BUS 350 Principles of finaceChapter 8 smartbook
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common stock
an ownership stake in a corporation
At any point in time, the market value of a firm's common stock depends on many factors, including
The company's profitability.
Growth prospects for the future.
Current market interest rates.
Conditions in the overall stock market.
stock price values arise
from the company's underlying business success
ticker symbol
unique code for a company consisting of one to five letters
to list its stock of NYSE, a company must meet minimum requirements for its
Total number of stockholders.
Level of trading volume.
Corporate earnings.
Firm size.
NASDAQ Stock Market
Large electronic stock exchange.
-no physical trading floor
-via computer
market makers
Dealers and specialists who oversee an orderly trading process.
dealers
NASDAQ market makers who use their own capital to trade with investors
stock index
Index of market prices of a particular group of stocks. The index is used to measure those stocks' performance.
Dow Jones Industrial Average
A popular index of 30 large, industry-leading firms.
Standard & Poor's 500 Index (S&P 500)
A stock index of 500 large companies.
NASDAQ Composite Index
A technology-firm weighted index of stocks listed on the NASDAQ Stock Exchange.
Standard & Poor's chooses companies to include in the S&P 500 Index to represent the 10 sectors of the economy:
Financial
Information technology
Health care
Industrials
Consumer discretionary
Consumer staples
Energy
Telecom services
Utilities
Materials
Market Capitalization
The size of the firm measured as the current stock price multiplied by the number of shares outstanding.
bid
the quoted price investors are likely to receive when they sell stock
ask
the quoted price investors are likely to pay when they buy stock
market order
a stock buy or sell order to be immediately executed at the current market price
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limit orders
a stock buy or sell order at a specific price. It will only be executed if the market price meets the specified price
p
present value
d1
dividends in year 1
p1
present value year 1
constant-growth model
a valuation method based on constantly growing dividends
preferred stock
a hybrid security that has characteristics of both long-term debt and common stock
-pays a constant dividend
dividend yield
last four quarters of dividend income expressed as a percentage of the current stock price
expected return
dividend yield + capital gain
growth stocks
companies expected to have above-average rates of growth in revenue, earnings and/or dividends
Price Earnings Ratio
current stock price divided by 4 quarters of earnings per share
trailing p/e ratio
the P/E ratio computed using the past four quarters of earnings per share
forward p/e ratio
the P/E ratio computed using the estimated next four quarters of earnings per share
value stocks
companies considered to be temporarily undervalued
Define common stock
an ownership stake in a corporation
What factors do the market value of a firm's common stock rely on?
1) profitability
2) growth prospects for the future
3) current market interest rates
4) conditions in the overall stock market
What does common stock offer?
1) security that provides voting privileges
2) potential for current income from dividends & capital appreciation from any stock price increases
3) equity security that offers ownership benefits in a corporation
What time period offers investors the best opportunities to increase wealth on stocks?
30 to 40 years
Define ticker symbol
unique code for a company consisting of 1-5 letters
Describe the NASDAQ Stock Market
large electronic stock exchange
Describe dealers
NASDAQ market makers who use their own capital to trade w/ investors
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Define market makers
dealers & specialists who oversee an orderly trading system
What are the minimum requirements for a company to list stock on the NYSE?
1) total number of stockholders
2) level of trading volume
3) corporate earnings
4) firm size
What best describes the trading process used by NASDAQ
multiple market maker system
What are stock indexes useful for?
to say anything about the general direction of the stock market
Define stock indexes
index of market prices of a particular group of stock; the index is used to measure those stocks' performances
What are the 3 most recognized stock indexes?
1) Dow Jones Industrial Average (DJIA) -- oldest
2) Standard & Poor's 500 Index (S&P 500)
3) NASDAQ Composite Index
What 10 sectors of the economy represent the Standard & Poor's Corp?
1) financial
2) information technology
3) health care
4) industrials
5) consumer discretionary
6) consumer staples
7) energy
8) telecom services
9) utilities
10) materials
Define market capitalization
the size of the firm measured as the current stock price multiplied by the number of shares outstanding
Do the DJIA, S&P 500, & NASDAQ Composite tend to be positively/negatively related?
positively
What applies to publicly-issued common stock?
1) value determined on the stock exchanges
2) ownership position
3) stock value depends on the issuer's business success
How important is the liquidity provided by stock exchanges to the equity markets?
very important
A stock quote displays the last price as $28.13, down 0.10. What was the previous day's closing price?
prior day's close = last price + down
$28.23
What is the key difference between a floor broker on AMEX & a dealer on NASDAQ?
a dealer buys & sells only from his own inventory while a floor broker executes trades both for himself & others
What are current trends related to stock trading?
1) international trading of securities is rising
2) exchanges are becoming more global in nature
3) exchanges are replying more on electronic trading & less on open-outcry
T/F: both the S&P 500 & the NASDAQ Composite indexes are based on market capilalization
true
What services would you expect to receive from a full-service brokerage firm?
1) investment advice
2) in-depth research on individual stocks
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T/F: a dealer will buy stock from an investor at the ask price
false; dealers buy at the bid & sell at the ask, investors buy at the ask & sell at the bid
What is the disadvantage of a market order?
the execution price is unknown in advance
A stock quote shows a P?E of 18. How is the ration defined?
current stock price / last four quarters of earnings
Define market order
a stock buy/sale order to be immediately executed at the current market price
Define limit orders
a stock buy/sale order at a specific price; it will only be executed if the market price meets the executed price
What equation represents today's value?
today's value = present value of next year's dividend & price
What is an underlying basis for a stock's value?
the profitability & success of the issuer
What is the key advantage of a limit order?
the order will only execute at the limit price or better
What describes stock valuation?
the value of a stock today equals the discounted value of the future expected cash flows
A stock is expected to pay a dividend of $2 in year 2, $3 in year 3, & sell for $40 at the end of year 3. The discount rate is 11%. What is the correct formula for computing the current stock price?
