Question 1

Shareholders exert control of the management of the firm by:

Accepted Answer

A)  running the daily operations of the firm. 
B)  directly replacing management with themselves. 
C)  buying shares in an IPO at a discounted price. 
D)  electing board members who can replace the management. 
E)  buying shares in a second firm at a substantially reduced price. 
A)  running the daily operations of the firm. 
B)  directly replacing management with themselves. 
C)  buying shares in an IPO at a discounted price. 
D)  electing board members who can replace the management. 
E)  buying shares in a second firm at a substantially reduced price.

Question 2

A call provision with a sinking fund will add a maturity option to a preferred stock issue.

Accepted Answer

A) True 
 B)False

Question 3

According to the convertibility provision, a common stock can be converted to a certain number of shares of preferred stock at the conversion price.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is a feature of a preferred stock?

Accepted Answer

A)  Preferred stockholders have priority over debt holders, with regard to earnings and assets of the firm. 
B)  Preferred stockholders can elect the members of the board of directors and also vote on corporate issues. 
C)  The firm has no obligation, contractual or implied, to pay preferred stock dividends. 
D)  Preferred stockholders have the right to receive shares of new stock issue in proportion to their current ownership holdings. 
E)  Preferred stockholders have a higher priority claim to distributions made by the firm than common stockholders. 
A)  Preferred stockholders have priority over debt holders, with regard to earnings and assets of the firm. 
B)  Preferred stockholders can elect the members of the board of directors and also vote on corporate issues. 
C)  The firm has no obligation, contractual or implied, to pay preferred stock dividends. 
D)  Preferred stockholders have the right to receive shares of new stock issue in proportion to their current ownership holdings. 
E)  Preferred stockholders have a higher priority claim to distributions made by the firm than common stockholders.

Question 5

Which of the following is true about the P/E ratio of a firm?

Accepted Answer

A)  The higher the P/E ratio, the less investors are willing to pay for each dollar earned by the firm. 
B)  If a firm's P/E ratio is 8, then, it would take 8 years for an investor to double his or her initial investment. 
C)  The appropriate value of P/E ratio is multiplied with EPS to estimate the stock price. 
D)  If a company's P/E ratio is too high relative to that of similar firms, its earnings have not been fully captured in the existing stock value. 
E)  If the firm's P/E ratio is too low relative to that of similar firms, it means that the market has overvalued its current earnings. 
A)  The higher the P/E ratio, the less investors are willing to pay for each dollar earned by the firm. 
B)  If a firm's P/E ratio is 8, then, it would take 8 years for an investor to double his or her initial investment. 
C)  The appropriate value of P/E ratio is multiplied with EPS to estimate the stock price. 
D)  If a company's P/E ratio is too high relative to that of similar firms, its earnings have not been fully captured in the existing stock value. 
E)  If the firm's P/E ratio is too low relative to that of similar firms, it means that the market has overvalued its current earnings.

Question 6

According to the convertibility provision, a preferred stock can be converted into a _____.

Accepted Answer

A)  common stock 
B)  corporate bond 
C)  nonvoting stock 
D)  cumulative stock 
E)  participating stock 
A)  common stock 
B)  corporate bond 
C)  nonvoting stock 
D)  cumulative stock 
E)  participating stock

Question 7

Which of the following securities is eligible for a cumulative dividend?

Accepted Answer

A)  Growth stock 
B)  Preferred stock 
C)  Classified stock 
D)  Income stock 
E)  Founders' stock 
A)  Growth stock 
B)  Preferred stock 
C)  Classified stock 
D)  Income stock 
E)  Founders' stock

Question 8

A share of perpetual preferred stock pays an annual dividend of $6 per share. If investors require a 12 percent rate of return, what should be the price of this preferred stock?

Accepted Answer

A)  $57.25 
B)  $50.00 
C)  $62.38 
D)  $46.75 
E)  $41.64 
A)  $57.25 
B)  $50.00 
C)  $62.38 
D)  $46.75 
E)  $41.64

Question 9

What does a P/E ratio of 10 indicate?

