Deck 7: Equity Markets and Stock Valuation

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?

A)dividend growth model
B)capital gain model
C)present value model
D)equity pricing model
E)stock pricing model

Answer 1

dividend growth model

Question 2

The Australian Securities Exchange (ASX):

A)is principally owned by the Reserve Bank of Australia
B)consists of a primary market only
C)is a market solely for small and medium enterprises
D)is a dealer market with a trading floor
E)is one of the world's top 10 listed exchange groups,measured by its market capitalisation

Answer 2

is one of the world's top 10 listed exchange groups,measured by its market capitalisation

Question 3

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

A)required return
B)capital return
C)capital gains yield
D)maturity yield
E)dividend yield

Answer 3

dividend yield

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.

A)$11
B)$10
C)$5
D)$50
E)$5.50

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:

A)pricing formula
B)stock price model
C)dividend growth model
D)gains formula
E)capital gain model

Question 6

What is true about a preference share?

A)All of the given answers are true.
B)Holders of the preference shares usually have no voting rights.
C)The preference share is a form of equity from a legal standpoint.
D)Unpaid preference share dividends are not debts of the company.
E)The preference share has preference over ordinary shares in the payment of dividends.

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?

A)$18.25
B)$16.80
C)$18.98
D)$15.60
E)$15.00

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?

A)14%
B)12%
C)10%
D)8%
E)9%

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?

A)16.23 per cent
B)16.53 per cent
C)16.35 per cent
D)16.49 per cent
E)15.80 per cent

Question 10

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

A)secondary
B)open
C)initial public
D)free
E)primary

Question 11

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

A)required return
B)capital return
C)maturity yield
D)dividend yield
E)capital gains yield

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.

A)-6.25%
B)6.25%
C)7%
D)12.50%
E)14%

Question 13

The current price of a share is based:

A)solely on the anticipated future dividends
B)on the present value of all the future cash flows from that stock
C)strictly on the anticipated future stock price
D)primarily on the future value of the cash flows derived from the stock
E)on the present value of the dividends and the repayment of the principal

Question 14

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

A)secondary
B)dealer
C)free
D)open
E)primary

Question 15

A dealer is an agent who:

A)buys and sells securities but never takes title to the securities
B)transacts buy and sell orders on a commission basis
C)arranges transactions on a fee basis
D)trades solely on behalf of a floor broker
E)buys and sells securities from inventory

Question 16

The required return:

A)tends to be low for the share of a firm which is experiencing rapid growth
B)provides an estimate of the return an investor might expect if he or she purchases a share at today's market price
C)places more emphasis on the capital gains yield than on the dividend yield
D)is based on the assumption that a share will maintain a constant dividend
E)is based on the projected dividend and share price for next year

Question 17

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

A)specialist
B)dealer
C)member
D)floor trader
E)broker

Question 18

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

A)statement
B)straight vote
C)proxy
D)preference
E)cumulative vote

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?

A)$0.56
B)$2.24
C)$0.46
D)$1.84
E)$0.92

Question 20

If shareholders are granted a preemptive right they will be:

A)granted shares that receive additional voting privileges
B)given the choice of receiving dividends in cash or in additional shares of stock
C)paid dividends prior to the preferred shareholders during the pre-emptive period
D)able to determine who the candidates should be for any open seats on the board
E)given the first right to purchase any new shares that are issued

Question 21

A firm expects to increase its annual dividend by 20 per cent per year for the next two years and by 15 per cent per year for the following two years.After that,the company plans to pay a constant annual dividend of $3.00 a share.The last dividend paid was $1.00 a share.What is the current value of this stock if the required rate of return is 12 per cent?

A)$20.50
B)$21.69
C)$18.97
D)$21.08
E)$17.71

Question 22

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

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

Question 23

Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share.What is the rate of return?

