Question 1

You recently contacted a brokerage firm and purchased 100 shares of stock.The brokerage firm acquired the shares for you by making a deal with a floor broker who represented one of the stock issuer's shareholders.Given this,you know your purchase:

Accepted Answer

The purchase was made through a floor broker who represented a shareholder, indicating that it was made in the secondary market.

Question 2

Rosita's announced that its next annual dividend will be $1.65 a share and all future dividends will increase by 2.5 percent annually.What is the maximum amount you should pay to purchase a share of this stock if you require a rate of return of 12 percent?

Accepted Answer

The maximum price to pay for the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the next dividend ($1.65), r is the required rate of return (12% or 0.12), and g is the growth rate (2.5% or 0.025). Plugging in the values: P = 1.65 / (0.12 - 0.025) = 1.65 / 0.095 = $17.37.

Question 3

Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5 percent each year.The rate of return on this stock is 9 percent.What is the amount of the last dividend paid?

Accepted Answer

The answer of Weisbro and Sons common stock sells for...

Question 4

Inside quotes on a stock are:

Accepted Answer

Inside quotes on a stock refer to the lowest asked quote and the highest bid quote, which are available only to market makers and other financial institutions that facilitate the buying and selling of securities. These quotes are not available to retail investors or the general public.

Question 5

If the issuer of a stock receives the proceeds from a sale of that issuer's stock,then the sale:

Accepted Answer

Sales of stocks that result in the issuer receiving the proceeds typically occur in the primary market, which is where securities are issued and sold for the first time. This could include initial public offerings (IPOs) or additional stock offerings by companies that are already public. Secondary market transactions, on the other hand, involve the buying and selling of existing securities between investors and do not involve the issuer directly.

Question 6

The common stock of Energy Saver pays an annual dividend that is expected to increase by 4 percent annually.The stock commands a market rate of return of 12 percent and sells for $58.25 a share.What is the expected amount of the next dividend to be paid?

Accepted Answer

The expected dividend can be calculated using the dividend discount model for a stock with constant growth: D1 = P0 * (k - g), where D1 is the expected dividend, P0 is the current price, k is the required rate of return, and g is the growth rate. Substituting the given values: D1 = $58.25 * (0.12 - 0.04) = $58.25 * 0.08 = $4.66.

Question 7

A limit order to buy:

Accepted Answer

A limit order to buy guarantees the purchase price, but not the order execution. The order will only be executed if the market price reaches the specified limit price or lower. If the price does not reach the limit price, the order will not be executed. Therefore, it is important to set the limit price at a level that is appropriate for the desired trade execution.

Question 8

MJ Enterprises stock traditionally provides an average rate of return of 11.6 percent.The firm's next annual dividend is projected at $2.40 with future increases of 3 percent per year.What price should you pay for this stock if you are satisfied with the firm's average rate of return?

Accepted Answer

We can use the dividend discount model to calculate the stock price:
P = D / (r - g)
Where:
P = stock price
D = expected dividend
r = required rate of return (in this case, the average rate of return of 11.6%)
g = growth rate of dividends

Plugging in the values:
P = 2.40 / (0.116 - 0.03)
P = 27.91

Therefore, the best choice is C, as it is the closest value to the calculated stock price.

Question 9

Which one of these statements is correct?

Accepted Answer

Dealers, also known as market makers, buy securities at the bid price and sell them at the ask price. They make money by earning the difference between these prices, which is known as the spread. Investors do not earn the spread nor do brokers pay the spread. Brokers facilitate trades between investors and dealers but do not maintain an inventory of securities.

Question 10

The Reading Co.has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3 percent annually.The last dividend it paid (T = 0)was $.90 a share.What will be the company's dividend six years from now?

Accepted Answer

The dividend will increase by 3% each year, so the dividend in six years will be:$.90 * (1.03)^6 = $1.07

Question 11

Supplemental liquidity providers (SLPs):

Accepted Answer

SLPs actually operate off the floor of a stock exchange and provide additional liquidity to the market by offering to buy and sell securities at specified prices. They are not floor brokers and their goal is not necessarily to seek the best price for their customers but rather to provide liquidity to the market. While they may represent stock purchasers, they also represent sellers. However, SLPs have largely been replaced by designated market makers.

Question 12

The free cash flow model is most helpful for firms:

Accepted Answer

The free cash flow model is most useful for firms that have external financing needs and are not currently paying dividends. This is because the free cash flow model calculates the cash that is available for the firm to reinvest in the business or to distribute to shareholders. For firms that are not currently paying dividends but have external financing needs, the free cash flow model can help them determine if they have enough cash flow to fund growth opportunities without issuing additional equity or debt.

Question 13

How much are you willing to pay for one share of stock if the company just paid an annual dividend of $1.03,the dividends increase by 3 percent annually,and you require a rate of return of 15 percent?

Accepted Answer

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

Question 14

Martin's Yachts is expected to pay annual dividends of $1.40,$1.75,and $2.00 a share over the next three years,respectively.After that,the dividend is expected to remain constant.What is the current value per share at a discount rate of 14 percent?

Accepted Answer

The answer of Martin's Yachts is expected to pay annual...

Question 15

What amount of a firm's cash should be included in the enterprise value?

Accepted Answer

Only the amount of cash needed to run the business should be included in the enterprise value. This is because excess cash is not considered a part of the operating business and may be used for non-core purposes such as investments, acquisitions or dividends. Therefore, only the cash required to fund the day-to-day operations of the business should be included in the enterprise value.

Question 16

Upland Motors recently paid a per share dividend of $1.48.Dividends are expected to increase by 2.5 percent annually.What is one share of this stock worth today if the appropriate discount rate is 14 percent?

Accepted Answer

The answer of Upland Motors recently paid a per share...

Question 17

Unique Stores common stock pays a constant annual dividend of $1.75 a share.What is the value of this stock at a discount rate of 13.25 percent?

Accepted Answer

To calculate the value of a stock with a constant dividend payment, we can use the dividend discount model:

Value of Stock = Dividend / Discount Rate

Plugging in the given values, we get:

Value of Stock = $1.75 / 0.1325 = $13.21

Therefore, the answer is C) $13.21.

Question 18

A day order to sell at a limit of $32 will be:

Accepted Answer

A day order to sell at a limit of $32 will only be valid until the end of the trading day. If it is not executed by the end of the day, it will be cancelled.

Question 19

A stop order to sell at $46 will be executed:

Accepted Answer

A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. In this case, the stop order is set to sell at $46. Once the stock price reaches $46 or less, the stop order will be triggered and executed as a market order. This means that the order will be filled at the prevailing market price, which could be higher or lower than $46, depending on the demand and supply in the market.

Question 20

NASDAQ:

Accepted Answer

NASDAQ has a multiple market maker system, meaning that there are many firms who serve as market makers for the stocks listed on the exchange. These market makers are responsible for maintaining an orderly market and providing liquidity to traders. There is no single trading floor for NASDAQ; rather, trading takes place electronically using a network of computers and communication links. While there are physical locations for some NASDAQ offices and data centers, the exchange is not limited to a specific geographic area.

Quiz 9: Stock Valuation