Question 1

Stock splits are a sign that the company ______.

Accepted Answer

A)  is in need of more financial capital 
B)  has set its stock price too low 
C)  wants to get its stock price to a more desirable trading level 
D)  cannot pay its stock dividend 
A)  is in need of more financial capital 
B)  has set its stock price too low 
C)  wants to get its stock price to a more desirable trading level 
D)  cannot pay its stock dividend C

Question 2

Which one of the following is NOT a reason a firm may decide to repurchase its own stock?

Accepted Answer

A)  future corporate needs 
B)  financial restructuring 
C)  investment 
D)  disposition of excess warrants 
A)  future corporate needs 
B)  financial restructuring 
C)  investment 
D)  disposition of excess warrants D

Question 3

In addition to direct costs, there are other costs associated with new security offerings. These other costs include all of the following EXCEPT _____.

Accepted Answer

A)  incentives such as the "Green Shoe" option 
B)  overpricing 
C)  stock price declines 
D)  management time 
A)  incentives such as the "Green Shoe" option 
B)  overpricing 
C)  stock price declines 
D)  management time B

Question 4

The earnings of Foggy Futures Weather Forecasting Company are expected to grow at an annual rate of 14% over the next 5 years and then slow to a constant rate of 10% per year. Foggy currently pays a dividend of $0.36 per share. What is the value of Foggy's stock to an investor who requires a 16% rate of return?

Accepted Answer

A)  $7.97 
B)  $7.76 
C)  $14.42 
D)  $11.11 
A)  $7.97 
B)  $7.76 
C)  $14.42 
D)  $11.11

Question 5

Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2. Determine the implied growth rate for Lawton assuming that an investor's required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model.

Accepted Answer

A)  6.74% 
B)  17.26% 
C)  6.40% 
D)  3.80% 
A)  6.74% 
B)  17.26% 
C)  6.40% 
D)  3.80%

Question 6

Which of the four common stockholder rights exists in only a minority of firms?

Accepted Answer

A)  dividend rights 
B)  asset rights 
C)  preemptive rights 
D)  voting rights 
A)  dividend rights 
B)  asset rights 
C)  preemptive rights 
D)  voting rights

Question 7

King of the Roost Chicken Farms has issued the following dividends. What would be the growth rate in dividends (rounded)? $$\begin{array} { | l | l | } 
\hline \text { YEARS } & \text { DIVIDENDS } \
\hline 2014 & \$ 3.00 \
\hline 2013 & \$ 2.50 \
\hline 2012 & \$ 1.75 \
\hline 2011 & \$ 1.54 \
\hline
\end{array}$$

Accepted Answer

A)  15% 
B)  25% 
C)  12% 
D)  21% 
A)  15% 
B)  25% 
C)  12% 
D)  21%

Question 8

Over the past 5 years, Dippity Doo-Dah Party Dips' common stock earnings per share have grown from $0.62 to $0.91. If an investor in Dippity's stock is assumed to have a required rate of return of 14%, what is the current value of Dippity if its current dividend is 0.12? Assume EPS will continue to grow at a constant rate.

Accepted Answer

A)  $2.16 
B)  $1.62 
C)  $4.94 
D)  $2.00 
A)  $2.16 
B)  $1.62 
C)  $4.94 
D)  $2.00

Question 9

Stockholders' equity includes all of the following EXCEPT _____.

Accepted Answer

A)  common stock 
B)  treasury stock 
C)  contributed capital in excess of par 
D)  preferred stock 
A)  common stock 
B)  treasury stock 
C)  contributed capital in excess of par 
D)  preferred stock

Question 10

Stockholders' equity includes _____.

Accepted Answer

A)  both preferred stock and common stock 
B)  total claims 
C)  additional paid-in capital plus capital surplus 
D)  total liabilities and total surplus 
A)  both preferred stock and common stock 
B)  total claims 
C)  additional paid-in capital plus capital surplus 
D)  total liabilities and total surplus

Question 11

An investment banker is generally thought to be qualified to advise a corporation on a variety of matters, including all the following EXCEPT _____.

Accepted Answer

A)  long-range financial planning 
B)  the marketing of securities 
C)  the timing of securities 
D)  the firm's new product marketing decisions 
A)  long-range financial planning 
B)  the marketing of securities 
C)  the timing of securities 
D)  the firm's new product marketing decisions

Question 12

A ____ is a group of underwriters who agree to underwrite a new issue in order to spread the risk.

Accepted Answer

A)  purchasing syndicate 
B)  cartel 
C)  bidding group 
D)  financial institution 
A)  purchasing syndicate 
B)  cartel 
C)  bidding group 
D)  financial institution

Question 13

Common stock dividends normally are paid _____.

