Test Bank Chapter 7 Equity Markets And Stock Valuation - Corporate Finance 10e Complete Test Bank by Stephen Ross. DOCX document preview.

Test Bank Chapter 7 Equity Markets And Stock Valuation

Chapter 07

Equity Markets and Stock Valuation

Test Bank - Static Key

1. When valuing a stock using the constant-growth model, D1 represents the:

A. expected difference in the stock price over the next year.

B. expected stock price in one year.

C. last annual dividend paid.

D. the next expected annual dividend.

E. discount rate.

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

2. The dividend yield is defined as:

A. the last annual dividend divided by the current market price per share.

B. the last annual dividend divided by the current book value per share.

C. next year's expected dividend divided by the current market price per share.

D. next year's expected dividend divided by the current book value per share.

E. next year's expected dividend divided by the par value per share.

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

3. The capital gains yield equals which one of the following?

A. Total yield

B. Required rate of return

C. Market rate of return

D. Dividend yield

E. Dividend growth rate

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

4. Which one of the following types of securities has the lowest priority in a bankruptcy proceeding?

A. Convertible bond

B. Senior debt

C. Common stock

D. Preferred stock

E. Straight bond

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Common stock features

5. 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?

A. Proxy

B. Aggregate

C. Cumulative

D. Straight

E. Condensed

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

6. 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.

A. simultaneous

B. straight

C. proxy

D. cumulative

E. sequential

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

7. 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 term applies to this granting of authority?

A. Straight

B. Cumulative

C. Consent-form

D. Proxy

E. In absentia

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

8. Dividends are best defined as:

A. cash payments to shareholders.

B. cash payments to either bondholders or shareholders.

C. cash or stock payments to shareholders.

D. cash or stock payments to either bondholders or shareholders.

E. distributions of stock to current shareholders.

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Dividends and payout policy

9. Which type of stock pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

A. Noncumulative preferred

B. Cumulative preferred

C. Senior common

D. Cumulative common

E. Noncumulative common

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Preferred stock features

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

A. Proxy

B. Stated value

C. Inside

D. Secondary

E. Primary

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Primary and secondary markets

11. What is the market called that facilitates the sale of shares between individual investors?

A. Primary

B. Proxy

C. Secondary

D. Inside

E. Initial

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Primary and secondary markets

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

A. floor trader.

B. dealer.

C. commission broker.

D. broker.

E. floor broker.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Dealers and brokers

13. A broker is an agent who:

A. trades on the floor of an exchange for himself or herself.

B. buys and sells from inventory.

C. offers new securities for sale to dealers only.

D. is ready to buy or sell at any time.

E. brings buyers and sellers together.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Dealers and brokers

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

A. dealer.

B. floor trader.

C. DMM.

D. member.

E. proxy.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

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

A. supplemental liquidity provider (SLP).

B. designated market maker (DMM).

C. runner.

D. Floor broker.

E. market maker.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

16. A DMM is a(n):

A. employee who executes orders to buy and sell for clients of his or her brokerage firm.

B. individual who trades on the floor of an exchange for his or her personal account.

C. NYSE member who functions as a dealer for a limited number of securities.

D. broker who buys and sells securities from a market maker.

E. trader who deals only with primary offerings.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

17. Supplemental liquidity providers (SLPs) trade securities on behalf of:

A. their own accounts.

B. the customers of a specific brokerage firm.

C. designated market makers.

D. any stock exchange member.

E. any stock exchange customer.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

18. Most trades on the NYSE are executed:

A. by floor brokers on the exchange floor.

B. independent brokers on the exchange floor.

C. electronically.

D. by designated market makers of the floor of the exchange.

E. bydealers.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

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

A. order flow.

B. market maker.

C. execution stream.

D. operations flow.

E. buyer's stream.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

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

A. box office.

B. Figure 6.

C. post.

D. trading booth.

E. seat.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

21. Inside quotes are defined as the:

A. bid and asked prices presented by NYSE DMMs.

B. last bid and asked price offered prior to the market close.

C. lowest asked and highest bid offers.

D. daily opening bid and asked quotes.

E. last traded bid and asked prices.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock market prices and reporting

22. Which one of the following is an electronic network that enables Katie to sell her shares of ABC stock directly to Marti?

