Question 1

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

The total return on a share of stock refers to the sum of the dividend yield and any increase (or decrease) in the stock's price. It does not include commissions paid when the stock is purchased and sold.

Question 2

A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions.

Accepted Answer

A publicly owned corporation is also known as a publicly traded company, and its shares are available for purchase on stock exchanges.

Question 3

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

Accepted Answer

While same dividend and expected growth rate are important determinants of stock prices, other factors such as risk, market sentiment, and investor demand can also impact a stock's price. Therefore, two firms with the same dividend and expected growth rate may not necessarily sell at the same current price.

Question 4

Founders' shares is a type of classified stock where the shares are owned by the firm's founders and they retain the sole voting rights to those shares but have restricted dividends for a specified time period.

Accepted Answer

Founders' shares typically have restricted dividend rights but grant the founders exclusive voting rights.

Question 5

The cash flows associated with common stock are dif¬ficult to evaluate due to the uncertainty and varia¬bility associated with them.

Accepted Answer

As common stock represents ownership in a company, the cash flows associated with it are dependent on the company's performance and can be affected by various factors, making them uncertain and variable.

Question 6

The preemptive right is important to shareholders because it

Accepted Answer

The preemptive right allows current shareholders to maintain their proportionate ownership in the company when new shares are issued. Without this right, the ownership interests of existing shareholders would be diluted. Therefore, the preemptive right is important for protecting the interests of current shareholders.

Question 7

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is most correct?

Accepted Answer

There is no standard classification for common stock, and companies are free to create their own classes and classify them in any way they see fit. Some classes of common stock may have different voting rights, dividend privileges, or other benefits, while others may be identical to the company's other common stock. There is no requirement for all common stock to fall into specific classes or have the same voting or dividend rights.

Question 8

According to the textbook model, under conditions of nonconstant growth, the dis¬count rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period.

Accepted Answer

The discount rate used to find the present value of the expected cash flows will be the same for both the initial growth period and the normal growth period under conditions of nonconstant growth, according to the textbook model. This is because the discount rate is determined by the required rate of return, which is assumed to be constant over the entire investment horizon.

Question 9

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares sold by the firm. This right protects current stockholders against both dilution of control and dilution of value.

Accepted Answer

The statement is correct. The preemptive right allows current stockholders to maintain their proportional ownership in the company and prevent the dilution of their control or the value of their shares.

Question 10

The constant growth model used for evaluating the price of a share of common stock may also be used to find the price of perpetual preferred stock or any other perpetuity.

Accepted Answer

The constant growth model, also known as the Gordon growth model, is used to find the price of any investment that pays a constant dividend or cash flow indefinitely, such as perpetual preferred stocks or perpetuities. Therefore, it can be used to find the price of perpetual preferred stock or any other perpetuity.

Question 11

Classified stock is one tool companies can use to meet special needs such as when owners of a start-up firm need capital but don't want to relinquish control of the firm.

Accepted Answer

Classified stock allows for different classes of shares, which can be used to give certain shareholders more voting power and control while still raising capital through the issuance of additional shares of a different class. This can be useful for companies that want to retain control with their founders or a specific group of shareholders while still allowing for future investment.

Question 12

If a firm's stockholders are given the preemptive right, this means that a group of stockholders can call for a meeting to replace the management. With¬out the preemptive right, dissident stockholders would have to seek to oust management through a proxy fight.

Accepted Answer

The statement is incorrect. Preemptive right allows stockholders to maintain their percentage ownership of the company by purchasing additional shares before they are offered to the public, but it does not grant the right to replace management or call for a meeting. The process of replacing management usually involves a proxy fight or a vote of no confidence.

Question 13

After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

The marginal investor, who is the investor with the highest willingness to buy or sell at a particular price, ultimately determines the price at which the stock will trade. This is due to the market forces of supply and demand, as the marginal investor's actions influence the equilibrium price.

Question 14

A proxy fight involves a battle by a shareholder or group of shareholders who seek to change the investment policy of the firm. If the proxy group is successful, current management retains control of the firm but the proxy group dictates what investments the firm makes.

Accepted Answer

In a proxy fight, the shareholders seeking change typically aim to gain control of the board of directors and replace current management, rather than simply dictating the firm's investment policy.

Question 15

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is "closely held."

Accepted Answer

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is "closely held."

Question 16

Which of the following statements is most correct?

Accepted Answer

The preemptive right allows existing shareholders to maintain their proportional ownership in the company by purchasing new shares before the company offers them to the public.

Question 17

If security markets were truly strong-form efficient, you would never be able to realize a rate of return on a security greater than the marginal investor's expected (or required) rate of return.

Accepted Answer

The answer of If security markets were truly strong-form efficient,...

Question 18

Which of the following statements is most correct?

Accepted Answer

A firm with classified stock can indeed pay different dividends to each class of shares, and financing with stock can decrease a firm's debt ratio by increasing equity.

Question 19

According to the basic stock valuation model, the value an investor assigns to a share of stock is dependent upon the length of time the investor plans to hold the stock.

Accepted Answer

According to the basic stock valuation model, the value of a share of stock is determined by factors such as the company's earnings, growth potential, and market conditions, and is not dependent upon the length of time an investor plans to hold the stock.

Question 20

A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock. A proxy can be an important tool relating to control of the firm.

Accepted Answer

A proxy can grant the authority to vote shares of common stock, which can be a significant way for shareholders to have a say in the decisions made by the company. As such, it can be an important tool in the control of the firm.

Quiz 5: Basic Stock Valuation

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions.

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

Founders' shares is a type of classified stock where the shares are owned by the firm's founders and they retain the sole voting rights to those shares but have restricted dividends for a specified time period.

The cash flows associated with common stock are dif¬ficult to evaluate due to the uncertainty and varia¬bility associated with them.

The preemptive right is important to shareholders because it

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is most correct?

According to the textbook model, under conditions of nonconstant growth, the dis¬count rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period.

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares sold by the firm. This right protects current stockholders against both dilution of control and dilution of value.

The constant growth model used for evaluating the price of a share of common stock may also be used to find the price of perpetual preferred stock or any other perpetuity.

Classified stock is one tool companies can use to meet special needs such as when owners of a start-up firm need capital but don't want to relinquish control of the firm.

If a firm's stockholders are given the preemptive right, this means that a group of stockholders can call for a meeting to replace the management. With¬out the preemptive right, dissident stockholders would have to seek to oust management through a proxy fight.

After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade.

A proxy fight involves a battle by a shareholder or group of shareholders who seek to change the investment policy of the firm. If the proxy group is successful, current management retains control of the firm but the proxy group dictates what investments the firm makes.

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is "closely held."

Which of the following statements is most correct?

If security markets were truly strong-form efficient, you would never be able to realize a rate of return on a security greater than the marginal investor's expected (or required) rate of return.

Which of the following statements is most correct?

According to the basic stock valuation model, the value an investor assigns to a share of stock is dependent upon the length of time the investor plans to hold the stock.

A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock. A proxy can be an important tool relating to control of the firm.