not guaranteed dividend payments by the company.
B)Preference shareholders have limited voting privileges relative to ordinary share owners.
C)Preference share dividends are fixed financial obligations to the company just like bond coupon payments.
D)Preference shares represent ownership in the company.

Question 19

The least efficient of all the different types of secondary markets is the:

A)dealer market.
B)brokered market.
C)auction market.
D)direct search market.

Question 20

In brokered markets:

A)buyers and sellers are brought together for a transaction fee.
B)brokers build a pool of price information through their extensive contacts.
C)the commission charged by brokers is a lower cost to buyers and sellers than the cost of direct search.
D)all of the above are true of broker markets.

Question 21

The value of a common stock today depends on:

A)the industry analysts.
B)the expected future dividends and the discount rate.
C)the expected future common earnings per share.
D)the number of authorised shares

Question 22

Cloud Storage Ltd is a fast-growing technology company.The company projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years.After that,the company expects a constant-growth rate of 8 percent.The company expects to pay its first dividend of $1.25 a year from now.If your required rate of return on such shares is 20 percent,what is the current price of the share?

A)$15.63.
B)$4.70.
C)$30.30.
D)$22.68.

Question 23

A security is worth buying when its:

A)price-earnings ratio is negative.
B)dividend growth rate is positive.
C)book value is greater than its market price.
D)intrinsic value is greater than its market price.

Question 24

Value is best defined as the:

A)worth of an asset to an individual.
B)accounting measure of an asset's worth.
C)amount of money needed to acquire an asset.
D)none of the above.

Question 25

In case of bankruptcy and liquidation of assets,what is the order of the claimants?

A)Debt holders,equity holders and preferred shareholders equally.
B)Debt holders,preferred shareholders,equity holders.
C)Debt holders,equity holders,preferred shareholders.
D)Equity holders,debt holders,preferred shareholders.

Question 26

Which of the following is/are needed when the discounted cash flow approach is used to value equity securities?

A)Estimate the expected future cash flows associated with the security.
B)Estimate the size and timing of the expected cash flows associated with the security.
C)Determine the appropriate discount rate based on an estimate of the risk associated with the security.
D)All of these.

Question 27

Lizzy's Pet Parlour Ltd has not paid out any dividend in the last three years.It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown.Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years.What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent?

A)$4.85.
B)$5.37.
C)$5.50.
D)$6.14.

Question 28

A share that pays $20 in dividends next year with an annual growth rate of 3% forever for a required return of 5% has a valuation of:

A)$412.
B)$420.
C)$1,000.
D)$1,030.

Question 29

Which of the following is false?

A)Australian companies normally pay dividends semi-annually.
B)Dividend valuation models are best applied to blue chip companies.
C)Intrinsic value is the present value of expected future cash flows discounted at the investor's required rate of return.
D)Dividend discount models tend to be robust to the choice of estimate for the relevant estimates used within the model.

Question 30

A share that pays $20 in dividends this year with an annual growth rate of 3% forever for a required return of 5% has a valuation of:

A)$257.
B)$412.
C)$420.
D)$1,030.

Question 31

Which of the following statements is true?

A)Corporations generally pay all their earnings as dividends.
B)A firm's residual earnings technically belong to the preferred shareholders.
C)Corporations typically reinvest none of their earnings to enhance future earnings.
D)The only cash flows that an investor will receive until he or she sells their shares will be the dividends.

Question 32

Which one of the following statements is not true about the general dividend valuation model?

A)The model does not assume any specific pattern for dividend growth.
B)The model calls for forecasting an infinite number of dividends for a share.
C)It makes a specific assumption about when the share is going to be sold in the future.
D)All of the above are true.

Question 33

The value of a stock increases as:

A)the required rate of return increases.
B)the required rate of return decreases.
C)the dividend growth rate increases.
D)b and c are both correct.

Question 34

Dividend valuation models are best applied to:

A)bank stocks.
B)internet stocks.
C)oil exploration stocks.
D)none of the above.

Question 35

Which of the following is a false statement about preference shares?