P0 = $2/1.11^2 + [($3+$40)/1.11^3]
A firm just paid its annual dividend of $1.80 & expects to increase that dividend each year. The discount rate is 11%. Which one of these correctly identifies an error when computing the current value of this firm's stock?
P0 = $1.80/(0.11 - 0.025); the value of D1 is incorrect as $1.80 equals D0
A firm just paid an annual dividend of $1.40 & increases that dividend by 2% each year. How do you find the price of the firm's stock at year 4 if the discount rate is 13%
P4 = (1.40 x 1.02^5)/(0.13 - 0.02)
What is one assumption of the constant-growth dividend model?
g < i -- the growth rate must be less than the discount rate
What are basic assumptions of variable growth rate valuation?
1) g1 applied to a designated number of years
2) g2 < i
3) g1 can be negative, positive, or equal to zero
The overall rate of growth for a firm & its industry is 3.5%. Which of these combinations of dividend growth rates are acceptable when computing the current value of the firm's stock?
short run growth = 15%; long-run growth = 3%
Which one generally applies to preferred stock?
higher dividend yields than common stock issued by the same issuer
What applies to the valuation of a preferred stock?
1) preferred dividends are assumed to be a constant dollar amount
2) preferred dividend payments are assumed to be infinite
Assume a preferred stock pays a constant annual dividend. Which of these is a correct computation of the dividend yield?
1) dividend yield = D0/P0
2) dividend yield = D1/P0
3) dividend yield = D/P0
How do you calculate dividend yield?
dividend yield = rate of return - growth rate; expected return = dividend yield + revised growth rate
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Why are dividends an important part of a common stock's rate of return?
1) dividends increase the return for stocks w/ capital gains & reduce the loss for stocks w/ capital losses
2) dividends tend to be more stable than capital gains
How can preferred stock be valued?
1) preferred stock can be viewed as perpetuity, PV = PMT/i
2) preferred stock can be valued using the constant growth model
How is the dividend yield on a constant dividend preferred stock defined?
1) las four quarters of dividend income / current stock price
T/F: a P/E is a measure of relative value
true; P/E ratios are used to compare one firm's stock value to another firm's stock value
What does it mean when a P/E is designed as a trailing P/E?
the earnings used in the P/E calculation were for the past four quarters
Which of these firms are considered to be incorrectly priced?
1) low growth, high P/E
2) high growth, low P/E
What is an indication of a value stock?
low P/E, high growth
T/F: a growth stock is considered to be a bargain stock
false; a value stock is considered
What is the best definition of the variable-growth rate stock valuation method?
stock valuation method used when a firm's current growth rate is expected to change in the future
What summarizes stock valuation?
stock valuation is an estimate of a stock's value given a certain set of assumptions
1. Which of these terms best describes the trading process used by NASDAQ?
Multiple market maker system
2. What is the definition of market capitalization?
Current stock price times number of shares outstanding
3. Which one of these statements is correct?
The DIJA, S&P 500, and NASDAQ Composite tend to be positively related.
4. Which statements are correct? Select all that apply.
-A limit sell order will only execute at the limit price or higher.
-A market order will execute immediately, regardless of the price.
-A limit sell order may never be executed.
5. Assume you are computing P0, which is the current price of a stock. What discount factor will you use to discount the dividend in year 3?
(1 + i)3
6. A stock is expected to pay a dividend of $2 in year 2, $3 in year 3, and sell for $40 at the end of year 3. The discount rate is 11 percent. Which one of these is the correct formula for computing the current stock price?
P0 - $2 / 1.112 + [($3 + $40) / 1.113]
7. What is the key premise upon which the dividend discount model is based?
All future cash flows from a stock are dividend payments.
8. A stock is expected to pay a dividend of $1.42 next year and increase that amount by 3 percent annually thereafter. The discount rate is 12 percent. How do you compute the current price?
P0 = $1.42 / (0.12 - 0.03)
9. What is the basic assumption of the constant-growth model?
If the dividend amount changes each year, it does so by a constant percentage.
10. Which of these accurately recaps dividend growth estimations and limitations as they apply to the dividend growth model?
-Dividends can grow quickly in the short-run but cannot exceed the overall economic growth rate over the long-run.
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-Dividend growth can be estimated based on historical data, dividend trends, or analyst's forecasts.
11. A preferred stock has which of these characteristics?
Zero dividend growth
12. Which of these applies to the valuation of a preferred stock? Select all that apply.
-Preferred dividends are assumed to be a constant dollar amount.
-Preferred dividend payments are assumed to be infinite
13. How is the dividend yield on a constant-dividend preferred stock defined?
Last four quarters of dividend income/current stock price
14. A stock has a dividend yield of 1.4 percent. What is the expected return if the growth rate is 4 percent?
What if the growth rate is 8 percent? 5.4 percent; 9.4 percent
15. How is the discount rate used to value a stock related to the expected return on the stock?
Assume the stock price failry reflects the stock's value. The discount rate should equal the expected rate of return.
16. Lew's increases its annual dividend by 2 percent annually. The last dividend paid was $1.42 and the stock price is $46. How is the expected rate of return computed?
i=(($1.42 x 1.02)/$46)+0.02
17. Approximately how much of a decline occurred in the NASDAQ composite index in the two and a half
years following its peak in March of 2000?
Approximately 78 percent
18. Mary placed an order to purchase 100 shares of ABC at the going price. The order was filled as soon as it reached the floor of the exchange. What type of order did Mary place?
Market buy order
19. The overall rate of growth for a firm and its industry is 3.5 percent. Which of these combinations of dividend growth rate are acceptable when computing the current value of the firm's stock?
Short-run growth = 15 percent; Long-run growth= 3 percent
20. Which of these descriptions apply to common stock?
-A security that provides the potential for its owner to receive both dividends and gains
-An equity security that offers ownership benefits in a corporation
-A security that provides voting privileges.