Accepted Answer

A)  It would take 10 years for an investor to recover his or her initial investment. 
B)  The firm will pay a dividend of $10 per share. 
C)  The value of the stock will be 10 times the initial investment at the time of maturity. 
D)  A stock's value will increase by 10 percent every year. 
E)  An investor would receive 10 percent of the total earnings of the firm, at the time of liquidation. 
A)  It would take 10 years for an investor to recover his or her initial investment. 
B)  The firm will pay a dividend of $10 per share. 
C)  The value of the stock will be 10 times the initial investment at the time of maturity. 
D)  A stock's value will increase by 10 percent every year. 
E)  An investor would receive 10 percent of the total earnings of the firm, at the time of liquidation.

Question 10

If we view P/E ratios as measures of payback, all else equal, higher earnings multipliers are better.

Accepted Answer

A) True 
 B)False

Question 11

A shareholder can transfer the right to vote to a second party, by means of an instrument known as _____.

Accepted Answer

A)  arbitrage 
B)  allotment 
C)  consortium 
D)  rationing 
E)  proxy 
A)  arbitrage 
B)  allotment 
C)  consortium 
D)  rationing 
E)  proxy

Question 12

A share of a preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the simple annual rate of return?

Accepted Answer

A)  12% 
B)  18% 
C)  20% 
D)  23% 
E)  28% 
A)  12% 
B)  18% 
C)  20% 
D)  23% 
E)  28%

Question 13

How can a preferred stock incorporate a maturity proviso with the preferred stock issue?

Accepted Answer

A)  By including a call provision 
B)  By including a cumulative dividends provision 
C)  By including a preemptive right 
D)  By including a participating provision 
E)  By including a convertibility provision 
A)  By including a call provision 
B)  By including a cumulative dividends provision 
C)  By including a preemptive right 
D)  By including a participating provision 
E)  By including a convertibility provision

Question 14

When do firms get the right to redeem a preferred stock?

Accepted Answer

A)  By paying accumulated dividends 
B)  By issuing the stock at par value 
C)  By incorporating a call provision 
D)  By providing voting rights 
E)  By including a preemptive right 
A)  By paying accumulated dividends 
B)  By issuing the stock at par value 
C)  By incorporating a call provision 
D)  By providing voting rights 
E)  By including a preemptive right

Question 15

Alpha's preferred stock currently has a market price equal to $80 per share. If the dividend paid on this stock is $6 per share, what is the required rate of return investors are demanding from Alpha's preferred stock?

Accepted Answer

A)  7.5% 
B)  13.3% 
C)  6.0% 
D)  $6.00 
E)  $13.33 
A)  7.5% 
B)  13.3% 
C)  6.0% 
D)  $6.00 
E)  $13.33

Question 16

What is the other name for par value of a preferred stock?

Accepted Answer

A)  Liquidation value 
B)  Interest 
C)  Preference value 
D)  Cumulative value 
E)  Hybrid value 
A)  Liquidation value 
B)  Interest 
C)  Preference value 
D)  Cumulative value 
E)  Hybrid value

Question 17

Which of the following is considered a hybrid security?

Accepted Answer

A)  Corporate bonds 
B)  Preferred stock 
C)  Founders' shares 
D)  Foreign equity 
E)  Growth stock 
A)  Corporate bonds 
B)  Preferred stock 
C)  Founders' shares 
D)  Foreign equity 
E)  Growth stock

Question 18

Stocks that produce returns that are based primarily on dividends are traditionally called _____.

Accepted Answer

A)  preferred stocks 
B)  income stocks 
C)  growth stocks 
D)  founders' stocks 
E)  classified stocks 
A)  preferred stocks 
B)  income stocks 
C)  growth stocks 
D)  founders' stocks 
E)  classified stocks

Question 19

You are trying to determine the appropriate price to pay for a share of common stock. If you purchase this stock, you plan to hold it for 1 year. At the end of the year you expect to receive a dividend of $5.50 and to sell the stock for $154. The appropriate rate of return for this stock is 16 percent. What should the current price of this stock be?