Accepted Answer

A)  monthly 
B)  quarterly 
C)  semiannually 
D)  annually 
A)  monthly 
B)  quarterly 
C)  semiannually 
D)  annually

Question 14

The P/E ratio indicates _____.

Accepted Answer

A)  how much investors are willing to pay for $1 of current earnings 
B)  the current yield 
C)  the current price 
D)  how risky the stock is 
A)  how much investors are willing to pay for $1 of current earnings 
B)  the current yield 
C)  the current price 
D)  how risky the stock is

Question 15

What is the rate of return to an investor in the stock of Bajo Inc. if the current dividend of $0.80 is not expected to change in the foreseeable future? The current price of Bajo is $13.25.

Accepted Answer

A)  6.04% 
B)  8.0% 
C)  24.15% 
D)  11.06% 
A)  6.04% 
B)  8.0% 
C)  24.15% 
D)  11.06%

Question 16

A rights offering (also called a privileged subscription) allows existing stockholders to _______.

Accepted Answer

A)  purchase one new share of stock for every ten shares of stock they currently possess 
B)  purchase any shares of stock not sold to rights holders 
C)  sell existing shares of stock above market price 
D)  purchase new shares of stock below market price 
A)  purchase one new share of stock for every ten shares of stock they currently possess 
B)  purchase any shares of stock not sold to rights holders 
C)  sell existing shares of stock above market price 
D)  purchase new shares of stock below market price

Question 17

A common stock's book value is calculated _____.

Accepted Answer

A)  as a multiple of the stock's price / earnings ratio 
B)  on the basis of income statement ratios 
C)  on the basis of balance sheet figures 
D)  on the value of income statement figures 
A)  as a multiple of the stock's price / earnings ratio 
B)  on the basis of income statement ratios 
C)  on the basis of balance sheet figures 
D)  on the value of income statement figures

Question 18

From an accounting standpoint, stock dividends involve a transfer from the _____.

Accepted Answer

A)  common stock account 
B)  cash account 
C)  retained earnings account 
D)  capital surplus account 
A)  common stock account 
B)  cash account 
C)  retained earnings account 
D)  capital surplus account

Question 19

The current price of Zebar is $32.00 and the current dividend is $0.60. What is an investor's required rate of return on Zebar if dividends are expected to grow perpetually at a compound annual rate of 8 percent?

Accepted Answer

A)  9.88% 
B)  11.38% 
C)  18.75% 
D)  10.03% 
A)  9.88% 
B)  11.38% 
C)  18.75% 
D)  10.03%

Question 20

If a company offers more than one class of stock, corporate governance experts feel that _____.

Accepted Answer

A)  this is more democratic since some shares are more expensive than others 
B)  this is preferable in order to provide a special class of nonvoting stock to executives 
C)  super-voting power allows for the election of directors that benefit a specific class of stock 
D)  decisions made by the dual class system are more advantageous for the average investor 
A)  this is more democratic since some shares are more expensive than others 
B)  this is preferable in order to provide a special class of nonvoting stock to executives 
C)  super-voting power allows for the election of directors that benefit a specific class of stock 
D)  decisions made by the dual class system are more advantageous for the average investor

Exam 8: Common Stock: Characteristics, Valuation, and Issuance

Stock splits are a sign that the company ______.

Which one of the following is NOT a reason a firm may decide to repurchase its own stock?

In addition to direct costs, there are other costs associated with new security offerings. These other costs include all of the following EXCEPT _____.

Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2. Determine the implied growth rate for Lawton assuming that an investor's required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model.

Which of the four common stockholder rights exists in only a minority of firms?

King of the Roost Chicken Farms has issued the following dividends. What would be the growth rate in dividends (rounded)? YEARS DIVIDENDS 2014 \ 3.00 2013 \ 2.50 2012 \ 1.75 2011 \ 1.54

Stockholders' equity includes all of the following EXCEPT _____.

Stockholders' equity includes _____.

An investment banker is generally thought to be qualified to advise a corporation on a variety of matters, including all the following EXCEPT _____.

A ____ is a group of underwriters who agree to underwrite a new issue in order to spread the risk.

Common stock dividends normally are paid _____.

The P/E ratio indicates _____.

What is the rate of return to an investor in the stock of Bajo Inc. if the current dividend of $0.80 is not expected to change in the foreseeable future? The current price of Bajo is $13.25.

A rights offering (also called a privileged subscription) allows existing stockholders to _______.

A common stock's book value is calculated _____.

From an accounting standpoint, stock dividends involve a transfer from the _____.

The current price of Zebar is $32.00 and the current dividend is $0.60. What is an investor's required rate of return on Zebar if dividends are expected to grow perpetually at a compound annual rate of 8 percent?

If a company offers more than one class of stock, corporate governance experts feel that _____.

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

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