21. Which of these are basic assumptions of a variable growth rate valuation?
g1 applies to a designated number of years
g2 < i
g1 can be negative positive or equal to zero
22. What is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock valuation formula?
To replace all of the dividends paid in stage 2
23. A stock just paid an annual dividend of $0.40 per share. The firm expects to increase the dividend by 20 percent per year for the next four years and 3 percent per year thereafter. The discount rate is 11 percent. Which one of these is correct regarding the two-stage growth formula?
g2=0.03
24. Which of these is a correct interpretation of a P/E ratio?
The stock with the lowest P/E has the lowest current price per dollar of earnings.
25. What does it mean when a P/E is designated as a trailing P/E?
The earnings used in the P/E calculation were for the past four quarters.
26. Which of these characteristics apply to the New York Stock Exchange (NYSE)
-Market maker (Specialist)
-Physical trading floor
-Brokers
27. The textbook lists four key factors that affect the market value of a firm's common stock. Which of these is one of those four factors?
The company's future growth prospects
28. Which one of these is the primary basis for a stock's value?
The profitability and success of the issuer
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29. Which of these are current trends related to stock trading? Select all that apply
-Exchanges are becoming more global in nature.
-Exchanges are relying more on electronic trading and less on open outcry
-International trading of securities is rising
30. Which one of these applies to stock valuation?
The value of a stock today equals the discounted value of the future expected cash flows.
31. Which one of these best summarizes stock valuation?
Stock valuation is an estimate of stock's value given a certain set of assumptions.
32. A firm just paid its annual dividend of $1.80 and expects to increase that dividend each year. The discount rate is 11 percent. Which one of these correctly identifies an error when computing the current value of this firm's stock?
P0 = $1.80 / (0.11-0.025); The value of D1 is incorrect as $1.80 equals D0
33. A preferred stock is currently selling for $68 a share. What will happen to the stock price if market interest rates increase?
The stock price will decrease
34. What is the definition of a growth stock?
Stock of a company with above-average rates of increases in revenues, earnings, and/or dividends.
35. Why are dividends an important part of a common stock's rate of return?
-Dividends increase the return for stocks with capital gains and reduce the loss for stocks with capital losses.
-Dividends tend to be more stable than capital gains.
36. Which one of these defines the current value of stock?
Discounted value of both the future dividends and the future stock price.
37. Which of these services should you expect to receive from a full-service brokerage firm?
-Investment advice
-In-depth research on individual stocks
38. A stock quote shows a P/E of 18. How is the ratio defined?
Current stock price / last four quarters of earnings.
39. What is the key difference between a floor broker on AMEX and a dealer on NASDAQ?
A dealer buys and sells only from his own inventory while a floor broker executes trades both for himself and others.
40. Which of these indexes is the most technology-oriented?
NASDAQ Composite
41. Which of these is correct?
Dealers are willing to sell stocks at the ask price.
42. Marcos owns 1,500 shares of ABC stock which he purchased at $44 a share. The stock has been steadily decreasing in value and he wants to cut his losses now as he expects the stock price to decline further. Which type of order should Marcos place?
Market sell order for 1,500 shares
43. Just before the market closes, ABC stock is selling for $43 a share, so you place a market sell order for
300 shares. The order reaches the trading floor after the market closes for the day. The next morning, ABC stock opens at a price of $28 a share. What happens to you order?
The order is executed at a price of $28 a share.
44. You own 500 share of ABC stock. The stock has been declining in price and is now selling for $30 a share. You decide to sell all your shares and place a limit sell order at a price of $30 a share. When you order reaches the trading desk, the market price has declined to $29 a share. The next day the price falls to $18 a share. What is the status of your order?
The order has not executed. You still own 500 shares.
45. What is the primary disadvantage of a limit order?
A limit order may not execute.
46. Which of these is the key service provided by stock exchanges that attracts investors?
Liquidity
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47. Which one of the following is the key financial market feature that must be present if investors are to
be attracted to equity securities?
Market liquidity
48. Which of these firms are considered to be incorrectly priced?
-Low growth high P/E
-High growth low P/E
49. Which of these indicates a value stock?
Low P/E, high growth
50. What is the primary purpose of the P/E valuation formula?
Estimate the future price of a stock
51. A firm is expected to have net earnings of $1,480,000 three years from now. There are 500,000 shares of stock outstanding. The firm's current P/E ratio is 18 and it is expected to remain at that level. What is the firm's expected stock price for year 3?
$53.28
Formula: P3 = 18 x (1,480,000 / 500,000)
52. A stock just paid an annual dividend of $0.70. The dividend is expected to increase by 10 percent per year for the next three years and by 2 percent per year thereafter. What is the current price at a discount
rate of 9 percent?
$12.62
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How can a preferred stock be valued? Select all that apply.
Preferred stock can be valued using the constant-growth model; Preferred stock can be valued as a perpetuity, PV=PMT/i
How is the dividend yield on a constant-dividend preferred stock defined?
Last four quarters of dividend income/Current stock price
Which of these apply to publicly-issued common stock? Select all that apply.
Value determined on the stock exchanges; Ownership position; Stock value depends on the issuer's business success
The overall rate of growth for a firm and its industry is 3.5 percent. Which of these combinations of dividend growth rates are acceptable when computing the current value of the firm's stock?
Short-run growth= 15 percent; Long-run growth= 3 percent
In a stock valuation formula, what does the symbol D1 represent?
Estimated dividend in time period 1, or next year's dividend when solving for the current price
Which of these are basic assumptions of a variable growth rate valuation? Select all that apply.
g1 applies to a designated number of years; g1 can be negative, positive, or equal to zero; g2<i
Which of these terms best describes the trading process used by NASDAQ?
Multiple market maker system
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Which of the following are two of the four key factors listed in the textbook that affect the value of a stock?
Current market interest rates and overall stock market conditions
What is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock valuation formula?
To replace all of the dividends paid in stage 2
Assume a preferred stock pays a constant annual dividend. Which of these is a correct computation of the dividend yield? Select all that apply.