Accepted Answer

A)  $150.22 
B)  $162.18 
C)  $137.50 
D)  $98.25 
E)  $175.83 
A)  $150.22 
B)  $162.18 
C)  $137.50 
D)  $98.25 
E)  $175.83

Question 20

Which of the following is true about the change in a stock price?

Accepted Answer

A)  If investors demand higher returns to invest in stocks, then prices should increase. 
B)  If investors demand lower returns to invest in stocks, then prices should fall. 
C)  If investors demand higher returns to invest in stocks, then prices should fall. 
D)  If investors expect their investments to generate lower future cash flows, then prices should increase. 
E)  If investors expect their investments to generate higher future cash flows, then prices should fall. 
A)  If investors demand higher returns to invest in stocks, then prices should increase. 
B)  If investors demand lower returns to invest in stocks, then prices should fall. 
C)  If investors demand higher returns to invest in stocks, then prices should fall. 
D)  If investors expect their investments to generate lower future cash flows, then prices should increase. 
E)  If investors expect their investments to generate higher future cash flows, then prices should fall.

Shareholders exert control of the management of the firm by:

A call provision with a sinking fund will add a maturity option to a preferred stock issue.

According to the convertibility provision, a common stock can be converted to a certain number of shares of preferred stock at the conversion price.

Which of the following is a feature of a preferred stock?

Which of the following is true about the P/E ratio of a firm?

According to the convertibility provision, a preferred stock can be converted into a _____.

Which of the following securities is eligible for a cumulative dividend?

A share of perpetual preferred stock pays an annual dividend of $6 per share. If investors require a 12 percent rate of return, what should be the price of this preferred stock?

What does a P/E ratio of 10 indicate?

If we view P/E ratios as measures of payback, all else equal, higher earnings multipliers are better.

A shareholder can transfer the right to vote to a second party, by means of an instrument known as _____.

A share of a preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the simple annual rate of return?

How can a preferred stock incorporate a maturity proviso with the preferred stock issue?

When do firms get the right to redeem a preferred stock?

Alpha's preferred stock currently has a market price equal to $80 per share. If the dividend paid on this stock is $6 per share, what is the required rate of return investors are demanding from Alpha's preferred stock?

What is the other name for par value of a preferred stock?

Which of the following is considered a hybrid security?

Stocks that produce returns that are based primarily on dividends are traditionally called _____.

Which of the following is true about the change in a stock price?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 7: Stocks Equity Characteristics and Valuation

Shareholders exert control of the management of the firm by:

A call provision with a sinking fund will add a maturity option to a preferred stock issue.

According to the convertibility provision, a common stock can be converted to a certain number of shares of preferred stock at the conversion price.

Which of the following is a feature of a preferred stock?

Which of the following is true about the P/E ratio of a firm?

According to the convertibility provision, a preferred stock can be converted into a _____.

Which of the following securities is eligible for a cumulative dividend?

A share of perpetual preferred stock pays an annual dividend of $6 per share. If investors require a 12 percent rate of return, what should be the price of this preferred stock?

What does a P/E ratio of 10 indicate?

If we view P/E ratios as measures of payback, all else equal, higher earnings multipliers are better.

A shareholder can transfer the right to vote to a second party, by means of an instrument known as _____.

A share of a preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the simple annual rate of return?

How can a preferred stock incorporate a maturity proviso with the preferred stock issue?

When do firms get the right to redeem a preferred stock?

Alpha's preferred stock currently has a market price equal to $80 per share. If the dividend paid on this stock is $6 per share, what is the required rate of return investors are demanding from Alpha's preferred stock?

What is the other name for par value of a preferred stock?

Which of the following is considered a hybrid security?

Stocks that produce returns that are based primarily on dividends are traditionally called _____.

Which of the following is true about the change in a stock price?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters