Deck 7: Equity Markets and Stock Valuation

Question 1

Which one of the following is an electronic network that enables Katie to sell her shares of ABC stock directly to Marti?

A) SuperDOT
B) POST
C) ECN
D) SEAT
E) eNET

Answer 1

ECN

Question 2

The stream of customer instructions to buy and sell securities is called the:

A) order flow.
B) market maker.
C) execution stream.
D) operations flow.
E) buyer's stream.

Answer 2

order flow.

Question 3

The capital gains yield equals which one of the following?

A) Total yield
B) Required rate of return
C) Market rate of return
D) Dividend yield
E) Dividend growth rate

Answer 3

Dividend growth rate

Question 4

Any person who owns a license to trade on the NYSE is called a:

A) dealer.
B) floor trader.
C) DMM.
D) member.
E) proxy.

Question 5

A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a:

A) supplemental liquidity provider (SLP).
B) designated market maker (DMM).
C) runner.
D) Floor broker.
E) market maker.

Question 6

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority?

A) Straight
B) Cumulative
C) Consent-form
D) Proxy
E) In absentia

Question 7

A DMM is a(n):

A) employee who executes orders to buy and sell for clients of his or her brokerage firm.
B) individual who trades on the floor of an exchange for his or her personal account.
C) NYSE member who functions as a dealer for a limited number of securities.
D) broker who buys and sells securities from a market maker.
E) trader who deals only with primary offerings.

Question 8

Supplemental liquidity providers (SLPs) trade securities on behalf of:

A) their own accounts.
B) the customers of a specific brokerage firm.
C) designated market makers.
D) any stock exchange member.
E) any stock exchange customer.

Question 9

Inside quotes are defined as the:

A) bid and asked prices presented by NYSE DMMs.
B) last bid and asked price offered prior to the market close.
C) lowest asked and highest bid offers.
D) daily opening bid and asked quotes.
E) last traded bid and asked prices.

Question 10

What is the market called that facilitates the sale of shares between individual investors?

A) Primary
B) Proxy
C) Secondary
D) Inside
E) Initial

Question 11

Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting?

A) Proxy
B) Aggregate
C) Cumulative
D) Straight
E) Condensed

Question 12

An agent who buys and sells securities from inventory is called a:

A) floor trader.
B) dealer.
C) commission broker.
D) broker.
E) floor broker.

Question 13

There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting.

A) simultaneous
B) straight
C) proxy
D) cumulative
E) sequential

Question 14

The specific location on the floor of an exchange where a particular security is traded is called a:

A) box office.
B) Figure 6.
C) post.
D) trading booth.
E) seat.

Question 15

When valuing a stock using the constant-growth model, D1 represents the:

A) expected difference in the stock price over the next year.
B) expected stock price in one year.
C) last annual dividend paid.
D) the next expected annual dividend.
E) discount rate.

Question 16

Newly issued securities are sold to investors in which one of the following markets?

A) Proxy
B) Stated value
C) Inside
D) Secondary
E) Primary

Question 17

Most trades on the NYSE are executed:

A) by floor brokers on the exchange floor.
B) independent brokers on the exchange floor.
C) electronically.
D) by designated market makers of the floor of the exchange.
E) bydealers.

Question 18

Dividends are best defined as:

A) cash payments to shareholders.
B) cash payments to either bondholders or shareholders.
C) cash or stock payments to shareholders.
D) cash or stock payments to either bondholders or shareholders.
E) distributions of stock to current shareholders.

Question 19

The dividend yield is defined as:

A) the last annual dividend divided by the current market price per share.
B) the last annual dividend divided by the current book value per share.
C) next year's expected dividend divided by the current market price per share.
D) next year's expected dividend divided by the current book value per share.
E) next year's expected dividend divided by the par value per share.

Question 20

A broker is an agent who:

A) trades on the floor of an exchange for himself or herself.
B) buys and sells from inventory.
C) offers new securities for sale to dealers only.
D) is ready to buy or sell at any time.
E) brings buyers and sellers together.