Dividend yield=D1/P0; Dividend yield=D/P0; Dividend yield=D0/P0
Which of these descriptions apply to common stock? Select all that apply.
An equity security that offers ownership benefits in a corporation; A security that provides voting privileges; A security that provides the potential for its owner to receive both dividends and capital gains
What is the definition of market capitalization?
Current stock price times number of shares outstanding
How is the discount rate used to value a stock related to the expected return on the stock? Assume the stock price fairy reflects the stock's value.
The discount rate should equal the expected rate of return
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Which of these applies to the valuation of a preferred stock? Select all that apply.
Preferred dividends are assumed to be a constant dollar amount; Preferred dividend payments are assumed to be infinite
Which one of these statements is correct? (DJIA, S&P, NASDAQ)
The DJIA,S&P 500, and NASDAW Composite tend to be positively related
A stock has an expected rate of return of 10.6 percent based on a 9 percent rate of growth. What will the
expected rate of return be if analysts revise the firm's growth rate to 7.5 percent?
9.1 percent
Dividend yield= 10.6%-9%=1.6%; Expected rate of return=1.6%+7.5%=9.1%
Which of these services should you expect to receive from a full-service brokerage firm? Select all that apply.
In-depth research on individual stocks; Investment advice
Which of these characteristics apply to the New York Stock Exchange (NYSE)? Select all that apply.
Brokers; Specialists; Physical trading floor
Which one of these applies to stock valuation?
The value of a stock today equals the discounted value of the future expected cash flows.
A preferred stock has which of these characteristics?
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Zero dividend growth
What is the basic assumption of the constant-growth model?
If the dividend amount changes each year, ti does so by a constant percentage
Which of these are current trends related to stock trading? Select all that apply.
International trading of securities is rising; Exchanges are becoming more global in nature; Exchanges are
relying more on electronic trading and less on open-outcry
A stock has a dividend yield of 1.4 percent. What is the expected return if the growth rate is 4 percent? What if the growth rate is 8 percent?
5.4 percent; 9.4 percent
Why do you have to use the dividend at time n + 1 to compute the terminal price in the two-stage growth valuation model?
The terminal price is the time n price. The dividend used to compute a price must always be on time period ahead of the price.
How is the discount rate used to evaluate a security related to the security's level of risk?
The higher the level of risk, the higher the discount rate needs to be
Which statements are correct? Select all that apply. (Sell order, market order)
A limit sell order may never be executed; A market order will execute immediately, regardless of the price; A limit sell order will only execute at the limit price or higher
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Approximately how much of a decline occurred in the NASDAQ Composite index in the two and a half years following its peak in March of 2000?
Approximately 78 percent
Yesterday, Trevor placed a limit buy order at a price of $35 on 100 shares of ABC stock. Since the order was placed, the market price of ABC stock has ranged from $35.10 to $36.30 a share. What is the status of Trevor's order?
The order has not executed.
What is the primary disadvantage of a limit order?
A limit order may not execute.
Which of these is correct? (Dealers)
Dealers are willing to sell stocks at the ask price.
Why are dividends and important part of a common stock's rate of return? Select all that apply.
Dividends increase the return for stocks with capital gains and reduce the loss for stocks with capital losses; Dividends tend to be more stable than capital gains
Which of these is the key service provided by stock exchanges that attracts investors?
Liquidity
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What is the primary purpose of the P/E valuation formula?
Estimate the future price of a stock
Which of these characteristics apply to the American Stock Exchange but not to NASDAQ? Select all that apply.
One designated market maker overseeing the process for an individual stock on a trading floor; Physical trading floor
Which one of these statements is correct? (P/E)
A forward P/E is less accurate than a trailing P/E.
A firm just paid an annual dividend of $1.40 and increases that dividend by 2 percent each year. How do you find the price of the firm's stock at year 4 if the discount rate is 13 percent?
P4=($1.40x1.02^5)/(0.13-0.02)
Lew's increases its annual dividend by 2 percent annually. The last dividend paid was $1.42 and the stock
price is $46. How is the expected rate of return computed?
i=[($1.42x1.02)/$46]+0.02
A stock is expected to pay annual dividends of $1.20 and sell for $42.60 three years from today. Which of
these is the correct formula for computing the value of the stock today if the discount rate is 9 percent?
P0=($1.20/1.09)+($1.20/1.09^2)+[($1.20+$42.60)/1.09^3]
What is the key premise upon which the dividend discount model is based?
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All future cash flows from a stock are dividend payments
A stock quote displays the last price as 28.13, down 0.10. What was the previous day's closing price?
$28.23
Which of these is a correct interpretation of a P/E ratio?
The stock with the lowest P/E has the lowest current price per dollar of earnings.
A stock just paid an annual dividend of $1.10. The dividend is expected to increase by 10 percent per year for the next two years and then increase by 2 percent per year thereafter. The discount rate is 14 percent. Which of these correctly computes the current stock price?
P0=($1.10(1.1)/1.14)+(($1.10(1.1)^2)+($1.10(1.1)^2(1.02)/0.14-0.02)/1.14^2
A stock is expected to pay a dividend of $1.42 next year and increase that amount by 3 percent annually thereafter. The discount rate is 12 percent. How do you compute the current price?
P0=$1.42/(0.12-0.03)
Which of these descriptions apply to common stock?
a. A financial security which provides guaranteed dividend payments
b. A security that provides the potential for its owner to receive both dividends and capital gains
c. A security that provides voting privileges
d. An equity security that offers ownership benefits in a corpora
b. A security that provides the potential for its owner to receive both dividends and capital gains
c. A security that provides voting privileges
d. An equity security that offers ownership benefits in a corporation
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Which of these is the key service provided by stock exchanges that attracts investors?
Research information
Ticker symbols
Liquidity
Trading volume reports
Liquidity
A stock quote displays the last price as 28.13, down 0.10. What was the previous day's closing price?
$28.23
A(n) ________________ symbol is the unique code for a company on a stock exchange. It consists of one
to five letters.
ticker
Which of these characteristics apply to the New York Stock Exchange (NYSE)? Select all that apply.
Brokers
Specialists
Physical trading floor
No actual trading floor
Brokers
Specialists
Physical trading floor
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Which of these apply to publicly-issued common stock?
Ownership position
Value determined on the stock exchanges
Stock value depends on the issuer's business success
Valueless security unless dividends are currently being paid
Ownership position
Value determined on the stock exchanges
Stock value depends on the issuer's business success
How important is the liquidity provided by stock exchanges to the equity markets?
Multiple choice question.
Somewhat important
Of little importance
Very important
Not important
very important
A stock quote shows a P/E of 18. How is the ratio defined?
Current stock price/Last four quarters of earnings
Average price for the last 52-week period/Estimated annual earnings for the next 12 months
Current stock price/Estimated annual earnings for the next 12 months
Average price for the last 52-week period/Last four quarters of earnings
Current stock price/Last four quarters of earnings
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_____________, located around the perimeter of the floor of the stock exchange, act as agents for those
buying and selling stocks.
Brokers
Which one of these is a factor that has minimum requirements which a firm must meet to be listed on the NYSE?
Number of corporate directors
Number of employees
Number of stockholders
Dividends per share
Number of stockholders
Which of these terms best describes the trading process used by NASDAQ?
Multiple market maker system
Broker system
Specialist system
Face-to-face trading
Multiple market maker
Which of these descriptions apply to common stock?
A security that provides voting privileges
A financial security which provides guaranteed dividend payments
A security that provides the potential for its owner to receive both dividends and capital gains
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An equity security that offers ownership benefits in a corporation
A security that provides voting privileges
A security that provides the potential for its owner to receive both dividends and capital gains
An equity security that offers ownership benefits in a corporation
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True or false: The value of a firm as measured by its market capitalization is solely dependent upon the market value of the firm's stock.
false
Which of these is the key service provided by stock exchanges that attracts investors?
Research information
Trading volume reports
Ticker symbols
Liquidity
liquidity
If you purchase shares of stock on NASDAQ, who is the most likely seller of those shares?
dealer
Mary placed an order to purchase 100 shares of ABC stock at the going price. The order was filled as soon as it reached the floor of the exchange. What type of order did Mary place?
Multiple choice question.
Market sell order
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limit buy order
market buy order
limit sell order
market buy order
What is the definition of market capitalization?
Current stock price times number of shares outstanding
Current stock prices times number of shares traded
Book value per share times number of shares outstanding
Book value of equity
Which one of these defines the current value of a stock?
Discounted value of both the future dividends and the future stock price
A stock just paid an annual dividend of $0.40 per share. The firm expects to increase the dividend by 20 percent per year for the next four years and 3 percent per year thereafter. The discount rate is 11 percent. Which one of these is correct regarding the two-stage growth formula?
g2=0.03
Which one of these is a factor that has minimum requirements which a firm must meet to be listed on the NYSE?
Number of stockholders
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You own 500 shares of ABC stock. The stock has been declining in price and is now selling for $30 a share. You decide to sell all your shares and place a limit sell order at a price of $30 a share. When you order reaches the trading desk, the market price has declined to $29 a share. The next day the price falls to $18 a share. What is the status of your order?
The order has not executed. You still own 500 shares.
Which of these firms are considered to be incorrectly priced? Select all that apply.
Low growth, high P/E; High growth, low P/E
What is the definition of a growth stock?
Stock of a company with above-average rates of increases in revenues, earnings, and/or dividends
Why are dividends and important part of a common stock's rate of return?
Dividends tend to be more stable than capital gains; Dividends increase the return for stocks with capital gains and reduce the loss for stocks with capital losses
If you want to estimate a future price, Pn, using the P/E valuation formula, you should use the estimated earnings for which year?
Year n
Which of these indexes is the most technology-oriented?
NASDAQ Composite
Which of these indicates a value stock?
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Low P/E, high growth
What does it mean when a P/E is designated as a trailing P/E?
The earnings used in the P/E calculation were for the past four quarters.
Just before the market closes, ABC stock is selling for $43 a share, so you place a market sell order for 300 shares. The order reaches the trading floor after the market closes for the day. The next morning, ABC stock opens at a price of $28 a share. What happens to your order?
The order is executed at a price of $28 a share.
Marcos owns 1,500 shares of ABC stock which he purchased at $44 a share. The stock has been steadily decreasing in value and he wants to cut his losses now as he expects the stock price to decline further. What type of order should Marcos place?
Market sell order for 1,500 shares
A stock just paid an annual dividend of $0.70. The dividend is expected to increase by 10 percent per year for the next three years and by 2 percent per year thereafter. What is the current price at a discount
rate of 9 percent?
$12.62
P0=($0.70(1.1)/1.09)+($0.70(1.1)^2/1.09^2)+(($0.70(1.1)^3)+(($0.70(1.1^3)(1.02))/(0.09-
0.02))/1.09^3=$12.62
A firm is expected to have net earnings of $1,480,000 three years from now. There are 500,000 shares of stock outstanding. The firm's current P/E ratio is 18 and it is expected to remain at that level. What is the firm's expected stock price for year 3?
$53.28
P3=18x($1,480,000/500,000)=$53.28
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Which one of these is an advantage of a market order?
The order will execute immediately.
A preferred stock is currently selling for $68 a share. What will happen to the stock price if market interest rates increase?
The stock price will decrease.
Why are dividends an important part of a common stock's rate of return? Select all that apply.
Dividends increase the return for stocks with capital gains and reduce the loss for stocks with capital losses; Dividends tend to be more stable than capital gains.
Which one of these is the underlying basis for a stock's value?
The profitability and success of the issuer
A firm just paid its annual dividend of $1.80 and expects to increase that dividend each year. The discount rate is 11 percent. Which one of these correctly identifies an error when computing the current value of this firm's stock?
P0=$1.80/(0.11-0.025); The value of D1 is incorrect as $1.80 equals D0
Which one of these best summarizes stock valuation?
Stock valuation is an estimate of a stock's value given a certain set of assumptions.
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Which one of the following is the key financial market feature that must be present if investors are to be attracted to equity securities?
Market liquidity
Which one of these firms are considered to be incorrectly priced? Select all that apply.
High growth, low P/E; Low growth, high P/E
A young firm has a P/E of 36 as compared to its industry average P/E of 21. Which one of these is the best explanation for the firm's higher P/E?
TheWhich of these descriptions apply to common stock? Select all that apply.
Multiple select question.
A security that provides voting privileges
A financial security which provides guaranteed dividend payments
An equity security that offers ownership benefits in a corporation
A security that provides the potential for its owner to receive both dividends and capital gains
A security that provides voting privileges
An equity security that offers ownership benefits in a corporation
A security that provides the potential for its owner to receive both dividends and capital gain
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located around the perimeter of the floor of the stock exchange, act as agents for those buying and selling stocks.
Brokers
Which of these apply to publicly-issued common stock? Select all that apply.
Multiple select question.
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Value determined on the stock exchanges
Stock value depends on the issuer's business success
Valueless security unless dividends are currently being paid
Ownership position
Which of these apply to publicly-issued common stock? Select all that apply.
Multiple select question.
Value determined on the stock exchanges
Stock value depends on the issuer's business success
Valueless security unless dividends are currently being paid
Ownership position
True or false: The value of a firm as measured by its market capitalization is solely dependent upon the market value of the firm's stock.
False
Which of these terms best describes the trading process used by NASDAQ?
Multiple market maker system
What is the definition of market capitalization?
Multiple choice question.
Book value of equity
Current stock prices times number of shares traded
Book value per share times number of shares outstanding
Current stock price times number of shares outstanding
Current stock price times number of shares outstanding
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Which of these is correct?
Multiple choice question.
Dealers are willing to purchase stocks at the ask price.
Dealers are willing to sell stocks at the ask price.
Investors buy stocks at the bid price.
Investors earn the spread.
Dealers are willing to sell stocks at the ask price.
Which statements are correct? Select all that apply.
A market order will execute immediately, regardless of the price.
A limit sell order may never be executed.
A limit sell order will only execute at the limit price or higher.
A limit sell order may never be executed.
A market order will execute immediately, regardless of the price.
A limit sell order may never be executed.
A limit sell order will only execute at the limit price or higher.
Which one of these applies to stock valuation?
The value of a stock today is determined by the stock's historical values.
The value of a stock can be computed with certainty.
The value of a stock today equals the discounted value of the future expected cash flows.
The value of a stock today is based on guaranteed future cash flows.
The value of a stock today equals the discounted value of the future expected cash flows.
Which one of these best defines the dividend discount model?
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A stock valuation method based on the present value of all future dividends
A method of valuing a stock based on a fixed dividend amount
A method of valuing a stock by limiting the number of future dividends that are to be discounted
A stock valuation method based on the present value of future dividends and an expected future stock price
A stock valuation method based on the present value of all future dividends
What is the basic assumption of the constant-growth model?
Dividends must increase by a constant percentage each year.
If the dividend amount changes each year, it does so by a constant percentage.
Dividends increase by a constant dollar amount each year.
The model assumes that dividends become a constant dollar amount after a set number of years.
If the dividend amount changes each year, it does so by a constant percentage.
Which one of these generally applies to preferred stock?
Multiple choice question.
Constant stock price
Principal repaid at maturity
Higher dividend yields than common stock issued by the same issuer
Stock prices that are directly related to market interest rates
Higher dividend yields than common stock issued by the same issuer
Which one of these defines the current value of a stock?
Multiple choice question.
Discounted value of a future stock price
Compounded value of both the future dividends and the future stock price
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Discounted value of both the future dividends and the future stock price
Summation of future dividends and the future stock price
Discounted value of both the future dividends and the future stock price
Which of these applies to the valuation of a preferred stock? Select all that apply.
Preferred dividend payments are assumed to have a finite life.
Preferred dividends are assumed to have a constant, non-zero rate of growth.
Preferred dividend payments are assumed to be infinite.
Preferred dividends are assumed to be a constant dollar amount.
Preferred dividend payments are assumed to be infinite.
Preferred dividend payments are assumed to be infinite.
Preferred dividends are assumed to be a constant dollar amount.
What is the key premise upon which the dividend discount model is based?
Multiple choice question.
All future cash flows from a stock are dividend payments.
Only dividends for the first 10 years are considered.
Dividends are paid only for a limited number of years.
The dividend amount must remain constant.
All future cash flows from a stock are dividend payments.
A firm just paid an annual dividend of $1.40 and increases that dividend by 2 percent each year. How do you find the price of the firm's stock at year 4 if the discount rate is 13 percent?
P4= ($1.40 × 1.02)/(0.13 - 0.02)
P4 = ($1.40 × 1.025)/(0.13 - 0.02)
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P4 = ($1.40 × 1.023)/(0.13 - 0.02)
P4 = ($1.40 × 1.024)/(0.13 - 0.02)
P4 = ($1.40 × 1.025)/(0.13 - 0.02)
A preferred stock has which of these characteristics?
Multiple choice question.
Guaranteed voting rights
Zero dividend growth
Owned primarily by individual investors
Residual ownership claim
Zero dividend growth
Which of these are basic assumptions of a variable growth rate valuation? Select all that apply.
g2 < i
g1 can be negative, positive, or equal to zero
g1 applies to a designated number of years
g1 must be a sustainable rate of growth
g2 < i
g1 can be negative, positive, or equal to zero
g1 applies to a designated number of years
How is the discount rate used to value a stock related to the expected return on the stock? Assume the stock price fairly reflects the stock's value.
Multiple choice question.
The discount rate should equal the expected rate of return.
The discount should be equal to or less than the expected rate of return.
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The discount rate should exceed the expected rate of return.
