Ch. 7 practice exam questions

What is the name given to the model that computes the present value of a stock by dividing next year’s annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?

dividend growth

The dividend yield is defined as:

next year’s expected cash dividend divided by the current market price per share.

The capital gains yield equals which one of the following?

dividend growth

Which one of the following types of securities has no priority in a bankruptcy proceeding?

common stock

Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting?

cumulative

There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting.

straight

Kate could not attend the last shareholders’ meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which one of the following terms is used to describe the method by which Kate’s shares were voted?

proxy

Dividends are best defined as:

cash or stock payments to shareholders

Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

cumulative preferred

Newly issued securities are sold to investors in which one of the following markets?

primary

What is the market called that allows shareholders to resell their shares to other investors?

secondary

An agent who buys and sells securities from inventory is called a:

dealer

A broker is an agent who:

brings buyers and sellers together

Any person who owns a license to trade on the NYSE is called a:

member

A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a:

commission broker

A DMM is a(n):

NYSE member

qAn individual who executes buy and sell orders on the floor of an exchange for a fee is called a:

floor broker

The owner of a trading license who trades on the floor of the NYSE for his or her personal account is called a(n):

floor trader

The stream of customer instructions to buy and sell securities is called the:

order flow

The specific location on the floor of an exchange where a particular security is traded is called a:

DMM’s post

Inside quotes are defined as the:

lowest and highest bid offers

Which one of the following is a website that enables Lester to sell his shares of ABC stock directly to Marti?

ECN

Which one of the following will increase the current value of a stock?

increase in capital gains yield

The price of a stock at year 4 can be expressed as:

D5/(R – g).

Delfino’s expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for year 5 if the firm increases its dividend by 2 percent annually?

$1.50 × (1.02)4

The required return on a stock is equal to which one of the following if the dividend on the stock decreases by 1 percent per year?

dividend yield + capital gains yield

Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following three years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 7?

($1.10) (1.08)3 (1.02)4

Aardvark, Inc. pays a constant annual dividend. At the end of trading on Wednesday, the price of its stock was $28. At the end of trading on the following day, the stock price was $27. As a result of the decline in the stock’s price, the dividend yield _____ while the capital gains yield ____.

increased; remainder constant

Which one of the following must equal zero if a firm pays a constant annual dividend?

capital gains yield

The dividend growth model can be used to value the stock of firms that pay which type of dividends?

I, II, III

Kate owns a stock with a market price of $31 per share. This stock pays a constant annual dividend of $0.60 per share. If the price of the stock suddenly increases to $36 a share, you would expect the:

II

Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following?

stock with constant growth value dividend

Jensen Shipping has four open seats on its board of directors. How many shares will a shareholder need to control to ensure that his or her candidate is elected to the board given the fact that the firm uses straight voting? Assume one share equals one vote.

50% plus one

Gleason, Inc. elects its board of directors on a staggered basis using cumulative voting. This implies that:

all open positions

Which one of the following statements is correct?

from a legal perspective…

Which one of the following statements is correct?

both…callable

If shareholders are granted a preemptive right they will:

have priority

On which one of the following dates do dividends become a liability of the issuer for accounting purposes?

declaration date

Dividends are which one of the following?

paid out of after tax profits

You have agreed to pay a 5 percent commission to your best friend if he can locate a buyer for your car. This arrangement is most similar to the compensation arrangement for which one of these individuals who is involved with the stock market?

commission broker

To be a member of the NYSE, you must:

own a trading license

Which one of the following players on the floor of the NYSE is obligated to maintain a fair, orderly market for a limited number of securities?

DMM

The NYSE:

order flow

Which one of the following parties on the NYSE floor posts bid and asked prices?

DMMs

Many of the smaller sell orders sent to the floor of the NYSE are:

electronically transmitted

If a trade is made "in the crowd," the trade has occurred:

between two brokers

The more actively traded large companies that are listed on NASDAQ are traded in which one of the NASDAQ markets?

Global select

Which one of the following features applies to NASDAQ but not the NYSE?

multiple market maker

Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC?

pink sheets

Reynolds Metals common stock is selling for $25 a share and has a dividend yield of 3.1 percent. What is the dividend amount?

.78

The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that future dividends will increase by 2.8 percent annually. What is the amount of the expected dividend in year 5?

2.53

The Waffle House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 25 percent rate of return?

$5

Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share. What is the rate of return?

5.61%

The common stock of The Garden of Eden is selling for $42 a share. The company pays a constant annual dividend and has a total return of 5.8 percent. What is the amount of the dividend?

2.44

Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you if you require a 14 percent rate of return?

13.31

Solar Energy, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future dividends will be increasing by 2 percent annually. How much are you willing to pay for one share of this stock if you require a 14 percent return?