A. SuperDOT

B. POST

C. ECN

D. SEAT

E. eNET

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

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

A. Decrease in the dividend growth rate

B. Increase in the required return

C. Increase in the market rate of return

D. Decrease in the expected dividend for next year

E. Increase in the capital gains yield

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock valuation using multiples

24. The price of a stock at Year 3 can be expressed as:

A. D0/(R + g4).

B. D0 × (1 + R)5.

C. D1 × (1 + R)5.

D. D4/(R - g).

E. D5/(R - g).

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

25. Far West Trading expects to pay an annual dividend of $1.75 per share next year. What is the anticipated dividend for Year 3 if the firm increases its dividend by 3 percent annually?

A. $1.75 × (1.03)1

B. $1.75 × (1.03)2

C. $1.75 × (1.03)3

D. $1.75 × (1.03)4

E. $1.75 × (1.03)5

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

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

A. (P0/D1) - g

B. (D1/P0)/g

C. Dividend yield + Capital gains yield

D. Dividend yield - Capital gains yield

E. Dividend yield × Capital gains yield

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

27. Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend by 8 percent per year the following four 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?

A. ($1.23) × (1.08 × 4) × (1.02 × 3)

B. ($1.23) × (1.08 × 4) × (1.02 × 2)

C. ($1.23) × (1.08)4 × (1.02)2

D. ($1.23) × (1.08)4 × (1.02)3

E. ($1.23) × (1.08)4 × (1.02)4

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividend timing

28. The dividend yield on a stock will increase if the:

A. dividend growth rate decreases.

B. stock price decreases.

C. capital gains rate decreases.

D. stock price increases.

E. tax rate on dividends increases.

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

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

A. Dividend yield

B. Capital gains yield

C. Total return

D. Par value per share

E. Book value per share

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

30. The constant growth model can be used to value the stock of firms that have which type(s) of dividends?

A. Dividends that change by either a constant amount or a constant rate

B. Dividends that change annually by a constant amount or that are zero

C. Dividends that change annually by a constant amount

D. Dividends that are either constant or change annually at a constant rate

E. Only dividends that increase at a constant rate

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

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

A. Non-dividend-paying stock

B. Stock with a constant dividend

C. Stock with irregular dividends

D. Stock with a constant-growth dividend

E. Stock with growing dividends for a limited period of time

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock valuation using multiples

32. 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 each share receives one vote.

A. Twenty percent of the shares plus one share

B. Twenty-five percent of the shares plus one share

C. One-third of the shares plus one share

D. Fifty percent of the shares plus one share

E. Fifty-one percent of the shares plus one share

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

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

A. if there are two open seats, then the candidate with the highest number of votes and the candidate with the lowest number of votes will be selected.

B. the candidates for the open seats are voted for in individual elections.

C. all open positions are filled with one round of voting, assuming there are no tie votes.

D. shareholders can accumulate their votes over multiple years and cast all those votes in one election.

E. the firm's entire board of directors is elected annually in one combined election.

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

34. Which statement is true?

A. From a legal perspective, preferred stock is a form of corporate equity.

B. All classes of stock must have equal voting rights per share.

C. Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions.

