Question 1

The book value per share is computed by taking the sum of common stock,additional paid in capital,and retained earnings and dividing the number by the number of shares outstanding.

Accepted Answer

This statement is true. The book value per share formula is (Common Stock + Additional Paid-in Capital + Retained Earnings) / Number of Shares Outstanding.

Question 2

American depository receipts (ADRs)are foreign stocks listed on a domestic exchange.

Accepted Answer

False

Question 3

One advantage of using common stock as a source of funds is that common stock does not legally obligate the firm to make payments to stockholders.

Accepted Answer

Common stock represents ownership in a company and stockholders are not legally entitled to receive payments from the company unless the board of directors declares dividends. Unlike debt (e.g., bonds) which require regular interest payments, common stock does not come with a contractual obligation to make payments to investors.

Question 4

A stock's par value is equal to the market value of the stock on the last day of the fiscal year for a firm.

Accepted Answer

A stock's par value is the nominal value per share established in the company's articles of incorporation and has no relation to the market value of the stock. The market value of the stock is determined by supply and demand in the stock market, and can fluctuate continuously.

Question 5

The constant growth model used for evaluating the price of a share of common stock can 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 dividend discount model, can be used to find the price of any security that pays a constant stream of income indefinitely, such as perpetual preferred stock or any other perpetuity.

Question 6

A proxy fight is an attempt by a group to gain control of a firm by convincing its stockholders to give the group the authority to vote their shares in order to elect a new management team.

Accepted Answer

This is a correct definition of a proxy fight.

Question 7

Other things held constant,P/E ratios are higher for firms with high growth prospects.At the same time,P/E's are lower for riskier firms,other things held constant.These two factors,growth prospects and riskiness,may either be offsetting or reinforcing as P/E determinants.

Accepted Answer

The statement is true, as firms with high growth prospects are often expected to have higher future earnings, which increases their P/E ratio. On the other hand, riskier firms may have lower P/E ratios because investors require a higher return to compensate for the additional risk involved. These two factors may either offset each other or reinforce each other as determinants of P/E ratios.

Question 8

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 means the ownership of the company is spread among the investing public, rather than being held by a small group of shareholders.

Question 9

When a firm issues new equity,market pressure applies first to the new shares issued and then to existing shares.Subsequent to the new issue,the value of the new shares will rise to the equilibrium price of the old shares.

Accepted Answer

When a firm issues new equity, market pressure applies to all shares, not just the new shares. Therefore, it is not necessarily true that the value of the new shares will rise to the equilibrium price of the old shares. The market will determine the price of all shares based on supply and demand.

Question 10

In international markets,excluding stocks sold in the United States,what is any stock that is traded in a country other than the issuing company's home country called?

Accepted Answer

Euro stocks are any stocks traded in a country other than the issuing company's home country in international markets, excluding stocks sold in the United States. ADRs are American Depositary Receipts, which are stocks of foreign companies traded in the US markets. Yankee stock refers to stocks of foreign companies trading on US stock exchanges. Class A stock and Preferred stock refer to different classes of stock issued by a company, regardless of where they are traded.

Question 11

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 an investor assigns to a share of stock is dependent upon its expected future cash flows, the discount rate used to calculate the present value of those cash flows, and the number of shares outstanding. The length of time the investor plans to hold the stock is not a factor in this model.

Question 12

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

This statement accurately defines founders' shares.

Question 13

The net income that firm earns can either be paid out to shareholders as __________ or can be reinvested in the company as __________.

Accepted Answer

Net income can be returned to shareholders as dividends or reinvested back in the company as retained earnings. This choice is represented by option B which mentions dividends and retained earnings.

Question 14

Preemptive rights are important to stockholders because they provide protection against a dilution of value when new shares are issued.

Accepted Answer

Preemptive rights allow existing stockholders to maintain their percentage ownership in a company by giving them the right to purchase new shares in proportion to their current holdings before they are offered to the general public. This helps prevent the dilution of value that can occur when new shares are issued without such rights.

Question 15

A preemptive right is a provision in the corporate charter or by laws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock.

Accepted Answer

This statement is true.

Question 16

From a social welfare perspective,common stock is a desirable form of financing in part because it involves no fixed charge payments.Its inclusion in a firm's capital structure makes the firm less vulnerable to the consequences of unanticipated declines in sales and earnings than if only debt were available.

Accepted Answer

Common stock is a desirable form of financing from a social welfare perspective because it does not involve any fixed charge payments, which makes the firm less vulnerable to the consequences of unanticipated declines in sales and earnings compared to if only debt were available.

Question 17

When management controls more than 50% of the shares of the firm,they must be concerned with the potential of a proxy fights than can lead to takeovers of the firm and the replacement of management.

Accepted Answer

The answer of When management controls more than 50% of...

Question 18

According to the textbook model,under conditions of nonconstant growth,the discount 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 answer of According to the textbook model,under conditions of...

Question 19

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, or the investor with the most influence or impact on the market, will determine the price at which the stock will trade after it is brought to market. This is because they are the ones who are willing and able to make the trade that sets the price.

Question 20

One advantage of common stock as a source of funds is that the underwriting and distribution costs of common stock are usually much lower than those for debt.

Accepted Answer

The statement is false. The underwriting and distribution costs of common stock are usually higher than those for debt. This is because the process of issuing and selling common stock involves more regulatory and marketing requirements than issuing debt.

Quiz 7: Stocks Equity-Characteristics and Valuation