Chater 7, Equity Markets and Stock Valuation 1. A) B) C) D) E)

The rate at which the stock price is expected to appreciate (or depreciate) is the: Current yield. Total yield. Dividend yield. Capital gains yield. Earnings yield.

2. Payments made by a corporation to its shareholders, in the form of either cash, stock, or payments in kind, are called: A) Retained earnings. B) Net income. C) Dividends. D) Redistributions. E) Infused equity. 3. The voting procedure where shareholders may cast all of their votes for each member of the board is: A) Democratic voting. B) Cumulative voting. C) Straight voting. D) Deferred voting. E) Proxy voting. 4. A) B) C) D) E)

An agent who arranges security transactions among investors is called a ____________. broker trader capitalist principal dealer

5. A NYSE member executing buy and sell orders from customers once transmitted to the exchange floor is called a(n): A) Floor trader. B) Exchange customer. C) Specialist. D) Floor broker. E) Commission broker.

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6. A) B) C) D) E)

An asset characterized by cash flows that increase at a constant rate forever is called a: Growing perpetuity. Growing annuity. Common annuity. Perpetuity due. Preferred stock.

7. A) B) C) D) E)

Which of the following statements regarding dividend yields is true? It measures how much the stock's price will increase in a year. It incorporates the par value of the stock into the calculation. It is analogous to the current yield for a bond. It is always greater than the stock's capital gains yield. It measures the total annual return an investor can expect to earn by owning the stock.

8. For young companies, the type of dividend growth valuation model that is typically most appropriate is the ___________ model. A) zero growth B) supernormal growth C) nonconstant growth D) growing perpetuity E) declining growth 9. Common stock valuation requires, among other things, information regarding the:

A) B) C) D) E)

I. Expected dividend growth rate. II. Current dividend payment. III. Par value of the common stock. I only I and II only I and III only II and III only I, II, and III

10. A) B) C) D) E)

The inside quotes for a security are the: First posted bid and ask quotes of the trading day. The prices quoted "inside" the exchange, i.e., on the trading floor. Highest bid quote and lowest ask quote. Lowest bid quote and highest ask quote. The average of the current bid and ask quotes.

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11. The dividend on Simple Motors common stock will be $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You can sell the stock for $100 in 3 years. If you require a 12% return on your investment, how much would you be willing to pay for a share of this stock today? A) $75.45 B) $77.24 C) $81.52 D) $85.66 E) $91.30 12. The stock of MTY Golf World currently sells for $90 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now? A) $ 90.00 B) $ 93.52 C) $ 95.40 D) $ 99.80 E) $112.78 13. If Big Amp, Inc. stock closed at $36 and the current quarterly dividend is $0.75 per share, what dividend yield would be reported for the stock in The Wall Street Journal? A) 2.0% B) 3.6% C) 5.7% D) 6.6% E) 8.3% 14. Suppose that you have just purchased a share of stock for $40. The most recent dividend was $2 and dividends are expected to grow at a rate of 7% indefinitely. What must your required return be on the stock? A) 5.45% B) 7.00% C) 10.25% D) 12.35% E) 13.65%

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15. The preferred stock of the Limbaugh Institute pays a constant annual dividend of $4 and sells for $50. You believe the stock will sell for $32 in one year. You must, therefore, believe that the required return on the stock will be _____ percentage points ________ in one year. A) 8; higher B) 8; lower C) 1.5; higher D) 2.5; lower E) 4.5; higher 16. Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 5% annually forever. The firm just paid a dividend of $4; given a required return is 10%, the price of the stock in 2 years will be: A) $14.45 B) $18.52 C) $22.86 D) $25.33 E) $29.95 17. A firm's stock has a required return of 12%. The stock's dividend yield is 5%. What is the dividend the firm is expected to pay in one year if the current stock price is $50? A) $2.00 B) $2.50 C) $3.00 D) $3.50 E) $4.00 18. Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of four years the growth rate will drop to a steady 6%. At the end of year 5, Oly will issue its first dividend in the amount of $3 per share. If the required return is 15%, what is the value of a share of stock? Assume dividends grow at the same rate as earnings after year 4. A) $10.20 B) $14.89 C) $16.42 D) $19.06 E) $21.05

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52 Weeks Hi Lo 48.72 20.10

19. A) B) C) D) E)

Stock Duke Energy

Sym DUK

Div 1.00

Yld % 3.3

PE 18

Vol 100s 20925

Hi 31.55

Lo 29.40

Close 30.20

Chg. –.56

Duke stock must have closed at ___________ per share on the previous trading day. $29.64 $30.76 $30.99 $31.55 $32.11

20. Assume that Duke paid a $0.92 annual dividend in the previous period. What is the dividend growth rate based on this quote? A) 4.8% B) 6.0% C) 7.2% D) 8.7% E) 9.9%

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