D. Preferred dividends provide tax-free income to individual investors.

E. Preferred shareholders prefer noncumulative dividends over cumulative dividends.

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Preferred stock features

35. Which one of the following statements is correct?

A. Preferred stock can be callable.

B. Preferred stock generally has a stated liquidation value of $1,000 per share.

C. Dividend payments to preferred shareholders are tax-deductible expenses for the issuing firm.

D. Preferred dividends are generally variable in amount.

E. Preferred shareholders receive preferential treatment over bondholders in a liquidation.

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Preferred stock features

36. If shareholders are granted a preemptive right they will:

A. be given the choice of receiving dividends either in cash or in additional shares of stock.

B. be paid dividends prior to the preferred shareholders during the preemptive period.

C. be entitled to two votes per share of stock.

D. be able to choose the timing and amount of any future dividends.

E. have priority in the purchase of any newly issued shares.

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder rights

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

A. First day of the fiscal year in which the dividend is expected to be paid

B. Twelve months prior to the expected dividend payment date

C. On the date the board declares the dividend

D. On the date the company announces the dividend to the public

E. On the date of payment

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Dividends and payout policy

38. Dividends are:

A. payable at the discretion of a firm's president.

B. treated as a tax-deductible expense of the issuing firm.

C. paid out of aftertax profits.

D. paid only to preferred stockholders.

E. only partially taxable to high-income individual shareholders.

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Dividends and payout policy

39. To be a member of the NYSE, you must:

A. be a primary dealer.

B. buy a seat.

C. own a trading license.

D. be registered as a floor trader.

E. be a DMM.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

40. Which one of the following players on the floor of the NYSE is obligated to maintain a two-sided, orderly market for a limited number of securities?

A. Designated market maker

B. Floor sweeper

C. Investment firms

D. Supplemental liquidity provider

E. Floor broker

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

41. The NYSE:

A. presently conducts all of its trading through SuperDOT.

B. is a dealer market.

C. is in the business of attracting order flow.

D. is solely a primary market.

E. is based on a multiple market maker system.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

42. In November 2013, the NYSE was acquired by:

A. the Amsterdam Exchange.

B. the Intercontinental Exchange.

C. the Securities Exchange Commission.

D. Euronext.

E. the American Stock Exchange.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

43. NASDAQ is best described as:

A. a modern-day trading floor with locations in Chicago and London.

B. an electronic communication network.

C. an electronic network of securities dealers.

D. an internet broker’s market.

E. a primary market.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

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

A. between a broker and a DMM.

B. between two brokers.

C. electronically on NASDAQ.

D. onSuperDOT.

E. on an ECN.

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

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

A. National

B. Capital

C. Regional

D. Global Select

E. Global

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

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

A. Trading in the crowd

B. Multiple market maker system

C. SuperDot

D. Broker market

E. Physical trading floor

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

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

A. NASDAQ Capital Market

B. Over-the-Counter Bulletin Board

C. Pink sheets

D. NASDAQ Global Market

E. NYSE

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock exchanges

48. Opulance Corp. common stock is selling for $44.25 a share and has a dividend yield of 1.9 percent. What is the dividend amount?

A. $..0.42

B. $.0.84

C. $4.20

D. $6.20

E. $8.40

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividends and payout policy

49. The Glass Ceiling paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 6?

A. $1.43

B. $1.75

C. $1.46

D. $1.77

E. $1.58

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividends and payout policy

50. Gator Tires pays a constant annual dividend of $1.21 per share. How much are you willing to pay for one share if you require a rate of return of 9.3 percent?

A. $14.72

B. $13.01

C. $6.50

D. $1.39

E. $13.90

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock valuation using multiples

51. Sweet Treats pays a constant annual dividend of $2.38 a share and currently sells for $52.60 a share. What is the rate of return?

A. 4.56 percent

B. 5.39 percent

C. 4.52 percent

D. 4.83 percent

E. 5.91 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

52. The common stock of Federal Logistics is selling for $57.56 per share. The company pays a constant annual dividend and has a total return of 10.13 percent. What is the amount of the dividend?

A. $3.53

B. $3.55

C. $5.83

D. $6.20

E. $5.31

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock dividends

53. Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?

A. $11.91

B. $12.95

C. $12.16

D. $10.54

E. $13.07

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

54. Polar Mechanical Systems will pay an annual dividend of $1.88 per share next year. The company just announced that future dividends will be increasing by 1.2 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 9.68 percent?

A. $18.30

B. $22.17

C. $22.94

D. $19.28

E. $22.48

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

55. Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually?

