Q&A Hero

Q: Preferred stock may have all of the following characteristics in common with bonds with the exception of: A) the lack of voting rights. B) a possible conversion option into common stock. C) annuity payments. D) a fixed liquidation value. E) tax-deductible payments.

Q: You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ________ quarter(s) of dividends when the next dividend is paid. A) 0 B) 1 C) 2 D) 3 E) either 1, 2, or 3

Q: Which one of these statements related to preferred stock is correct? A) Preferred shareholders normally receive one vote per share of stock owned. B) Preferred shareholders determine the outcome of any election that involves a proxy fight. C) Preferred shareholders are considered to be the residual owners of a corporation. D) Preferred stock normally has a stated liquidating value of $1,000 per share. E) Cumulative preferred shares are more valuable than comparable noncumulative shares.

Q: Which one of the following statements related to corporate dividends is correct? A) Dividends are nontaxable income to shareholders. B) Dividends reduce the taxable income of the corporation. C) The chief executive officer of a corporation is responsible for declaring dividends. D) The chief financial officer of a corporation determines the amount of dividend to be paid. E) Corporate shareholders may receive a tax break on a portion of their dividend income.

Q: Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company: A) must always show a current liability of $2,400 for dividends payable. B) must still declare each dividend before it becomes an actual company liability. C) is obligated to pay $2.40 per share each year in perpetuity. D) will be declared in default if it does not pay at least $2.40 per share per year on a timely basis. E) incurs a liability that must be paid at a later date should the company miss paying an annual dividend payment.

Q: Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders? A) Right to share in company profits prior to other shareholders B) Right to elect the corporate directors C) Right to vote on proposed mergers D) Right to all residual income after the common dividends have been paid E) Right to a permanent seat on the board of directors

Q: Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management? A) Negotiated settlement where each side is granted control over one of the open seats B) Protracted legal battle over control of the board of directors C) Arbitrated settlement where the arbitrator determines who will be elected to the board D) Control of the board decided without your influence E) Proxy fight for control of the board

Q: The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? A) 17 percent B) 20 percent plus one vote C) 25 percent plus one vote D) 50 percent plus one vote E) 51 percent

Q: Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information? A) Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board. B) If straight voting applies, Jen is assured a seat on the board. C) If straight voting applies, Jen can control all of the open seats. D) If cumulative voting applies, Jen is assured one seat on the board. E) If cumulative voting applies, Jen can control all of the open seats.

Q: Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? A) Electing the board of directors B) Receiving a distribution of company profits C) Voting either for or against a proposed merger or acquisition D) Determining the amount of the dividend to be paid per share E) Having first chance to purchase any new equity shares that may be offered

Q: Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? A) No dividends for five years, then increasing dividends forever B) $1 per share annual dividend for two years, then $1.25 annual dividends forever C) Decreasing dividends for six years followed by one final liquidating dividend payment D) Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter E) Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

Q: The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: A) pay an increasing dividend for a period of time and then cease paying dividends altogether. B) increase the dividend amount every other year. C) pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. D) grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. E) pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

Q: Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true? A) The dividend must be constant. B) The stock has a negative capital gains yield. C) The capital gains yield must be zero. D) The required rate of return for this stock increased over the year. E) The firm is experiencing supernormal growth.

Q: Which one of the following represents the capital gains yield as used in the dividend growth model? A) D1 B) D1/P0 C) P0 D) g E) g/P0

Q: Supernormal growth is a growth rate that: A) is both positive and follows a year or more of negative growth. B) exceeds a firm's previous year's rate of growth. C) is generally constant for an infinite period of time. D) is unsustainable over the long term. E) applies to a single, abnormal year.

Q: Which one of the following statements is correct? A) Stocks can only be assigned one dividend growth rate. B) Preferred stocks generally have variable growth rates. C) Dividend growth rates must be either zero or positive. D) All stocks can be valued using the dividend discount models. E) Stocks can have negative growth rates.

Q: When using the two-stage dividend growth model: A) g1cannot be negative. B) Pt= Dt/R. C) g1must be greater than g2. D) g1can be greater than R. E) R must be less than g1but greater than g2.

Q: Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: A) an increase in all stock values. B) all stock values to remain constant. C) a decrease in all stock values. D) dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. E) dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.

Q: Which one of the following applies to the dividend growth model? A) An individual stock has the same value to every investor. B) Even if the dividend amount and growth rate remain constant, the value of a stock can vary. C) Zero-growth stocks have no market value. D) Stocks that pay the same annual dividend will have equal market values. E) The dividend growth rate is inversely related to a stock's market price.

Q: The dividend growth model: A) assumes dividends increase at a decreasing rate. B) only values stocks at Time 0. C) cannot be used to value constant dividend stocks. D) can be used to value both dividend-paying and non-dividend-paying stocks. E) requires the growth rate to be less than the required return.

Q: Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ________ than the stock of Dixie South. A) market price B) dividend yield C) capital gains yield D) total return E) real return

Q: A decrease in which of the following will increase the current value of a stock according to the dividend growth model? A) Dividend amount B) Number of future dividends, provided the total number of dividends is less than infinite C) Dividend growth rate D) Discount rate E) Both the discount rate and the dividend growth rate

Q: A forward PE is based on: A) the last four quarterly dividend payments. B) the last dividend payment multiplied by 2. C) historical earnings. D) estimated future earnings. E) industry averages.

Q: National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: A) basically worthless as it offers no growth potential. B) equal in value to the present value of $1 paid one year from today. C) priced the same as a $1 perpetuity. D) valued at an assumed growth rate of 1 percent. E) worth $1 a share in the current market.

Q: Which one of following is the rate at which a stock's price is expected to appreciate? A) Current yield B) Total return C) Dividend yield D) Capital gains yield E) Coupon rate

Q: The annual dividend yield is computed by dividing ________ annual dividend by the current stock price. A) this year's B) last year's C) next year's D) the past 5-year average E) the next 5-year average

Q: What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A) Maximal-growth model B) Constant-growth model C) Capital pricing model D) Realized-earnings model E) Realized-growth model

Q: Nu-Tek has preferred stock outstanding that pays a cumulative $1.50 dividend per quarter. This company has not paid any of its dividends for the past two quarters. How much must be paid as a dividend for each share of preferred stock if the company plans to pay a dividend to its common shareholders this upcoming quarter? A) $0 B) $4.50 C) $1.50 D) $6.00 E) $3.00

Q: Russell United has 28,500 shares of stock outstanding and has two open seats on its board of directors. Each share of common stock is granted one vote. How many additional votes are required to guarantee a seat on the board if the company were to use straight voting rather than cumulative voting? A) 0 B) 4,750 C) 4,749 D) 4,751 E) 950

Q: Jensen Shipping has 38,400 shares outstanding and uses cumulative voting. The firm grants one vote for each share of common stock. What is the minimum number of votes required to obtain a seat on the board of directors if there are three open seats? A) 12,800 B) 9,600 C) 12,801 D) 9,601 E) 19,201

Q: Raul wants to join the directors of World Trade but currently owns no shares in the company. He knows that no one else will help elect him. Assume there are 46,000 shares outstanding at a market price of $12.80 a share. What is the minimum amount Raul must spend to acquire a seat on the board of directors if there are three open seats and straight voting applies? A) $147,212.80 B) $196,266.67 C) $294,412.80 D) $147,200.00 E) $294,400.00

Q: Jensen Shipping currently has an EPS of $2.31, a benchmark PE of 13.5, and an earnings growth rate of 2.3 percent. What is the target share price 4 years from now? A) $27.32 B) $31.15 C) $38.47 D) $34.15 E) $29.42

Q: Currently, a firm has a benchmark PE of 11.7 and an EPS of $3.20. Earnings are expected to grow 3.2 percent annually. What is the implicit rate of return? A) 3.20 percent B) 2.89 percent C) 4.08 percent D) 3.67 percent E) 4.23 percent

Q: A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year? A) $19.57 B) $22.89 C) $19.07 D) $20.14 E) $21.08

Q: Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price? A) $27.42 B) $27.09 C) $26.08 D) $26.42 E) $28.13

Q: Shore Hotels just paid an annual dividend of $1.50 per share. The company will increase its dividend by 7 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 3 percent dividend growth, after which the company will keep a constant growth rate forever. What is the price of this stock today given a required return of 14 percent? A) $14.85 B) $18.99 C) $11.83 D) $16.54 E) $13.02

Q: HCC, Inc., expects its dividends to grow at 25 percent per year for the next seven years before levelling off to a constant 3 percent growth rate. The required return is 11 percent. What is the current stock price if the annual dividend per share that was just paid was $1.05? A) $43.21 B) $44.36 C) $38.93 D) $32.11 E) $39.96

Q: Farmco just paid its annual dividend of $.32 per share. The dividends are expected to grow at 25 percent annually for the next 4 years and then level off to an annual growth rate of 3 percent indefinitely. What is the price of this stock today given a required return of 15 percent? A) $7.54 B) $7.32 C) $6.03 D) $5.42 E) $9.01

Q: Electric Utilities preferred stock will pay an annual dividend of $12 per share in perpetuity beginning 8 years from now. What is one share of this stock worth today if the market requires a return of 9.5 percent? A) $66.92 B) $64.16 C) $69.08 D) $61.11 E) $63.09