The discount rate should be less than the expected rate of return.
The discount rate should equal the expected rate of return.
What is the primary purpose of the P/E valuation formula?
Estimate the future price of a stock
Estimate a firm's future earnings
Estimate future dividends
Determine the appropriate P/E for a firm
Estimate the future price of a stock
What is the best definition of the variable-growth rate stock valuation method?
Multiple choice question.
Stock valuation method used when a firm is expected to pay totally irregular dividends into infinity
Stock valuation method used when a firm is expected to go out of business
Stock valuation method used when a firm has variable earnings but a constant dividend rate of growth
Stock valuation method used when a firm's current growth rate is expected to change in the future
Stock valuation method used when a firm's current growth rate is expected to change in the future
A firm is expected to have net earnings of $4.00 per share of stock outstanding. The firm's current P/E ratio is 14 and it is expected to remain at that level. What is the firm's expected stock price for year 2?
Multiple choice question.
$102.00
$56.00
$18.00
$53.28
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14 x 4
56
Which one of these statements is correct?
Multiple choice question.
Media outlets generally report the forward P/E.
Investors generally use the trailing P/E.
The trailing P/E includes investor's expectations of future profits.
A forward P/E is less accurate than a trailing P/E.
A forward P/E is less accurate than a trailing P/E.
Which of these are basic assumptions of a variable growth rate valuation? Select all that apply.
Multiple select question.
g1 applies to a designated number of years
g1 can be negative, positive, or equal to zero
g1 must be a sustainable rate of growth
g2 < i
g2 < i
g1 can be negative, positive, or equal to zero
g1 applies to a designated number of years
A firm is expected to have net earnings of $1,480,000 three years from now. There are 500,000 shares of stock outstanding. The firm's current P/E ratio is 18 and it is expected to remain at that level. What is the firm's expected stock price for year 3?
Multiple choice question.
$55.07
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$44.29
$53.28
$49.16
Reason:
P3 = 18 × ($1,480,000/500,000) = $53.28
If you want to estimate a future price, Pn, using the P/E valuation formula, you should use the estimated earnings for which year?
Multiple choice question.
Year n
Year n - 1
Year 0
Year n + 1
Year n
How can a preferred stock be valued? Select all that apply.
Preferred stock can be valued using the constant-growth model; Preferred stock can be valued as a perpetuity, PV=PMT/i
How is the dividend yield on a constant-dividend preferred stock defined?
Last four quarters of dividend income/Current stock price
Which of these apply to publicly-issued common stock? Select all that apply.
Value determined on the stock exchanges; Ownership position; Stock value depends on the issuer's business success
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The overall rate of growth for a firm and its industry is 3.5 percent. Which of these combinations of dividend growth rates are acceptable when computing the current value of the firm's stock?
Short-run growth= 15 percent; Long-run growth= 3 percent
In a stock valuation formula, what does the symbol D1 represent?
Estimated dividend in time period 1, or next year's dividend when solving for the current price
Which of these are basic assumptions of a variable growth rate valuation? Select all that apply.
g1 applies to a designated number of years; g1 can be negative, positive, or equal to zero; g2<i
Which of these terms best describes the trading process used by NASDAQ?
Multiple market maker system
Which of the following are two of the four key factors listed in the textbook that affect the value of a stock?
Current market interest rates and overall stock market conditions
What is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock valuation formula?
To replace all of the dividends paid in stage 2
Assume a preferred stock pays a constant annual dividend. Which of these is a correct computation of the dividend yield? Select all that apply.
Dividend yield=D1/P0; Dividend yield=D/P0; Dividend yield=D0/P0
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Which of these descriptions apply to common stock? Select all that apply.
An equity security that offers ownership benefits in a corporation; A security that provides voting privileges; A security that provides the potential for its owner to receive both dividends and capital gains
What is the definition of market capitalization?
Current stock price times number of shares outstanding
How is the discount rate used to value a stock related to the expected return on the stock? Assume the stock price fairy reflects the stock's value.
The discount rate should equal the expected rate of return
Which of these applies to the valuation of a preferred stock? Select all that apply.
Preferred dividends are assumed to be a constant dollar amount; Preferred dividend payments are assumed to be infinite
Which one of these statements is correct? (DJIA, S&P, NASDAQ)
The DJIA,S&P 500, and NASDAW Composite tend to be positively related
A stock has an expected rate of return of 10.6 percent based on a 9 percent rate of growth. What will the
expected rate of return be if analysts revise the firm's growth rate to 7.5 percent?
9.1 percent
Dividend yield= 10.6%-9%=1.6%; Expected rate of return=1.6%+7.5%=9.1%
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Which of these services should you expect to receive from a full-service brokerage firm? Select all that apply.
In-depth research on individual stocks; Investment advice
Which of these characteristics apply to the New York Stock Exchange (NYSE)? Select all that apply.
Brokers; Specialists; Physical trading floor
Which one of these applies to stock valuation?
The value of a stock today equals the discounted value of the future expected cash flows.
A preferred stock has which of these characteristics?
Zero dividend growth
What is the basic assumption of the constant-growth model?
If the dividend amount changes each year, ti does so by a constant percentage
Which of these are current trends related to stock trading? Select all that apply.
International trading of securities is rising; Exchanges are becoming more global in nature; Exchanges are
relying more on electronic trading and less on open-outcry
A stock has a dividend yield of 1.4 percent. What is the expected return if the growth rate is 4 percent? What if the growth rate is 8 percent?
5.4 percent; 9.4 percent
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Why do you have to use the dividend at time n + 1 to compute the terminal price in the two-stage growth valuation model?
The terminal price is the time n price. The dividend used to compute a price must always be on time period ahead of the price.
How is the discount rate used to evaluate a security related to the security's level of risk?
The higher the level of risk, the higher the discount rate needs to be
Which statements are correct? Select all that apply. (Sell order, market order)
A limit sell order may never be executed; A market order will execute immediately, regardless of the price; A limit sell order will only execute at the limit price or higher
Approximately how much of a decline occurred in the NASDAQ Composite index in the two and a half years following its peak in March of 2000?