A. $2.71

B. $3.84

C. $2.78

D. $2.86

E. $3.72

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

56. The common stock of Zeta Group sells for $42 per share, has a rate of return of 12.2 percent, and a dividend growth rate of 1.8 percent annually. What was the amount of the last annual dividend paid?

A. $3.82

B. $3.85

C. $4.29

D. $4.57

E. $4.35

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

57. Dry Dock 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 9.48 percent. What is the dividend growth rate?

A. .82 percent

B. 1.03 percent

C. 1.28 percent

D. .95 percent

E. .66 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

58. River City Recycling just paid its annual dividend of $1.15 per share. The required return is 12.3 percent and the dividend growth rate is 0.75 percent. What is the expected value of this stock five years from now?

A. $10.16

B. $10.41

C. $12.03

D. $8.42

E. $9.75

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

59. 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 dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now?

A. $2.43

B. $2.51

C. $2.63

D. $2.87

E. $2.92

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

60. Great Lakes Steel Supply is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $.1.30 per share but all future dividends will be decreased by 2.75 percent annually. What is a share of this stock worth today at a required return of 15.5 percent?

A. $6.09

B. $6.93

C. $6.50

D. $6.68

E. $6.98

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

61. Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of $13.16 a share, and a required return of 14 percent. What is the amount of the last dividend this company paid?

A. $1.05

B. $1.55

C. $1.60

D. $1.15

E. $1.30

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

62. The common stock of Big Marvin Treats has a total return of 10.25 percent, a stock price of $28.75, and recently paid an annual dividend of $1.65. What is the capital gains rate if the company maintains a constant dividend?

A. 7.54 percent

B. 15.76 percent

C. 10.37 percent

D. 4.51 percent

E. 3.79 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

63. 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?

A. $23.60

B. $24.65

C. $25.08

D. $25.50

E. $26.90

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

64. Ferris Athletic Equipment plans to pay an annual dividend of $1.90 per share next year, $1.25 per share a year for the following two years, and then a final liquidating dividend of $11.50 per share four years from now. How much is one share of this stock worth to you today if you require a rate of return of 19.65 percent of this risky investment?

A. $8.80

B. $7.54

C. $6.74

D. $11.77

E. $9.47

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividend discount model

65. 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 that 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?

A. $25.51

B. $26.08

C. $24.57

D. $26.02

E. $26.84

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Nonconstant-growth stock

66. Flash Freeze Frozen Foods is expected to pay annual dividends of $1.34 and $ 1.45 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.50 a share. What is the value of this stock at a required return of 15.1 percent?

A. $7.77

B. $10.25

C. $9.76

D. $12.78

E. $9.93

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividend discount model

67. The Impulse Shopper recently paid an annual dividend of $1.13 per share. The company just announced that it is suspending all dividend payments on its common stock for the next five years. After that, the company expects to pay $.50 a share at the end of each year. At a required return of 18 percent, what is this stock worth today?

A. $0

B. $1.13

C. $2.78

D. $1.03

E. $1.21

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividend discount model

68. Software Sales Supply is expected to pay its first annual dividend of $.1.10 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 3.2 percent per year. What is the value of this stock today, Year 0, at a required return of 13.1 percent?

A. $8.22

B. $11.31

C. $11.49

D. $10.35

E. $12.66

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Nonconstant-growth stock

69. Nu-Tek is expanding rapidly. As a result, the company expects to pay annual dividends of $.62, .80, and $1.05 per share over the next three years, respectively. After that, the dividend is projected to increase by 4 percent annually. What is the current value of this stock if the required return is 16 percent?

A. $7.63

B. $9.67

C. $10.46

D. $6.58

E. $8.49

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Nonconstant-growth stock

70. Car Parts Center recently announced that it will pay annual dividends at the end of the next two years of $ 1.20 and $1.35 per share, respectively. Then, in Year 5 it plans to pay a final dividend of $11.75 a share before closing its doors permanently. At a required return of 17 percent, what should this stock sell for today?