Question 21

Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend by 8 percent per year the following four years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for Year 7?

A) ($1.23) ×(1.08 ×4) ×(1.02 ×3)
B) ($1.23) ×(1.08 ×4) ×(1.02 ×2)
C) ($1.23) ×(1.08)4×(1.02)2
D) ($1.23) ×(1.08)4×(1.02)3
E) ($1.23)× (1.08)4×(1.02)4

Question 22

If a trade is made "in the crowd," the trade has occurred:

A) between a broker and a DMM.
B) between two brokers.
C) electronically on NASDAQ.
D) onSuperDOT.
E) on an ECN.

Question 23

On which one of the following dates do dividends become a liability of the issuer for accounting purposes?

A) First day of the fiscal year in which the dividend is expected to be paid
B) Twelve months prior to the expected dividend payment date
C) On the date the board declares the dividend
D) On the date the company announces the dividend to the public
E) On the date of payment

Question 24

The NYSE:

A) presently conducts all of its trading through SuperDOT.
B) is a dealer market.
C) is in the business of attracting order flow.
D) is solely a primary market.
E) is based on a multiple market maker system.

Question 25

In November 2013, the NYSE was acquired by:

A) the Amsterdam Exchange.
B) the Intercontinental Exchange.
C) the Securities Exchange Commission.
D) Euronext.
E) the American Stock Exchange.

Question 26

The constant growth model can be used to value the stock of firms that have which type(s) of dividends?

A) Dividends that change by either a constant amount or a constant rate
B) Dividends that change annually by a constant amount or that are zero
C) Dividends that change annually by a constant amount
D) Dividends that are either constant or change annually at a constant rate
E) Only dividends that increase at a constant rate

Question 27

NASDAQ is best described as:

A) a modern-day trading floor with locations in Chicago and London.
B) an electronic communication network.
C) an electronic network of securities dealers.
D) an internet broker?s market.
E) a primary market.

Question 28

The dividend yield on a stock will increase if the:

A) dividend growth rate decreases.
B) stock price decreases.
C) capital gains rate decreases.
D) stock price increases.
E) tax rate on dividends increases.

Question 29

The more actively traded large companies that are listed on NASDAQ are traded in which one of the NASDAQ markets?

A) National
B) Capital
C) Regional
D) Global Select
E) Global

Question 30

To be a member of the NYSE, you must:

A) be a primary dealer.
B) buy a seat.
C) own a trading license.
D) be registered as a floor trader.
E) be a DMM.

Question 31

The price of a stock at Year 4 can be expressed as:

A) D0/(R + g4).
B) D0 × (1 + R)5.
C) D1 × (1 + R)5.
D) D4/(R - g).
E) D5/(R - g).

Question 32

Which one of the following features applies to NASDAQ but not the NYSE?

A) Trading in the crowd
B) Multiple market maker system
C) SuperDot
D) Broker market
E) Physical trading floor

Question 33

Which one of the following players on the floor of the NYSE is obligated to maintain a two-sided, orderly market for a limited number of securities?

A) Designated market maker
B) Floor sweeper
C) Investment firms
D) Supplemental liquidity provider
E) Floor broker

Question 34

Which one of the following will increase the current value of a stock?

A) Decrease in the dividend growth rate
B) Increase in the required return
C) Increase in the market rate of return
D) Decrease in the expected dividend for next year
E) Increase in the capital gains yield

Question 35

Jensen Shipping has four open seats on its board of directors. How many shares will a shareholder need to control to ensure that his or her candidate is elected to the board given the fact that the firm uses straight voting? Assume each share receives one vote.

A) Twenty percent of the shares plus one share
B) Twenty-five percent of the shares plus one share
C) One-third of the shares plus one share
D) Fifty percent of the shares plus one share
E) Fifty-one percent of the shares plus one share

Question 36

The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year?

A) (P0/D1) - g
B) (D1/P0)/g
C) Dividend yield + Capital gains yield
D) Dividend yield - Capital gains yield
E) Dividend yield × Capital gains yield

Question 37

Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following?

A) Non-dividend-paying stock
B) Stock with a constant dividend
C) Stock with irregular dividends
D) Stock with a constant-growth dividend
E) Stock with growing dividends for a limited period of time

Question 38

Gleason, Inc., elects its board of directors on a staggered basis using cumulative voting. This implies that:

A) if there are two open seats, then the candidate with the highest number of votes and the candidate with the lowest number of votes will be selected.
B) the candidates for the open seats are voted for in individual elections.
C) all open positions are filled with one round of voting, assuming there are no tie votes.
D) shareholders can accumulate their votes over multiple years and cast all those votes in one election.
E) the firm's entire board of directors is elected annually in one combined election.

Question 39

Which one of the following must equal zero if a firm pays a constant annual dividend?

A) Dividend yield
B) Capital gains yield
C) Total return
D) Par value per share
E) Book value per share

Question 40

Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for Year 5 if the firm increases its dividend by 2 percent annually?

A) $1.50 ×(1.02)1
B) $1.50 ×(1.02)2
C) $1.50 ×(1.02)3
D) $1.50 ×(1.02)4
E) $1.50 ×(1.02)5

Question 41

The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of 11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of the last annual dividend paid?

A) $2.58
B) $2.61
C) $3.04
D) $3.32
E) $3.10

Question 42

River Rock, Inc., just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent?

A) $23.60
B) $24.65
C) $25.08
D) $25.50
E) $26.90

Question 43

Triad common stock is selling for $27.80 a share and has a dividend yield of 2.8 percent. What is the dividend amount?

A) $.31
B) $.78
C) $3.49
D) $4.25
E) $7.80

Question 44

Best Ever Toys just paid its annual dividend of $1.78 per share. The required return is10.6 percent and the dividend growth rate is 1.23 percent. What is the expected value of this stock five years from now?

A) $20.19
B) $20.44
C) $22.06
D) $18.45
E) $19.78

Question 45

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent?

A) $3.06
B) $3.90
C) $3.41
D) $3.59
E) $3.95

Question 46

Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 9.48 percent. What is the dividend growth rate?

A) .82 percent
B) .03 percent
C) 1.28 percent
D) .95 percent
E) .66 percent

Question 47

Breakfast Hut pays a constant annual dividend of $1.39 per share. How much are you willing to pay for one share if you require a rate of return of 14.6 percent?

A) $14.72
B) $9.52
C) $2.52
D) $1.59
E) $11.87

Question 48

The Glass Ceiling paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 6?

A) $1.43
B) $1.75
C) $1.46
D) $1.77
E) $1.58

Question 49

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?

A) $25.51
B) $26.08
C) $24.57
D) $26.02
E) $26.84

Question 50

The Impulse Shopper recently paid an annual dividend of $1.13 per share. The company just announced that it is suspending all dividend payments on its common stock for the next five years. After that, the company expects to pay $.50 a share at the end of each year. At a required return of 18 percent, what is this stock worth today?

A) $0
B) $1.13
C) $2.78
D) $1.03
E) $1.21

Question 51

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?

A) $11.91
B) $12.95
C) $12.16
D) $10.54
E) $13.07

Question 52

Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC?

A) NASDAQ Capital Market
B) Over-the-Counter Bulletin Board
C) Pink sheets
D) NASDAQ Global Market
E) NYSE

Question 53

Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of $13.16 a share, and a required return of 14 percent. What is the amount of the last dividend this company paid?

A) $1.05
B) $1.55
C) $1.60
D) $1.15
E) $1.30

Question 54

Solar Energy will pay an annual dividend of $1.93 per share next year. The company just announced that future dividends will be increasing by 1.6 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 11.75 percent?

A) $15.14
B) $19.01
C) $19.78
D) $16.12
E) $19.32

Question 55

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now?