15.42

Braxton’s Cleaning Company stock is selling for $32.60 a share based on a 14 percent rate of return. What is the amount of the next annual dividend if the dividends are increasing by 5 percent annually?

2.93

The common stock of Up-Towne Movers is selling for $33 a share and has a 10 percent rate of return. The growth rate of the dividends is 2 percent annually. What is the amount of the next annual dividend?

2.64

Swan Lake Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 12 percent. What is the dividend growth rate?

3.47

Santa Klaus Toys just paid its annual dividend of $1.40. The required return is 8 percent and the dividend growth rate is 1 percent. What is the expected value of this stock five years from now?

21.23

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be on this stock if you sell it three years from now?

2.43

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm’s annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 10 percent annually. What is a share of this stock worth today at a required return of 15 percent?

3.24

Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock sells for $28.40 a share at a required return of 14 percent. What is the amount of the last dividend this company paid?

3.50

The common stock of Sweet Treats is valued at $10.80 a share. The company increases its dividend by 8 percent annually and expects its next dividend to be $0.40 per share. What is the total rate of return on this stock?

11.70

River Rock, Inc. just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent?

24.65

The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 19 percent rate of return?

2.31

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at the level through year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?

2.51

Brickhouse is expected to pay annual dividends of $1.90 and $2.10 over the next two years, respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is the value of this stock at a required return of 16 percent?

13.89

General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for five years. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 per share. What is the current value of this stock if the required return is 18 percent?

4.88

Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share three years from now. Starting in year 6, the company is expected to start increasing the dividend by 2 percent per year. What is the value of this stock today at a required return of 12 percent?

7.70

New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of this stock if the required return is 16 percent?

$8.50

The Farmer’s Market recently announced that it will pay its first annual dividend two years from today. The first dividend will be $0.50 a share with that amount doubling each year for the following two years. After that, the dividend is expected to increase by 4 percent annually. What is the value of this stock today if the required return is 10 percent?

$26.21

A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1 a share. What is the current value of this stock if the required rate of return is 12 percent?

$20.50

The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is 15 percent?

$33.93

A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield?

5.21

The required return on Mountain Brook stock is 13 percent and the dividend growth rate is 5.5 percent. The stock is currently selling for $18.80 a share. What is the dividend yield?

7.50

For the past six years, the price of Slippery Rock stock has been increasing at a rate of 9.6 percent a year. Currently, the stock is priced at $67 a share and has a required return of 14 percent. What is the dividend yield?

4.40

A stock has paid dividends of $1.80, $1.85, $2.00, $2.20, and $2.25 over the past five years, respectively. What is the average capital gains yield?

5.79 percent

The Toy Chest pays an annual dividend of $4.80 per share and sells for $93.20 a share based on a market rate of return of 15 percent. What is the capital gains yield?

9.85 percent

Investors receive a total return of 13.7 percent on the common stock of Dexter International. The stock is selling for $41.68 a share. What is the dividend growth rate if the company plans to pay an annual dividend of $2.10 a share next year?

8.66 percent

Vegan Delite stock is valued at $124.20 a share. The company pays a constant annual dividend of $8.80 per share. What is the total return on this stock?

7.09 percent

Last year, when the stock of Alpha Minerals was selling for $55 a share, the dividend yield was 3.2 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.5 percent?

6.90 percent

There are four open positions on the board of directors of Double Tree Hotels. The company has 360,000 shares of stock outstanding. Each share is entitled to one vote. How many shares of stock must you own to guarantee your personal election to the board of directors if the firm uses cumulative voting?

72,001 shares

A firm has two open positions on its board of directors. How many shares do you need to own to guarantee your own election to the board if the firm has 12,500 shares of stock outstanding and uses cumulative voting? Each share is granted one vote.

4,168 shares

Miller’s Hardware has 370,000 shares of stock outstanding with a current market value of $37 a share. You own 48,000 of those shares. Next month, the election will be held to select four new members to the board of directors. The firm uses a cumulative voting system. How much additional money do you need to spend to guarantee that you will be elected to the board assuming that everyone else votes for one of the other candidates?

$0

The Chip Dip Co. has 15,500 shares of stock outstanding, grants one vote per share, and uses straight voting. How many shares must you control to guarantee that you will be elected to the firm’s board of directors if there are three open seats?

7,751 shares

Laura Lynn owns 20,700 shares of Global Exporters. Her shares have a total market value of $787,270. In total, the firm has 65,000 shares outstanding. Each share is entitled to one vote under the straight voting policy of the firm. The next election is in four months at which time two directors are up for election. How much more must Laura Lynn invest in this firm to guarantee that she is elected to the board?

$448,820

A preferred stock sells for $48.20 a share and has a market return of 15.65 percent. What is the dividend amount?

