Question 1

Excluding stocks traded in the United States, a stock that is traded in a country other than the issuing company's home country is called a ________.

Accepted Answer

A)  Class B stock
B)  Yankee stock
C)  Euro stock
D)  Global classified equity
E)  Preferred stock C

Question 2

Which of the following types of stock generally pays a fixed amount of dividends each year?

Accepted Answer

A)  Preemptive stocks
B)  Growth stocks
C)  Common stocks
D)  Preferred stocks
E)  Founders' shares D

Question 3

The current expected value of a stock is $32. If investors demand a higher rate of return of 10 percent instead of the 8 percent rate of return, what will the impact on the stock price of the firm be?

Accepted Answer

A)  The stock price will increase by 10 percent.
B)  The stock price will not be affected by the change in the rate of return.
C)  The stock price will increase to $35.
D)  The stock price will reduce to zero.
E)  The stock price will decrease as a result of the higher rate of return demanded by investors. E

Question 4

A firm undertakes stock repurchase only if the price of its stock is overvalued.

Accepted Answer

A) True 
 B)False

Question 5

Nahanni Treasures Corporation is planning a new common stock issue of five million shares to fund a new project. The increase in shares will bring the number of shares outstanding to 25 million. Nahanni's long-term growth rate is 6 percent, and its current required rate of return is 12.6 percent. The firm just paid a $1.00 dividend, and the stock sells for $16.06 in the market. On the announcement of the new equity issue, the firm's stock price dropped. Nahanni estimates that the company's growth rate will increase to 6.5 percent with the new project, but as the project is riskier than average, the firm's required return on stock will increase to 13.5 percent. Using the constant growth dividend discount model, what is the change in the equilibrium stock price?

Accepted Answer

A)  -$1.77
B)  -$1.06
C)  -$0.85
D)  -$0.66
E)  -$0.08

Question 6

A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of return, how much should you be willing to pay for this stock? (Round intermediate calculations to two decimal places.)

Accepted Answer

A)  $39.38
B)  $22.49
C)  $58.15
D)  $63.00
E)  $43.96

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

If the expected rate of return on a stock exceeds the required rate, it means that _____

Accepted Answer

A)  the stock is experiencing an abnormal growth pattern.
B)  the stock should be sold.
C)  the company is not trying to maximize the price per share.
D)  the stock is a good buy.
E)  the dividends are not declared.

Question 9

A protective feature on a preferred stock that requires preferred dividends that were not paid in previous years to be disbursed before any common stock dividends can be paid is called _____.

Accepted Answer

A)  par value
B)  voting rights
C)  cumulative dividends
D)  a sinking fund
E)  a preemptive right

Question 10

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

Accepted Answer

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

Question 11

A call provision gives the issuing corporation the right to call in the preferred stock for redemption.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is true of common stock?

Accepted Answer

A)  Common stock is often referred to as a hybrid security.
B)  Common stock often contains some of the same characteristics as bonds.
C)  Most common stock traditionally pays a constant income called interest.
D)  A firm can be forced into bankruptcy if it misses common stock dividend payments.
E)  Dividends must be paid on preferred stock before they can be paid on common stock.

Question 13

The preferred dividend is generally stated as a percentage of the preferred stock's _____.

Accepted Answer

A)  market value per share
B)  earnings per share
C)  call premium per share
D)  per share par value
E)  sinking fund

Question 14

A firm has earnings before interest and taxes (EBIT) of $22 million, total invested capital of $74 million, and average cost of funds of 12 percent. The firm has a marginal tax rate of 35 percent, and 4.2 million shares of the firm are outstanding. What is the firm's economic value added (EVA) of the firm?

Accepted Answer

A)  $4.83 million
B)  $5.42 million
C)  $6.33 million
D)  $3.61 million
E)  $7.97 million

Question 15

On January 3 of the current year, the per-share stock price of a firm was $25, and on January 4 of the current year, it was $19. Which of the following is a probable reason for the decrease in the stock price?

Accepted Answer

A)  A boom in the economy
B)  A reduction in the cost of debt
C)  An increased rate of return
D)  Higher future dividends
E)  An increase in the firm's growth rate

Question 16

Which of the following provisions/features allows the firm to repurchase and retire a given percentage of its preferred stock each year?

Accepted Answer

A)  Participation provision
B)  Cumulative dividends
C)  Sinking fund
D)  Preemptive right
E)  Call provision

Question 17

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)  3.7%
D)  4.2%
E)  13.3%.

Question 18

Stock prices move opposite to the changes in the dividends stockholders expect to be paid in the future, but they move in the same direction as changes in rates of return.

Accepted Answer

A) True 
 B)False

Question 19

_____ have sole voting rights, are owned by the persons who started the company, and generally pay only restricted dividends (if any) for a specified number of years.

Accepted Answer

A)  Preferred shares
B)  Ordinary common shares
C)  Founders' shares
D)  Convertible shares
E)  Retained shares

Question 20

Which of the following securities can be converted into common stock by investors?

Accepted Answer

A)  Proxy stocks
B)  Growth stocks
C)  Preemptive stocks
D)  Founders' shares
E)  Preferred stocks

Exam 7: Stocks Equity Characteristics and Valuation

Excluding stocks traded in the United States, a stock that is traded in a country other than the issuing company's home country is called a ________.

Which of the following types of stock generally pays a fixed amount of dividends each year?

The current expected value of a stock is $32. If investors demand a higher rate of return of 10 percent instead of the 8 percent rate of return, what will the impact on the stock price of the firm be?

A firm undertakes stock repurchase only if the price of its stock is overvalued.

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

If the expected rate of return on a stock exceeds the required rate, it means that _____

A protective feature on a preferred stock that requires preferred dividends that were not paid in previous years to be disbursed before any common stock dividends can be paid is called _____.

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

A call provision gives the issuing corporation the right to call in the preferred stock for redemption.

Which of the following is true of common stock?

The preferred dividend is generally stated as a percentage of the preferred stock's _____.

On January 3 of the current year, the per-share stock price of a firm was $25, and on January 4 of the current year, it was $19. Which of the following is a probable reason for the decrease in the stock price?

Which of the following provisions/features allows the firm to repurchase and retire a given percentage of its preferred stock each year?

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?

Stock prices move opposite to the changes in the dividends stockholders expect to be paid in the future, but they move in the same direction as changes in rates of return.

_____ have sole voting rights, are owned by the persons who started the company, and generally pay only restricted dividends (if any) for a specified number of years.

Which of the following securities can be converted into common stock by investors?