A. $1.18

B. $14.14

C. $7.37

D. $11.27

E. $10.64

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividend discount model

71. Dixie Mart plans to pay dividends of $1.36, $1.15, $1.35, and $.40 at the end of the next four years, respectively. After that, the company will be sold and shareholders are expected to receive $82.40 per share in Year 6 when the sale should be finalized. If the required return is 11.4 percent, what is the current value of one share of this stock?

A. $47.71

B. $51.87

C. $46.50

D. $51.08

E. $47.29

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividend discount model

72. Canine Crates just paid an annual dividend of $..45 per share but plans to double that amount each year for three years. After that, the firm expects to maintain a constant dividend. What is the value of this stock today if the required return is 13 percent?

A. $24.48

B. $26.45

C. $23.46

D. $19.91

E. $23.89

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividend discount model

73. Village East expects to pay an annual dividend of $1.40 per share next year, and $1.68 per share for the following two years. After that, the company plans to increase the dividend by 3.4 percent annually. What is this stock’s current value at a discount rate of 13.7 percent?

A. $14.09

B. $17.28

C. $15.15

D. $16.08

E. $18.18

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Supernormal growth stock

74. The required return on Mountain Brook stock is 13.8 percent and the dividend growth rate is 3.64 percent. The stock is currently selling for $32.80 a share. What is the dividend yield?

A. 10.16 percent

B. 8.93 percent

C. 11.75 percent

D. 10.50 percent

E. 13.36 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

75. For the past six years, the price of Slippery Rock stock has been increasing at a rate of 8.21 percent a year. Currently, the stock is priced at $43.40 a share and has a required return of 11.65 percent. What is the dividend yield?

A. 3.20 percent

B. 2.75 percent

C. 3.69 percent

D. 4.28 percent

E. 3.44 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

76. A stock has paid dividends of $1.70, $1.85, $2.00, $2.20, and $2.50 over the past five years, respectively. What is the average capital gains yield?

A. 8.86 percent

B. 3.24 percent

C. 9.45 percent

D. 5.34 percent

E. 10.14 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

77. The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield?

A. 7.35 percent

B. 7.78 percent

C. 9.23 percent

D. 6.20 percent

E. 4.49 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

78. A stock is priced at $38.24 a share and has a market rate of return of 9.65 percent. What is the dividend growth rate if the company plans to pay an annual dividend of $.48 a share next year?

A. 7.42 percent

B. 8.39 percent

C. 2.23 percent

D. 7.60 percent

E. 1.26 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

79. Vegan Delite stock is valued at $68.60 a share. The company pays a constant annual dividend of $2.40 per share. What is the total return on this stock?

A. 3.62 percent

B. 4.00 percent

C. 3.50 percent

D. 3.39 percent

E. 3.82 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

80. Last year, when the stock of Alpha Minerals was selling for $49.50 a share, the dividend yield was 3.4 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 2.2 percent?

A. 6.13 percent

B. 6.58 percent

C. 6.40 percent

D. 6.47 percent

E. 6.38 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

81. There are three open positions on the board of directors of XYZ Enterprises. The company has 264,000 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?

A. 82,001 shares

B. 75,001 shares

C. 88,001 shares

D. 72,000 shares

E. 66,001 shares

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

82. A firm has four 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 387,500 shares of stock outstanding and uses cumulative voting? Each share is granted one vote.

A. 33,334 shares

B. 77,501 shares

C. 75,251 shares

D. 70,501 shares

E. 96,876 shares

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

83. Miller's Hardware has 415,000 shares of stock outstanding with a current market value of $42 a share. You own 84,500 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?

A. $0

B. $28,518

C. $34,062

D. $62,958

E. $98,910

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

84. The Chip Dip Co. has 685,500 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 five open seats?

A. 335,167 shares

B. 345,134 shares

C. 345,876 shares

D. 342,751 shares

E. 337,134 shares

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

85. Laura owns 6,700 shares of GP Global stock worth $92,460. The firm has 15,000 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 four directors are up for election. How much more must Laura invest in this firm to guarantee her election to the board?