$7.54

Spiral Staircase is offering preferred stock which is commonly referred to as 10-10 stock. This stock will pay an annual dividend of $10 a share starting 10 years from now. What is this stock worth to you today if you desire a 15 percent rate of return?

18.95

Graphic Designs has 120,000 shares of cumulative preferred stock outstanding. Preferred shareholders are supposed to be paid $1.50 per quarter per share in dividends. However, the firm has encountered financial problems and has not paid any dividends for the past three quarters. How much will the firm have to pay per share of preferred next quarter if the firm also wishes to pay a common stock dividend?

$6.00

Berzett Industrial Products has both common and noncumulative preferred stock outstanding. The dividends on these stocks are $1.10 per quarter per share of common and $3.50 per quarter per share of preferred. The company has not paid any dividends for the past two quarters but is expected to pay dividends on both the common and the preferred stock next quarter. What is the minimum amount the firm must pay per share to its preferred stockholders next quarter if it plans to pay a common dividend?

$3.50

Given the following partial stock quote, what was the closing price on the previous trading day if the firm’s earnings per share are $1.90?

$17.09

Given the following partial stock quote, what is the expected annual dividend?

$0.99

Given the following partial stock quote, what is the amount of the next annual dividend if yesterday’s closing price was $23.60?

$0.81

Charles Berkeley, Inc. just paid an annual dividend of $3.60 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require an 11 percent return on this stock, what will the price be in 12 years?

$98.15

The next dividend payment by Swenson, Inc. will be $1.80 per share. The dividends are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells for $48.50 per share, what is the required return?

9.21 percent

Suppose you know that a company’s stock currently sells for $75 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between capital gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

$4.91

Venus, Inc. has an issue of preferred stock outstanding that pays a $9.00 dividend every year, in perpetuity. If this issue currently sells for $164.60 per share, what is the required return?

5.47 percent

After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Marine Enterprises. Unfortunately, you will be the only individual voting for you. If Marine Enterprises has 350,000 shares outstanding and the stock currently sells for $52, how much will it cost you to buy a seat if the company uses straight voting? Assume Marine Enterprises uses cumulative voting and there are five open seats in the current election; how much will it cost you to buy a seat now?

$9,100,052; $3,033,385

The stock price of Russell, Inc. is $81. Investors require a 14 percent rate of return on similar stocks. If the company plans to pay a dividend of $4.20 next year, what growth rate is expected for the company’s stock price?

8.81 percent

Tim Taylor Tools is a young start-up company. No dividends will be paid on the stock over the next eight years because the firm needs to plow back its earnings to fuel growth. The company will then pay a $9 per share dividend in year 8 and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 12 percent, what is the current share price?

$45.44

Gamma Corp. is expected to pay the following dividends over the next four years: $5, $12, $18, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return on the stock is 14 percent, what is the current share price?

$37.92

Classic Pickles is a mature manufacturing firm. The company just paid a $4 annual dividend, but management expects to reduce the payout by 4 percent per year, indefinitely. If you require a 12 percent return on this stock, what will you pay for a share today?

$24.00

Granger Corp. stock currently sells for $48.29 per share. The market requires a 13 percent return on the firm’s stock. If the company maintains a constant 5.5 percent growth rate in dividends, what was the most recent annual dividend per share paid on the stock?

$3.43

Michael’s, Inc. just paid $1.90 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.20 percent. If you require a rate of return of 8.5 percent, how much are you willing to pay today to purchase one share of Michael’s stock?

$46.04

Leslie’s Unique Clothing Stores offers a common stock that pays an annual dividend of $2.80 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 10.40 percent return on your equity investments?

26.29

The common stock of Eddie’s Engines, Inc. sells for $45.68 a share. The stock is expected to pay $4.10 per share next year. Eddie’s has established a pattern of increasing their dividends by 6.2 percent annually and expects to continue doing so. What is the market rate of return on this stock?

15.18 percent

Shares of common stock of the Samson Co. offer an expected total return of 12.8 percent. The dividend is increasing at a constant 5.1 percent per year. The dividend yield must be:

7.70 percent.

Weisbro and Sons common stock sells for $40 a share and pays an annual dividend that increases by 5.2 percent annually. The market rate of return on this stock is 9.20 percent. What is the amount of the last dividend paid by Weisbro and Sons?

$1.52

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $2.60 per share. What is the current value of one share of this stock if the required rate of return is 8.10 percent?

$90.41

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.31 a share. The following dividends will be $0.36, $0.51, and $0.81 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.5 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 10 percent?

$9.08

The Red Bud Co. pays a constant dividend of $2.90 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.5 percent?

$5.14

Railway Cabooses just paid its annual dividend of $5.10 per share. The company has been reducing the dividends by 13.0 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 15 percent?

$15.85