A)5.39 per cent
B)5.61 per cent
C)6.91 per cent
D)6.63 per cent
E)4.56 per cent

Question 24

The Glass Ceiling paid an annual dividend of $2.20 per share last year.Management just announced that future dividends will increase by 2.8 per cent annually.What is the amount of the expected dividend in year five?

A)$2.46
B)$2.39
C)$2.41
D)$2.58
E)$2.53

Question 25

Which one of the following types of securities has no priority in a bankruptcy proceeding?

A)ordinary Shares
B)senior debt
C)straight bond
D)preferred stock
E)convertible bond

Question 26

Ordinary shareholders have all the following rights except:

A)the right to priority in the event of company liquidation
B)the right to share proportionally in dividends paid
C)the right to share proportionally in assets remaining after liabilities have been paid in a company liquidation
D)the right to vote on matters of great importance as set out in the constitution of the company
E)the right to elect directors

Question 27

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 one of the following terms is used to describe the method by which Kate's shares were voted?

A)consent-form
B)in absentia
C)cumulative
D)proxy
E)straight

Question 28

The Market Place recently announced that it will pay its first annual dividend two years from today.The first dividend will be $0.50 a share with that amount doubling each year for the following two years.After that,the dividend is expected to increase by 4 per cent annually.What is the value of this stock today if the required return is 15 per cent?

A)$12.47
B)$14.02
C)$11.68
D)$12.99
E)$14.94

Question 29

Business Services,Inc.is expected to pay its first annual dividend of $0.80 per share three years from now.Starting in year six,the company is expected to start increasing the dividend by 2 per cent per year.What is the value of this stock today at a required return of 12 per cent?

A)$7.22
B)$6.16
C)$6.63
D)$7.47
E)$6.47

Question 30

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

A)D₄ / (R-g).
B)D₀ ´ (1 + R)⁵.
C)D₀ / (R + G₄).
D)D₁ ´ (1 + R)⁵.
E)D₅ / (R-g).

Question 31

Auto Transmissions is expected to pay annual dividends of $1.90 and $2.10 over the next two years,respectively.After that,the company expects to pay a constant dividend of $2.30 a share.What is the value of this stock at a required return of 15 per cent?

A)$15.60
B)$14.21
C)$15.08
D)$14.83
E)$13.67

Question 32

Keller Metal's common stock is selling for $36 a share and has a dividend yield of 3.2 per cent.What is the dividend amount?

A)$0.32
B)$11.52
C)$3.49
D)$1.15
E)$11.25

Question 33

What is the market called that allows shareholders to resell their shares to other investors?

A)inside
B)initial
C)proxy
D)secondary
E)primary

Question 34

New Gadgets is growing at a very fast pace.As a result,the company expects to pay annual dividends of $0.55,0.80,and $1.10 per share over the next three years,respectively.After that,the dividend is projected to increase by 5 per cent annually.The last annual dividend the firm paid was $0.40 a share.What is the current value of this stock if the required return is 16 per cent?

A)$9.67
B)$8.50
C)$12.23
D)$10.46
E)$12.49

Question 35

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 per cent annually?

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

Question 36

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 per cent and will stay at the level through year three,after which time the dividends will increase by 2 per cent annually.The required return on this stock is 12 per cent.What is the current value per share?

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

Question 37

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

A)primary
B)stated value
C)inside
D)secondary
E)proxy

Question 38

General Importers announced today that its next annual dividend will be $2.60 per share.After that dividend is paid,the company expects to encounter some financial difficulties and is going to suspend dividends for five years.Following the suspension period,the company expects to pay a constant annual dividend of $1.30 per share.What is the current value of this stock if the required return is 18 per cent?

A)$3.55
B)$4.88
C)$4.27
D)$3.01
E)$3.89

Question 39

The Pancake House pays a constant annual dividend of $1.25 per share.How much are you willing to pay for one share if you require a 15 per cent rate of return?

