Question 1

How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend,the dividends increase by 2.5 percent annually,and you require a 10 percent rate of return?

Accepted Answer

To determine the price we need to use the formula for the Gordon Growth Model:

P0 = D1 / (r - g)

Where:
P0 = current stock price
D1 = expected dividend next year
r = required rate of return
g = expected dividend growth rate

Substituting the values given in the question, we get:

P0 = 0.70 * (1 + 0.025) / (0.10 - 0.025) = $9.57

Therefore, the best choice is C, $9.57.

Question 2

Which of the following features do preferred shareholders and bondholders frequently have in common?
I.lack of voting rights
II.conversion option into common stock
III.annuity payments
IV.fixed liquidation value

Accepted Answer

Preferred shareholders and bondholders often lack voting rights (I), may have conversion options into common stock (II), receive annuity-like payments (III), and have a fixed liquidation value (IV).

Question 3

Which one of the following statements applies to NASDAQ?

Accepted Answer

NASDAQ is comprised of three separate markets: the NASDAQ Global Select Market, the NASDAQ Global Market, and the NASDAQ Capital Market.

Question 4

You own 600 shares of a NASDAQ listed stock that you wish to sell.Which of the following are options available to you for this purpose?
I.sell the shares to a dealer at the dealer's bid price
II.sell directly to another individual via an ECN
III.offer the shares yourself on NASDAQ via an ECN
IV.have a broker offer the shares for sale on the NYSE

Accepted Answer

Options I, II, and III are correct. You can sell shares to a dealer at the bid price, sell directly to another individual via an Electronic Communication Network (ECN), or offer the shares yourself on NASDAQ via an ECN. Option IV is incorrect because NASDAQ-listed stocks are not offered for sale on the NYSE by brokers; they are traded on the NASDAQ system.

Question 5

Which one of the following players on the floor of the NYSE can be likened to part-time help because they are called to duty only when others are fully employed?

Accepted Answer

Floor brokers are only called to duty when others are fully employed, as their role is to execute orders on behalf of other market participants. In contrast, floor traders, specialists, dealers, and commission brokers are all considered to be full-time players on the floor.

Question 6

Free Motion Enterprises paid a $2.20 per share annual dividend last week.Dividends are expected to increase by 3.75 percent annually.What is one share of this stock worth to you today if your required rate of return is 15 percent?

Accepted Answer

The answer of Free Motion Enterprises paid a $2.20 per...

Question 7

Which of the following apply to a specialist who trades on the floor of the NYSE?
I.provides liquidity for an individual security
II.partially being replaced by SuperDOT
III.pays an annual fee for a trading license
IV.acts as a dealer

Accepted Answer

Specialists on the floor of the NYSE provide liquidity for an individual security and act as dealers. They also pay an annual fee for a trading license. However, SuperDOT is a trading system introduced by the NYSE that allows for electronic order entry and execution without the need for a specialist, so it does not directly apply to the role of a specialist. Therefore, options II is not correct. The correct options are I, III, and IV, making option C the best answer.

Question 8

You are an accountant and have been analyzing the financial statements of Euro Place Markets,which is a foreign retailer.While the firm's financials are not prepared according to GAAP,you have still been able to understand the firm's accounting practices and feel that this firm has a bright future.On which one of the following U.S.markets,if any,might you be able to purchase shares in this firm?

Accepted Answer

Pink Sheets is a market where foreign companies that do not comply with U.S. GAAP can still have their shares traded.

Question 9

Who owns the NYSE?

Accepted Answer

The NYSE is owned by its shareholders, who are primarily large financial institutions and corporations. The NYSE is a publicly traded company itself, with shares available for purchase on other stock exchanges. The other listed options are all participants in the trading process, but do not actually own the exchange.

Question 10

Sessler Manufacturers made two announcements concerning its common stock today.First,the company announced that the next annual dividend will be $1.75 a share.Secondly,all dividends after that will decrease by 1.5 percent annually.What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return?

Accepted Answer

The correct answer is A because the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return is $11.29.

Question 11

Hardy Lumber has a capital structure which includes bonds,preferred stock,and common stock. Which of the following rights have most likely been granted to the preferred shareholders?
I.right to share in company profits prior to other shareholders
II.right to elect the corporate directors
III.right to vote on proposed mergers
IV.right to all residual income after the common dividends have been paid

Accepted Answer

Preferred shareholders typically have the right to receive a fixed dividend prior to common shareholders, but they do not typically have the right to elect directors or vote on mergers. Additionally, preferred shareholders may have certain liquidation preferences, but they do not typically have the right to residual income.

Question 12

Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock.The firm has 1,000 shares of stock outstanding.The company:

Accepted Answer

Dividends become a liability only when they are declared by the company's board of directors. Until then, no matter the dividend policy, there is no actual obligation to pay.

Question 13

Miller Brothers Hardware paid an annual dividend of $0.95 per share last month.Today,the company announced that future dividends will be increasing by 2.6 percent annually.If you require a 13 percent rate of return,how much are you willing to pay to purchase one share of this stock today?

Accepted Answer

The answer of Miller Brothers Hardware paid an annual dividend...

Question 14

Which one of these statements related to preferred stock is correct?

Accepted Answer

Cumulative preferred shares are more valuable than comparable non-cumulative shares because they have a feature that requires the company to pay all dividends that were missed or deferred before any dividends can be paid to common shareholders. This provides an additional layer of security for the dividends of preferred shareholders.

Question 15

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

Accepted Answer

The primary market is where newly issued securities are sold for the first time. A purchase of newly issued stock from AT&T would therefore occur in the primary market. Choices A, B, C, and E all involve transactions with existing shares of stock, which would occur in the secondary market.

Question 16

You own one share of a cumulative preferred stock which pays quarterly dividends.The firm has recently suffered some financial setbacks and has failed to pay the last two dividends.However,new funding has been arranged and the firm intends to restore all dividends,both common and preferred,this quarter.As a preferred shareholder,you should expect to receive the equivalent of ____ quarter(s)of dividends when the next dividend is paid.

Accepted Answer

Cumulative preferred stock ensures that missed dividends are accumulated and paid out before any dividends are paid to common shareholders. Since the firm missed the last two dividends and is paying the current one, you should receive dividends for 3 quarters (the 2 missed plus the current one).

Question 17

Which one of the following statements related to corporate dividends is correct?

Accepted Answer

Corporate shareholders may receive a tax break on a portion of their dividend income. This is due to the fact that dividend income is usually taxed at a lower rate than other forms of income, such as wages or salary. However, the tax break on dividend income may vary depending on the individual's income level and tax bracket.

Question 18

You are the sole shareholder of a small corporation.Presently,you wish to diversify your holdings and thus want to sell a portion of your shares but do not want to incur the costs associated with SEC filings.Which one of the following markets,if any,might be conducive to this sale?

Accepted Answer

Pink Sheets is a market that does not require SEC filings or registration, making it a cost-effective option for small corporations looking to sell a portion of their shares. NASDAQ and NYSE both require SEC filings and are typically reserved for larger corporations. OTCBB also requires SEC filings and is often subject to lower trading volumes and liquidity. Therefore, Pink Sheets would be the best choice for this particular scenario.

Question 19

Which one of the following statements currently applies to a NYSE broker?

Accepted Answer

A NYSE broker matches customer buy and sell orders, facilitating trades on behalf of clients.

Question 20

Which one of the following statements related to the NYSE is correct?

Accepted Answer

Commission brokers indeed work on behalf of brokerage firm clients, executing buy and sell orders on the New York Stock Exchange (NYSE). They act as agents for clients, trying to get the best price possible.

Quiz 8: Stock Valuation