Question 1

The value of common stock today depends on

Accepted Answer

The value of common stock today depends on the expected future dividends, capital gains and the discount rate. Expected future dividends represent the cash flow that investors expect to receive from owning the stock, while the expected future capital gains represent the increase in the stock price over time. The discount rate is used to calculate the present value of these expected future cash flows, and takes into account factors such as inflation and the opportunity cost of investing in other assets. Therefore, the correct answer is option C, which includes all three of these factors.

Question 2

A stock listing contains the following information: P/E 17.5,closing price 33.10,dividend .80,YTD% chg 3.4,and net chg of -.50.Which of the following statements are correct given this information?
I.The stock price has increased by 3.4% during the current year.
II.The closing price on the previous trading day was $32.60.
III.The earnings per share are approximately $1.89.
IV.The current yield is 17.5%.

Accepted Answer

The stock price has increased by 3.4% during the current year (I is correct). The earnings per share can be calculated as $33.10 / 17.5 = $1.89 (III is correct). The closing price on the previous trading day was $33.10 - $0.50 = $32.60 (II is incorrect). The current yield is calculated as dividend/price, which is $0.80/$33.10, not 17.5% (IV is incorrect).

Question 3

Which one of the following statements concerning preferred stock is correct?

Accepted Answer

Preferred shareholders may be granted voting rights and seats on the board if preferred dividend payments remain unpaid, especially if the preferred stock has provisions for such rights in the event of dividend arrears.

Question 4

A 8% preferred stock priced at $100 per share should pay _____ a year in dividends per share.

Accepted Answer

An 8% preferred stock priced at $100 per share pays 8% of $100, which is $8 per year in dividends per share.

Question 5

The owner of preferred stock:

Accepted Answer

The owner of preferred stock is entitled to a distribution of income prior to the common shareholders. This means that when the company distributes profits, the owners of preferred stocks get paid first before the owners of common stocks receive their share.

Answer: D
 If the preferred stock is non-cumulative preferred, the owners have the right to collect payment on any unpaid dividends. This means that if the company skipped paying dividends in one year, the owners of non-cumulative preferred stocks can still collect the unpaid dividends in the future if the company starts distributing profits again.

Option A and B are incorrect because the owner of preferred stock does not have the right to declare the company bankrupt or veto the outcome of an election held by the common shareholders.

Option E is incorrect because it is not true that receiving tax-free dividends applies only to individuals who own more than 20% of the outstanding preferred shares.

Question 6

The discount rate in equity valuation is composed entirely of:

Accepted Answer

The discount rate in equity valuation is composed entirely of the dividend yield and the growth rate. The dividend yield is the annual dividend per share divided by the current stock price. The growth rate is the expected annual percentage increase in dividends.

Question 7

Lee Hong Imports paid a $1.00 per share annual dividend last week.Dividends are expected to increase by 5% annually.What is one share of this stock worth to you today if the appropriate discount rate is 14%?

Accepted Answer

We can use the dividend discount model to find the price of the stock today: 
Price = D1 / (r - g) 
where D1 is the dividend next year, r is the discount rate, and g is the growth rate.

Here, D1 = $1.05 (since dividends are expected to increase by 5% annually), r = 14%, and g = 5%.

Plugging in the values, we get:
Price = $1.05 / (0.14 - 0.05) = $11.67

Therefore, the correct answer is D) $11.67.

Question 8

The dividends paid by a corporation:
I.to an individual become taxable income of that individual.
II.reduce the taxable income of the corporation.
III.are declared by the chief financial officer of the corporation.
IV.to another corporation may or may not represent taxable income to the recipient.

Accepted Answer

Option I is true as dividends received by individuals are taxable income. 
Option IV is also true because dividends paid to another corporation may or may not represent taxable income to the recipient depending on several factors, such as the tax status of the recipient corporation and the nature of the dividend. 
Options II and III are not correct, as the payment of dividends by a corporation doesn't reduce its taxable income and the declaration of dividends is the responsibility of the board of directors, not the chief financial officer.