A)$11.38
B)$7.86
C)$8.33
D)$11.04
E)$10.87

Question 40

Healthy Foods just paid its annual dividend of $1.45 a share.The firm recently announced that all future dividends will be increased by 2.8 per cent annually.What is one share of this stock worth to you if you require a 14 per cent rate of return?

A)$12.56
B)$13.68
C)$12.95
D)$14.07
E)$13.31

Question 41

The Oz Printing Company's ordinary shares are trading at $32.60 a share based on a 14 per cent rate of return.What is the amount of the next annual dividend if the dividends are increasing by 2.5 per cent annually?

A)$3.57
B)$3.75
C)$3.52
D)$3.66
E)$3.48

Question 42

Aussie Investors Pty Ltd is considering investing in a new biotech company.The biotech company has indicated that the first dividend payment will be at the end of year four.This maiden dividend will be $5.00 per share and is forecast to grow at 8 per cent per year for the foreseeable future.Aussie Investors requires a rate of return of 25 per cent on this risky investment.What is the maximum price that Aussie Investors will pay for this share?

A)$29.41
B)$62.50
C)$20.00
D)$15.06
E)$12.05

Question 43

Palm Beach Beachwear has $100 preference shares that pay a dividend of $7.50 per annum.If investors require a return of 9 per cent on shares of a similar risk what price would you expect to pay for these preference shares?

A)$100.00
B)$120.00
C)$91.74
D)$107.50
E)$83.33

Question 44

The Queensland Border Company has just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share for the next two years,respectively.After that,the firm expects to maintain a constant dividend growth rate of 2 per cent per year.What is the value of this stock today if the required return is 14 per cent?

A)$30.04
B)$33.33
C)$32.18
D)$35.80
E)$36.75

Question 45

Get Rich Quick,a funds management company,is considering an investment in a new pharmaceutical company.The company will be unable to pay a dividend until the end of year six but if a new product is successfully developed for sale at that time the dividends will be significant.The year-six dividend will be $8.00,the year-seven dividend will be $10.00 and dividends will grow by 8 per cent thereafter.If the required rate of return is 18 per cent,what is the maximum price Get Rich Quick should pay?

A)$100.00
B)$40.01
C)$58.75
D)$40.75
E)$38.59

Question 46

Palm Beach Beachwear has ordinary shares that are listed on the ASX and have just paid a dividend of $1.25.They have announced that next year's dividend will be increased to $1.50 but that this dividend will not change in the foreseeable future.Current investors have indicated that they expect a return of 12 per cent.Based on this information,at what price would you expect the share to trade at immediately after this announcement?

A)$12.50
B)$10.41
C)$21.50
D)$10.00
E)$10.50

Question 47

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

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

Question 48

Which one of the following generally pays a fixed dividend,receives first priority in dividend payment,and maintains the right to a dividend payment,even if that payment is deferred?

A)cumulative preference shares
B)ordinary shares
C)non-cumulative preference shares
D)promisary notes
E)corporate bonds

Question 49

The Australian Clean Energy Company is growing fast.It has just paid a maiden dividend of $1.05.Next year's dividend is forecast to grow by 20 per cent,followed by another 20 per cent growth in year two.The dividend in year three will grow by 10 per cent,followed by another 5 per cent in year four.From year five onwards dividends are expected to grow by 2 per cent per annum,indefinitely.If investors require a rate of return of 15 per cent for investments of this type what is the maximum price you would pay for a share in this company?

A)$12.17
B)$11.27
C)$13.07
D)$10.83
E)$13.70

Question 50

Manly Cove Manufacturing Company is listed on the ASX and has released information that details its expansion plans for the next decade.The information release indicates that next year's dividend will be increased to $1.10 and is expected to grow at a constant rate of 5% per annum thereafter.The required rate of return for this type of company is considered to be 13 per cent.Based on this information,what price would you expect the share to trade at after the release of the information?

A)$13.75
B)$7.50
C)$6.11
D)$22.00
E)$8.46