A) $2.43
B) $2.51
C) $2.63
D) $2.87
E) $2.92

Question 56

The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.12 per share a year for the following two years, and then a final liquidating dividend of $14.20 per share four years from now. How much is one share of this stock worth to you today if you require a rate of return of 18.7 percent of this risky investment?

A) $9.63
B) $8.36
C) $7.56
D) $12.60
E) $10.30

Question 57

The Fish House is expected to pay annual dividends of $1.23 and $1.25 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.35 a share. What is the value of this stock at a required return of 16.4 percent?

A) $6.07
B) $8.55
C) $8.05
D) $11.08
E) $8.23

Question 58

Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually?

A) $2.71
B) $3.84
C) $2.78
D) $2.86
E) $3.72

Question 59

The common stock of GT Enterprises is selling for $63.09 a share. The company pays a constant annual dividend and has a total return of 11.64 percent. What is the amount of the dividend?

A) $5.02
B) $4.04
C) $7.34
D) $7.70
E) $6.81

Question 60

The common stock of Sweet Treats has a total return of 11.62 percent, a stock price of $48.20, and recently paid an annual dividend of $2.38. What is the capital gains rate if the company maintains a constant dividend?

A) 8.34 percent
B) 16.56 percent
C) 11.17 percent
D) 6.68 percent
E) 4.59 percent

Question 61

For the past six years, the price of Slippery Rock stock has been increasing at a rate of 8.21 percent a year. Currently, the stock is priced at $43.40 a share and has a required return of 11.65 percent. What is the dividend yield?

A) 3.20 percent
B) 2.75 percent
C) 3.69 percent
D) 4.28 percent
E) 3.44 percent

Question 62

A stock is priced at $38.24 a share and has a market rate of return of 9.65 percent. What is the dividend growth rate if the company plans to pay an annual dividend of $.48 a share next year?

A) 7.42 percent
B) 8.39 percent
C) 2.23 percent
D) 7.60 percent
E) 1.26 percent

Question 63

AZ stock closed today at $18.24, down .23. The dividend yield is 2.4 percent. What was yesterday's closing price if the firm pays a constant $.40 per share quarterly dividend?

A) $16.67
B) $18.01
C) $16.90
D) $18.47
E) $17.40

Question 64

Business Solutions is expected to pay its first annual dividend of $.84 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 2 percent per year. What is the value of this stock today, Year 0, at a required return of 14.4 percent?

A) $5.01
B) $8.09
C) $8.29
D) $7.03
E) $9.34

Question 65

Vegan Delite stock is valued at $68.60 a share. The company pays a constant annual dividend of $2.40 per share. What is the total return on this stock?

A) 3.62 percent
B) 4.00 percent
C) 3.50 percent
D) 3.39 percent
E) 3.82 percent

Question 66

Today's stock market report shows that SW Companies has a PE ratio of 9.8, a dividend yield of 2.2 percent, a closing price $29.86, and a net change of .11. What is the annual dividend amount?

A) $.66
B) $1.08
C) $1.13
D) $1.28
E) $1.33

Question 67

Village East expects to pay an annual dividend of $1.40 per share next year, and $1.68 per share for the following two years. After that, the company plans to increase the dividend by 3.4 percent annually. What is this stock's current value at a discount rate of 13.7 percent?

A) $14.09
B) $17.28
C) $15.15
D) $16.08
E) $18.18

Question 68

A firm has four open positions on its board of directors. How many shares do you need to own to guarantee your own election to the board if the firm has 387,500 shares of stock outstanding and uses cumulative voting? Each share is granted one vote.

A) 33,334 shares
B) 77,501 shares
C) 75,251 shares
D) 70,501 shares
E) 96,876 shares

Question 69

The Three Amigos just paid an annual dividend of $.60 per share but plans to double that amount each year for three years. After that, the firm expects to maintain a constant dividend. What is the value of this stock today if the required return is 15 percent?