Question 9

The Zilo Corp.has 1,000 shareholders and is preparing to elect three new board members.You do not own enough shares to control the elections but are determined to oust the current leadership.The most likely result of this situation is a:

Accepted Answer

As a minority shareholder, the most viable option for you to try to oust the current leadership is to launch a proxy fight for control of the firm. This would involve soliciting support from other shareholders to vote for your proposed board members instead of those put forward by the current leadership. While this can be a costly and time-consuming process, it is the most common way minority shareholders can try to influence the direction of the company. Other options such as negotiated or arbitrated settlements are unlikely as the current leadership is unlikely to be willing to give up control voluntarily.

Question 10

Which one of the following statements concerning dealers and brokers is correct?

Accepted Answer

A broker in market securities does not take ownership of the securities being traded. This distinguishes brokers from dealers who typically hold inventory and take ownership of the securities they sell. Options A, B, C, and E all contain incorrect statements regarding the roles of dealers and brokers in the market.

Question 11

Angelina's made two announcements concerning its common stock today.First,the company announced that its next annual dividend has been set at $2.20 a share.Secondly,the company announced that all future dividends will increase by 5% annually.What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?

Accepted Answer

The answer of Angelina's made two announcements concerning its common...

Question 12

The Scott Co.has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock.The firm has 1,000 shares of stock outstanding.The company:

Accepted Answer

The company must declare each dividend before it becomes an actual liability, as dividends are not liabilities until they are declared by the board of directors.

Question 13

The closing price of a stock is quoted at 22.87,with a P/E of 26 and a net change of 1.42.Based on this information,which one of the following statements is correct?

Accepted Answer

The answer of The closing price of a stock is...

Question 14

Which one of the following transactions occurs in the primary market?

Accepted Answer

The primary market is where new securities are issued and sold directly by the issuer to investors. The initial sale of JKL stock by JKL to Jamie is a transaction that occurs in the primary market. The other options either involve a stock transfer between individuals or a repurchase by the issuing company, which do not occur in the primary market.

Question 15

The post is a stationary position on the floor of the New York Stock Exchange where a _____ is assigned to work.

Accepted Answer

A specialist is a person who is assigned to work in a stationary position on the floor of the New York Stock Exchange. Their role is to maintain an orderly market for a specific stock or set of stocks by matching buyers and sellers and ensuring that trades are executed fairly and at the best possible price. Floor traders, dealers, commission brokers, and floor brokers are all different types of traders who work on the floor of the exchange, but they do not have the same responsibilities as a specialist.

Question 16

Common stock shareholders are generally granted rights which include the right to:
I.share in company profits.
II.vote for company directors.
III.vote on proposed mergers.
IV.residual assets in a liquidation.

Accepted Answer

Common stock shareholders typically have the right to share in company profits through dividends, vote for company directors, vote on significant corporate actions like mergers, and claim residual assets in the event of liquidation after debts and other obligations are settled.

Question 17

The net present value of a growth opportunity,NPVGO,can be defined as

Accepted Answer

NPVGO is the difference between the present value of a firm with a growth opportunity and the present value of the same firm without the growth opportunity, per share. In other words, it measures the value added to the firm by the growth opportunity, expressed as a net present value per share. Therefore, the correct answer is B.

Question 18

In a liquidation,each share of 5% preferred stock is generally entitled to a liquidation payment of _____ as long as there are sufficient funds available.

Accepted Answer

Preferred stock typically has a par value, and in liquidation, preferred shareholders are usually entitled to receive the par value of their shares. In this case, the par value is $100.

Question 19

The formula P₀ = DIV/r represents

Accepted Answer

The formula P₀ = DIV/r is used to calculate the present value of a perpetuity, which is a stream of constant dividends with no growth. This means it represents both the present value of a zero growth dividend stream and a lower value than if growth were included.

Question 20

How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend,the dividends increase by 4% annually and you require an 8% rate of return?

Accepted Answer

The answer of How much are you willing to pay...

Quiz 6: Stock Valuation