Q: Farm Machinery stock currently sells for $54.80 per share. The market required return is 14.2 percent while the company maintains a constant 3 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock? A) $6.14 B) $5.96 C) $6.08 D) $5.99 E) $5.87

Q: Timber Co. just paid its annual dividend of $3.82 and expects to reduce this payout by 6 percent each year, indefinitely. What is the per share value of this stock if you require a return of 14.5 percent? A) $34.79 B) $17.52 C) $18.27 D) $42.24 E) $39.15

Q: K's Fashions is growing quickly. Dividends are expected to increase by 8 percent annually for the next three years, with the growth rate falling off to a constant 3 percent thereafter. The required return is 14 percent and the company just paid its annual dividend of $3.64 per share. What is the current share price? A) $48.96 B) $51.11 C) $38.79 D) $41.87 E) $55.70

Q: Galloway, Inc., just paid a dividend of $3 per share and has announced that it will increase its dividend by $1 per share for each of the next 4 years, and then never pay another dividend. What is the current per share value at a required return of 12.7 percent? A) $20.08 B) $21.15 C) $16.02 D) $18.60 E) $17.33

Q: You want to have $2 million in real dollars in an account when you retire in 35 years. The nominal return on your investment is 9.94 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal? A) $20,403 B) $7,482 C) $16,017 D) $18,887 E) $19,711

Q: An investment offers a total return of 13.8 percent over the coming year. You believe the total real return will be only 9.4 percent. What do you believe the exact inflation rate will be for the next year? A) 3.52 percent B) 3.67 percent C) 4.02 percent D) 3.89 percent E) 4.14 percent

Q: Suppose the real rate is 3.45 percent and the inflation rate is 2.2 percent. What rate would you expect to earn on a Treasury bill? A) 1.25 percent B) 3.30 percent C) 5.73 percent D) 6.56 percent E) 7.75 percent

Q: You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 8.46 percent and the inflation rate is 3.1 percent. What is the present value of these payments in real dollars? A) $20,720 B) $21,705 C) $20,447 D) $18,811 E) $18,529

Q: You will receive $5,000 a year in real terms for the next 5 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 9.625 percent and the inflation rate is 2.3 percent. What are your winnings worth today in real dollars? A) $20,413 B) $19,367 C) $20,781 D) $21,500 E) $19,137

Q: The yield to maturity on a bond is currently 8.76 percent. The real rate of return is 4.48 percent. What is the rate of inflation? A) 4.10 percent B) 5.64 percent C) 7.24 percent D) 12.04 percent E) 13.63 percent

Q: The outstanding bonds of Winter Tires Inc. provide a real rate of return of 3.6 percent. If the current rate of inflation is 2.68 percent, what is the actual nominal rate of return on these bonds? A) 7.58 percent B) 7.33 percent C) 7.71 percent D) 6.76 percent E) 6.38 percent

Q: A bond has a yield to maturity of 8.97 percent. If the inflation rate is 1.2 percent, what is the real rate of return on the bond? A) 8.97 percent B) 7.90 percent C) 7.57 percent D) 7.68 percent E) 7.95 percent

Q: A bond that pays interest annually yielded 7.37 percent last year. The inflation rate for the same period was 2.4 percent. What was the actual real rate of return? A) 4.19 percent B) 4.25 percent C) 4.85 percent D) 4.41 percent E) 4.49 percent

Q: You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of this bond? A) $1,108.58 B) $1,052.17 C) $1,114.14 D) $1,087.75 E) $1,083.50

Q: A Treasury bond is quoted as 99.6325 asked and 99.1250 bid. What is the bid-ask spread in dollars on a $10,000 face value bond? A) $25.38 B) $5.75 C) $5.08 D) $50.75 E) $2.54

Q: A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000? A) $5,005.46 B) $5,105.46 C) $5,073.11 D) $5,264.44 E) $5,215.00

Q: The 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value and matures in 12 years. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 4 months from today? A) $987.00 B) $994.50 C) $1,002.00 D) $1,011.25 E) $1,022.50

Q: A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $3,000? A) $.30 B) $.90 C) $3.00 D) $.09 E) $.03

Q: The zero coupon bonds of JK Industries have a market price of $318.46, a face value of $1,000, and a yield to maturity of 6.69 percent. How many years is it until these bonds mature? Assume semiannual compounding. A) 34.78 years B) 32.28 years C) 17.39 years D) 24.01 years E) 16.14 years

Q: Global Exporters wants to raise $31.3 million to expand its business. To accomplish this, it plans to sell 15-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 5.75 percent. What is the minimum number of bonds it must sell to raise the money it needs? Assume semiannual compounding. A) 80,411 B) 69,800 C) 74,907 D) 86,029 E) 73,225