A) $27.64
B) $29.61
C) $26.67
D) $23.05
E) $27.05

Question 70

Miller's Hardware has 415,000 shares of stock outstanding with a current market value of $42 a share. You own 84,500 of those shares. Next month, the election will be held to select four new members to the board of directors. The firm uses a cumulative voting system. How much additional money do you need to spend to guarantee that you will be elected to the board assuming that everyone else votes for one of the other candidates?

A) $0
B) $28,518
C) $34,062
D) $62,958
E) $98,910

Question 71

According to today's stock report, BL Lumber shares were up .14, the stock dividend yield is 2.6 percent, and the PE ratio is 9.8. What is the amount of the next annual dividend if yesterday's closing price was $35.14?

A) $.918
B) $.917
C) $.914
D) $.924
E) $9.31

Question 72

Last year, when the stock of Alpha Minerals was selling for $49.50 a share, the dividend yield was 3.4 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.2 percent?

A) 6.13 percent
B) 6.58 percent
C) 6.40 percent
D) 6.47 percent
E) 6.38 percent

Question 73

The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield?

A) 7.35 percent
B) 7.78 percent
C) 9.23 percent
D) 6.20 percent
E) 4.49 percent

Question 74

The Chip Dip Co. has 685,500 shares of stock outstanding, grants one vote per share, and uses straight voting. How many shares must you control to guarantee that you will be elected to the firm's board of directors if there are five open seats?

A) 335,167 shares
B) 345,134 shares
C) 345,876 shares
D) 342,751 shares
E) 337,134 shares

Question 75

The required return on Mountain Brook stock is 13.8 percent and the dividend growth rate is 3.64 percent. The stock is currently selling for $32.80 a share. What is the dividend yield?

A) 10.16 percent
B) 8.93 percent
C) 11.75 percent
D) 10.50 percent
E) 13.36 percent

Question 76

A stock has paid dividends of $1.70, $1.85, $2.00, $2.20, and $2.50 over the past five years, respectively. What is the average capital gains yield?

A) 8.86 percent
B) 3.24 percent
C) 9.45 percent
D) 5.34 percent
G = [($1.85 - 1.70) / $1.70 + ($2.00 - 1.85) / $1.85 + ($2.20 - 2.00) / $2.00 + ($2.50 - 2.20) / $2.20] / 4 = .1014, or 10.14 percent
E) 10.14 percent

Question 77

Dixie Mart plans to pay dividends of $1.36, $1.15, $1.35, and $.40 at the end of the next four years, respectively. After that, the company will be sold and shareholders are expected to receive $82.40 per share in Year 6 when the sale should be finalized. If the required return is 11.4 percent, what is the current value of one share of this stock?

A) $47.71
B) $51.87
C) $46.50
D) $51.08
E) $47.29

Question 78

Laura owns 6,700 shares of GP Global stock worth $92,460. The firm has 15,000 shares outstanding. Each share is entitled to one vote under the straight voting policy of the firm. The next election is in four months at which time four directors are up for election. How much more must Laura invest in this firm to guarantee her election to the board?

A) $0
B) $6,554.00
C) $11,053.80
D) $8,406.15
E) $14,478.80

Question 79

Toy Mart recently announced that it will pay annual dividends at the end of the next two years of $1.60 and $1.10 per share, respectively. Then, in Year 5 it plans to pay a final dividend of $13.50 a share before closing its doors
Permanently. At a required return of 13.5 percent, what should this stock sell for today?

A) $3.24
B) $16.20
C) $9.43
D) $13.33
E) $12.70

Question 80

Nu-Tek is expanding rapidly. As a result, the company expects to pay annual dividends of $.62, .80, and $1.05 per share over the next three years, respectively. After that, the dividend is projected to increase by 4 percent annually. What is the current value of this stock if the required return is 16 percent?

A) $7.63
B) $9.67
C) $10.46
D) $6.58
E) $8.49