A. $0

B. $6,554.00

C. $11,053.80

D. $8,406.15

E. $14,478.80

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

86. A preferred stock sells for $54.20 a share and has a market return of 9.68 percent. What is the dividend amount?

A. $5.09

B. $5.14

C. $4.75

D. $5.42

E. $5.25

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Stock returns and yields

87. Spiral Staircase is offering preferred stock which is 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 require a rate of return of 9.5 percent?

A. $66.70

B. $46.51

C. $49.63

D. $120.52

E. $105.26

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Stock valuation using multiples

88. Graphic Designs has 68,000 shares of cumulative preferred stock outstanding. Preferred shareholders are supposed to be paid $1.60 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?

A. $3.20

B. $4.80

C. $6.40

D. $7.50

E. $1.60

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Preferred stock features

89. 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 $2.25 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?

A. $0

B. $3.35

C. $2.25

D. $4.50

E. $6.75

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Preferred stock features

90. AZ stock closed today at $18.24, down .23. The dividend yield is 2.4 percent. What was yesterday’s closing price if the firm pays a constant $.40 per share quarterly dividend?

A. $16.67

B. $18.01

C. $16.90

D. $18.47

E. $17.40

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock market prices and reporting

91. Today’s stock market report shows that SW Companies has a PE ratio of 9.8, a dividend yield of 2.2 percent, a closing price $29.86, and a net change of .11. What is the annual dividend amount?

A. $.66

B. $1.08

C. $1.13

D. $1.28

E. $1.33

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock market prices and reporting

92. According to today’s stock report, BL Lumber shares were up .14, the stock dividend yield is 2.6 percent, and the PE ratio is 9.8. What is the amount of the next annual dividend if yesterday's closing price was $35.14?

A. $.918

B. $.917

C. $.914

D. $.924

E. $9.31

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Learning Objective: 07-03 Explain how the stock markets work.

Section: 7.3 The Stock Markets

Topic: Stock market prices and reporting

93. TMS just paid an annual dividend of $2.84 per share on its stock. The dividends are expected to grow at a constant rate of 1.85 percent per year. If investors require a rate of return of 10.4 percent, what will be the stock price be in Year 11?

A. $41.71

B. $40.64

C. $35.75

D. $41.39

E. $42.57

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock valuation using multiples

94. The next dividend payment by S&S will be $1.38 per share. The dividends are anticipated to maintain a 2.5 percent growth rate, forever. If the stock currently sells for $26.90 per share, what is the required return?

A. 8.03 percent

B. 7.82 percent

C. 7.63 percent

D. 8.74 percent

E. 9.02 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

95. A particular stock sells for $43.20 share and provides a total return of 11.6 percent. The total return is evenly divided between the capital gains yield and the dividend yield. Assuming a constant dividend growth rate, what is the current dividend per share?

A. $2.24

B. $2.37

C. $2.34

D. $2.51

E. $2.47

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

96. The VIC Co. has preferred stock outstanding that pays a $4.50 dividend annually and sells for $48.20 per share. What is the rate of return?

A. 9.34 percent

B. 6.89 percent

C. 7.70 percent

D. 8.23 percent

E. 8.98 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

97. Hi-Lo has 160,000 shares outstanding priced at $33 a share. There will be three open positions on its board in the next election. Currently, you are not a shareholder but would like to become one and also gain a seat on the board. How much will it cost you to buy a seat if the company uses straight voting? What if the firm uses cumulative voting?

A. $2,640,033; $1,320,033

B. $2,710,033; $1,760,033

C. $2,710,033; $1,430,033

D. $2,640,033; $1,320,033

E. $2,640,033; $1,760,033

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Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.

Section: 7.2 Some Features of Common and Preferred Stock

Topic: Shareholder voting

98. Russell Foods pays a fixed annual dividend of $2.28 a share. At a required return of 11.5 percent, the stock is valued at $43.20 a share. What is the dividend growth rate at this price?