Q: A newly issued 10-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? Assume semiannual compounding. A) $47.72 B) $38.53 C) $41.47 D) $57.63 E) $45.89

Q: Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 3.5 years. How much will you receive for your bond if the market yield to maturity is currently 6.19 percent? Ignore any accrued interest. Assume semiannual compounding. A) $896.60 B) $798.09 C) $741.08 D) $756.14 E) $807.86

Q: You are purchasing a 15-year, zerocoupon bond. The yield to maturity is 6.85 percent and the face value is $1,000. What is the current market price? Assume semiannual compounding. A) $406.67 B) $408.18 C) $364.11 D) $321.50 E) $358.47

Q: The 7 percent, semiannual coupon bonds offered by House Renovators are callable in two years at $1,035. What is the amount of the call premium if the bonds have a par value of $1,000? A) $42 B) $35 C) $70 D) $67 E) $105

Q: Wheeler's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate? A) 6.40 percent B) 6.33 percent C) 6.60 percent D) 6.67 percent E) 6.50 percent

Q: Bare Trees United issued 20-year bonds 3 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 91.4 percent of par value, what is the YTM? A) 8.98 percent B) 9.53 percent C) 9.13 percent D) 9.27 percent E) 8.42 percent

Q: Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par? A) 8.75 percent B) 9.23 percent C) 8.41 percent D) 8.62 percent E) 8.87 percent

Q: Sunset Sales has 6.8 percent coupon bonds on the market with 11 years left to maturity. The bonds make semiannual payments and currently sell for 98.6 percent of par. What is the effective annual yield? A) 7.24 percent B) 7.19 percent C) 7.33 percent D) 7.11 percent E) 7.07 percent

Q: A bond has a coupon rate of 8 percent, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent. If interest rates suddenly rise by 1.5 percent, what will be the percentage change in the bond price? A) −8.16 percent B) −8.87 percent C) −7.56 percent D) −7.64 percent E) −8.67 percent

Q: Dexter Mills issued 20-year bonds one year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM is 8.2 percent, what is the current bond price? A) $985.55 B) $991.90 C) $1,142.16 D) $1,190.93 E) $1,098.00

Q: Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and a current price of $1,108.60. At this price, the bonds yield 7.5 percent. What is the coupon rate? A) 8.93 percent B) 8.46 percent C) 9.01 percent D) 9.32 percent E) 8.78 percent

Q: A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms? A) 5.03 percent B) 4.68 percent C) 4.92 percent D) 4.84 percent E) 5.68 percent

Q: The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000? A) $41.50 B) $42.25 C) $43.15 D) $85.00 E) $86.29

Q: A 3.25 percent Treasury bond is quoted at a price of 99.04. The bond pays interest semiannually. What is the current yield? A) 2.94 percent B) 2.99 percent C) 3.28 percent D) 3.33 percent E) 3.23 percent

Q: The yield to maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a coupon bond with 9 percent annual interest for $1,000. The bond has 12 years to maturity. Three years from now, the yield to maturity has declined to 7 percent and you decide to sell. What is your holding period yield? A) 8.84 percent B) 9.49 percent C) 10.96 percent D) 13.01 percent E) 12.83 percent

Q: A corporate bond is quoted at a price of 98.96 and has a coupon rate of 4.8 percent, paid semiannually. What is the current yield? A) 4.24 percent B) 4.85 percent C) 5.36 percent D) 5.62 percent E) 4.66 percent

Q: A $10,000 face value Treasury bond is quoted at a price of 101.6533 with a current yield of 4.87 percent. What is the coupon rate? A) 5.20 percent B) 4.48 percent C) 5.41 percent D) 4.95 percent E) 4.27 percent

Q: The $1,000 par value bonds of Uptown Tours have a coupon rate of 6.5 and a current price quote of 101.23. What is the current yield? A) 6.60 percent B) 6.37 percent C) 6.42 percent D) 6.49 percent E) 6.58 percent

Q: Do-Well bonds have a face value of $1,000 and are currently quoted at 867.25. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds? A) 7.45 percent B) 7.67 percent C) 7.49 percent D) 8.03 percent E) 8.47 percent

Q: The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7.25 percent? A) The bond price will decrease by 9.27 percent. B) The bond price will increase by 7.04 percent. C) The bond price will decrease by 8.64 percent. D) The bond price will increase by 7.16 percent. E) The bond price will increase by 3.86 percent.

Q: A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent? A) −1.79 percent B) −1.38 percent C) −1.64 percent D) 1.79 percent