A)Always have voting rights.
B)Provide the owner with a claim to a fixed amount of equity.
C)Have preference over common shares with respect to income and assets.
D)Dividends must be paid in entirety before the common shareholders can receive any payments.

Question 36

You are interested in investing in a company that expects to grow steadily at an annual rate of 6 percent for the foreseeable future.The company paid a dividend of $2.30 last year.If your required rate of return is 10 percent,what is the most you would be willing to pay for this share? (Round to the nearest dollar.)

A)$23.
B)$24.
C)$58.
D)$61.

Question 37

Johnson Co has just paid a dividend of $4.45.The company has forecasted a growth rate of 8 percent for the next several years.If the appropriate discount rate is 14 percent,what is the current price of this share? (Round to the nearest dollar.)

A)$74.
B)$32.
C)$80.
D)$60.

Question 38

Kwik Lift Ltd will pay dividends of $4.75,$5.25,$5.75,and $7 for the next four years.Thereafter,the company expects its growth rate to be at a constant rate of 7 percent.If the required rate of return is 15 percent,what is the current market price of the share?

A)$69.42.
B)$93.63.
C)$57.54.
D)$80.29.

Question 39

What are the sources of uncertainties in the valuation of common equities?

A)Cash flow size,timing,and discount rate.
B)Cash flow size,timing,and risk-free rate.
C)Discount rate only.
D)Cash flow size and timing only.

Question 40

BlueSteel Manufacturing Company has been generating stable revenues but sees no growth in it for the foreseeable future.The company's last dividend was $3.25,and it is unlikely to change the amount paid out.If the required rate of return is 12 percent,what is the share worth today?

A)$39.00.
B)$3.69.
C)$27.08.
D)$21.23.

Question 41

Given that the required return on a preference share is 10% and that the preference share's current price is $7.50,then the dividend payment per preference share is:

A)7.5%.
B)5.5%.
C)75%.
D)10%.

Question 42

What is the estimated value of a share that paid a $5 dividend this year,has dividends expected to grow at 6 per cent every year,and requires a 20 per cent return?

A)$20.38.
B)$25.00.
C)$35.71.
D)$37.86.

Question 43

The National Bank of Australia has issued perpetual preference shares with a $100 par value.The bank pays a quarterly dividend of $1.40 on this share.What is the current price of this preference share given a required rate of return of 8.5 percent?

A)$23.06.
B)$37.57.
C)$43.25.
D)$65.88.

Question 44

If the required rate of return is higher than the dividend rate of a preferred share,the par value is _________________ the current market value of the preferred share.

A)independent of
B)less than
C)equal to
D)higher than

Question 45

Dave Amos Ltd pays a constant dividend of $2 every year.What will the stock sell for three years from now if the required rate of return is 9 percent?

A)$21.30.
B)$22.22.
C)$25.70.
D)$28.78.

Question 46

A company has just paid a dividend on 20 cents per ordinary share.If dividends are expected to grow indefinitely at the rate of 5% pa and an investor's required rate of return is 15%,what is the share's intrinsic value?

A)$1.33.
B)$1.40.
C)$2.00.
D)$2.10.

Question 47

Bedrock Ltd is about to issue preference shares paying $5 per year.If preference shareholders have a required rate of return of 12%,the current price of Bedrock's preference shares is:

A)$5.60.
B)$42.
C)$50.
D)$100.

Question 48

Chameleon Company has issued perpetual preference shares with a par of $100 and a dividend of 5.5 percent.If the required rate of return is 7.75 percent,what is the share's current market price?

A)$12.90.
B)$53.27.
C)$62.14.
D)$70.97.

Question 49

Which one of the following statements is not true about zero-growth shares?

A)Dividend payments are zero.
B)Dividend stays constant over time.
C)There is no growth in dividends over time.
D)The cash flow pattern resembles a perpetuity with a constant cash flow.

Question 50

A preference share is known to be:

A)a debt instrument.
B)a hybrid instrument.
C)an equity instrument.
D)none of the above.