A. 5.99 percent

B. 5.28 percent

C. 6.12 percent

D. 5.37 percent

E. 6.22 percent

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

99. JL Tools is a young start-up company. The company expects to pay its first dividend of $.20 a share in Year 6 with annual dividend increases of 1.5 percent thereafter. At a required return of 12 percent, what is the current share price?

A. $1.77

B. $1.08

C. $1.23

D. $1.90

E. $2.13

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock valuation using multiples

100. Gamma Corp. is expected to pay the following dividends over the next four years: $7.50, $8.25, $15, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return is 14 percent, what is the current share price?

A. $35.20

B. $31.06

C. $38.18

D. $32.30

E. $34.90

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividend discount model

101. JLT is a mature manufacturing firm. The company just paid an annual dividend of $3.62, but management expects to reduce future payouts by 3.5 percent per year, indefinitely. What is this stock worth today at a required return of 12.5 percent?

A. $21.42

B. $21.83

C. $20.24

D. $23.56

E. $20.02

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Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

102. KIT Kars stock currently sells for $54.10 per share and has a fixed 2.5 percent dividend growth rate. What was the amount of the last dividend paid if the required rate of return is 11 percent?

A. $4.49

B. $3.57

C. $5.30

D. $4.15

E. $4.36

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

103. Juniper Trees has earnings per share of $1.38, all of which is added to retained earnings. What is the value of a share of its stock if the PE ratio is 9.8 and market-to-book ratio is 2.5?

A. $13.52

B. $13.67

C. $15.30

D. $33.80

E. $34.18

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock valuation using multiples

104. Blasco International has sales of $389,700 and costs of $413,210. The company has 120,000 shares outstanding. What is the price-sales ratio if the stock has a book value of $19.20 per share and a market value per share of $8.60?

A. 2.65

B. 1.89

C. 2.23

D. 2.48

E. 2.37

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock valuation using multiples

NEW QUESTIONS:

105. Resorts Corp. common stock is selling for $36.75 a share and has a dividend yield of 2.3 percent. What is the dividend amount?

A. $.0.43

B. $.0.85

C. $4.21

D. $6.21

E. $8.41

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividends and payout policy

106. The Painted Parlor paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 4?

A. $1.43

B. $1.68

C. $1.46

D. $1.73

E. $1.70

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Dividends and payout policy

107. Crocodile Swimwear pays a constant annual dividend of $1.88 per share. How much are you willing to pay for one share if you require a rate of return of 11.1 percent?

A. $14.72

B. $16.94

C. $8.47

D. $1.69

E. $13.90

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock valuation using multiples

108. Bernard Fashionista pays a constant annual dividend of $3.75 a share and currently sells for $48.50 a share. What is the rate of return?

A. 7.87 percent

B. 8.60 percent

C. 7.73 percent

D. 8.04 percent

E. 9.12 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock returns and yields

109. The common stock of Duck Diagnostics is selling for $69.23 per share. The company pays a constant annual dividend and has a total return of 9.1 percent. What is the amount of the dividend?

A. $4.25

B. $4.27

C. $6.30

D. $6.92

E. $6.03

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Stock dividends

110. Ground Chuck Processing just paid its annual dividend of $1.25 per share. The firm recently announced that all future dividends will be increased by 3 percent annually. What is one share of this stock worth to you if you require a rate of return of 11.5 percent?

A. $14.89

B. $15.92

C. $15.15

D. $13.52

E. $15.05

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

111. Business Calculators Inc. will pay an annual dividend of $2.25 per share next year. The company just announced that future dividends will be increasing by 0.75 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 12.25 percent?

A. $18.30

B. $19.57

C. $22.94

D. $19.28

E. $22.48

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Section: 7.1 Common Stock Valuation

Topic: Constant-growth stock

Document Information

Document Type:
DOCX
Chapter Number:
7
Created Date:
Aug 21, 2025
Chapter Name:
Chapter 7 Equity Markets And Stock Valuation
Author:
Stephen Ross

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