Question 51

Matt's Carpentry Services Inc.has just paid a dividend of $0.55 per share.The dividends are expected to grow at an annual rate of 5 percent indefinitely.What is today's stock price if the required return is 12.5 percent?

A)$4.62. b. $7.33.
C)$7.70.
D)$11.55.

Question 52

Suppose that the current cash dividend of Capri Ltd is $0.30.Financial analysts expect the dividends to grow at a constant rate of 7 per cent per year,and investors require a 15 per cent return on this class of shares.What should be the current share price of Capri?

A)$4.01.
B)$3.75.
C)$13.37.
D)$0.80.

Question 53

Under the mixed growth dividend model,the assumption is:

A)a firm experiences non-constant growth in dividend payments.
B)a firm experiences a mix of constant and non-constant growth in dividend payments.
C)a firm experiences a mix of constant and non-constant dividend payments (dollar amounts).
D)none of the above.

Question 54

Plumbwise Ltd issued 200,000 preferred shares with a book value of $10 million three years ago.If the required return is 8.42% and the current market value of these preferred shares is $9.5 million,what is the annual dividend?

A)$2.50.
B)$4.00.
C)$4.71.
D)Cannot be calculated.

Question 55

Just Us Realty Ltd has issued perpetual preference shares with a $100 par value.The company pays a quarterly dividend of $2.60 on this share.What is the current price of this preference share given a required rate of return of 12.5 percent?

A)$20.80.
B)$47.25.
C)$80.00.
D)$83.20.

Question 56

A share is expected to pay dividends of $1 in one year,$1.20 in two years and then $1.30 in three years with this amount lasting in perpetuity.The current intrinsic value of this share given a discount rate of 5% is:

A)$25.10.
B)$25.62.
C)$26.43.
D)$38.43.

Question 57

Rum City Foods Ltd is a wholesale company of frozen foods.The company pays a dividend of $7 per share per year,and the board of directors have no plan to change the dividend payouts.Investors within the company expect a return of 25% per share that they own.What is the price of one share?

A)$0.25.
B)$7.00
C)$7.25.
D)$28.00.

Question 58

The common stock of Grunskies Ltd currently sells for $48 per share.The firm has a constant dividend growth rate of 6 percent.If the required rate of return is 15 percent,what is the expected dividend yield on the stock?

A)6.0%.
B)8.5%.
C)9.0%.
D)15.0%.

Question 59

Bundaberg Brewed Drinks Corporation has just announced a dividend of $0.80 for this year and $0.835 for the next year.Dividends are expected to grow at a constant rate indefinitely.What is the current stock price if the required return is 13.1 percent?

A)$8.55.
B)$9.35.
C)$9.57.
D)$10.37.

Question 60

Coral Coast Printers Ltd's preferred stock is selling for $30 per share.What is the expected dividend of year four if the required rate of return is 7.5 percent?

A)$3.25.
B)$2.00.
C)$2.25.
D)$3.00.

Question 61

Determine the market price of a $50 par value preferred share that pays annual dividends based on a 4 percent dividend rate when the market rate is 5%?

A)$35.
B)$40.
C)$50.
D)$60.

Question 62

Determine the required rate of return on preferred shares that provide a $10 annual dividend if they are selling for $60?

A)15.66%.
B)16.66%.
C)17.14%.
D)18.14%.

Question 63

Bushman Sheds Ltd's preference shares are trading at $33.33.Given that investor's required return is 18%,the current dividend yield on Bushman Shed's preference shares is:

A)6%.
B)24%.
C)16%.
D)18%.

Question 64

The preference share of Gainsite Ltd is selling currently at $110.35.If your required rate of return is 9.75 percent,what is the dividend paid by this share?

A)$9.75.
B)$11.32.
C)$10.76.
D)$8.53.

Question 65

Century 21 preferred shares have a par value of $60 and are selling for $50.What is the required rate of return if the preferred shares pay an annual dividend of 6 percent?

A)5.00%.
B)6.00%.
C)7.2%.
D)11.11%.