Approximately 78 percent
Yesterday, Trevor placed a limit buy order at a price of $35 on 100 shares of ABC stock. Since the order was placed, the market price of ABC stock has ranged from $35.10 to $36.30 a share. What is the status of Trevor's order?
The order has not executed.
What is the primary disadvantage of a limit order?
A limit order may not execute.
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Which of these is correct? (Dealers)
Dealers are willing to sell stocks at the ask price.
Why are dividends and important part of a common stock's rate of return? Select all that apply.
Dividends increase the return for stocks with capital gains and reduce the loss for stocks with capital losses; Dividends tend to be more stable than capital gains
Which of these is the key service provided by stock exchanges that attracts investors?
Liquidity
What is the primary purpose of the P/E valuation formula?
Estimate the future price of a stock
Which of these characteristics apply to the American Stock Exchange but not to NASDAQ? Select all that apply.
One designated market maker overseeing the process for an individual stock on a trading floor; Physical trading floor
Which one of these statements is correct? (P/E)
A forward P/E is less accurate than a trailing P/E.
A firm just paid an annual dividend of $1.40 and increases that dividend by 2 percent each year. How do you find the price of the firm's stock at year 4 if the discount rate is 13 percent?
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P4=($1.40x1.02^5)/(0.13-0.02)
Lew's increases its annual dividend by 2 percent annually. The last dividend paid was $1.42 and the stock
price is $46. How is the expected rate of return computed?
i=[($1.42x1.02)/$46]+0.02
A stock is expected to pay annual dividends of $1.20 and sell for $42.60 three years from today. Which of
these is the correct formula for computing the value of the stock today if the discount rate is 9 percent?
P0=($1.20/1.09)+($1.20/1.09^2)+[($1.20+$42.60)/1.09^3]
What is the key premise upon which the dividend discount model is based?
All future cash flows from a stock are dividend payments
A stock quote displays the last price as 28.13, down 0.10. What was the previous day's closing price?
$28.23
Which of these is a correct interpretation of a P/E ratio?
The stock with the lowest P/E has the lowest current price per dollar of earnings.
A stock just paid an annual dividend of $1.10. The dividend is expected to increase by 10 percent per year for the next two years and then increase by 2 percent per year thereafter. The discount rate is 14 percent. Which of these correctly computes the current stock price?
P0=($1.10(1.1)/1.14)+(($1.10(1.1)^2)+($1.10(1.1)^2(1.02)/0.14-0.02)/1.14^2
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A stock is expected to pay a dividend of $1.42 next year and increase that amount by 3 percent annually thereafter. The discount rate is 12 percent. How do you compute the current price?
P0=$1.42/(0.12-0.03)
Which one of these defines the current value of a stock?
Discounted value of both the future dividends and the future stock price
A stock just paid an annual dividend of $0.40 per share. The firm expects to increase the dividend by 20 percent per year for the next four years and 3 percent per year thereafter. The discount rate is 11 percent. Which one of these is correct regarding the two-stage growth formula?
g2=0.03
Which one of these is a factor that has minimum requirements which a firm must meet to be listed on the NYSE?
Number of stockholders
You own 500 shares of ABC stock. The stock has been declining in price and is now selling for $30 a share. You decide to sell all your shares and place a limit sell order at a price of $30 a share. When you order reaches the trading desk, the market price has declined to $29 a share. The next day the price falls to $18 a share. What is the status of your order?
The order has not executed. You still own 500 shares.
Which of these firms are considered to be incorrectly priced? Select all that apply.
Low growth, high P/E; High growth, low P/E
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What is the definition of a growth stock?
Stock of a company with above-average rates of increases in revenues, earnings, and/or dividends
Why are dividends and important part of a common stock's rate of return?
Dividends tend to be more stable than capital gains; Dividends increase the return for stocks with capital gains and reduce the loss for stocks with capital losses
If you want to estimate a future price, Pn, using the P/E valuation formula, you should use the estimated earnings for which year?
Year n
Which of these indexes is the most technology-oriented?
NASDAQ Composite
Which of these indicates a value stock?
Low P/E, high growth
What does it mean when a P/E is designated as a trailing P/E?
The earnings used in the P/E calculation were for the past four quarters.
Just before the market closes, ABC stock is selling for $43 a share, so you place a market sell order for 300 shares. The order reaches the trading floor after the market closes for the day. The next morning, ABC stock opens at a price of $28 a share. What happens to your order?
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The order is executed at a price of $28 a share.
Marcos owns 1,500 shares of ABC stock which he purchased at $44 a share. The stock has been steadily decreasing in value and he wants to cut his losses now as he expects the stock price to decline further. What type of order should Marcos place?
Market sell order for 1,500 shares
A stock just paid an annual dividend of $0.70. The dividend is expected to increase by 10 percent per year for the next three years and by 2 percent per year thereafter. What is the current price at a discount
rate of 9 percent?
$12.62
P0=($0.70(1.1)/1.09)+($0.70(1.1)^2/1.09^2)+(($0.70(1.1)^3)+(($0.70(1.1^3)(1.02))/(0.09-
0.02))/1.09^3=$12.62
A firm is expected to have net earnings of $1,480,000 three years from now. There are 500,000 shares of stock outstanding. The firm's current P/E ratio is 18 and it is expected to remain at that level. What is the firm's expected stock price for year 3?
$53.28
P3=18x($1,480,000/500,000)=$53.28
Which one of these is an advantage of a market order?
The order will execute immediately.
A preferred stock is currently selling for $68 a share. What will happen to the stock price if market interest rates increase?
The stock price will decrease.
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Why are dividends an important part of a common stock's rate of return? Select all that apply.
Dividends increase the return for stocks with capital gains and reduce the loss for stocks with capital losses; Dividends tend to be more stable than capital gains.
Which one of these is the underlying basis for a stock's value?
The profitability and success of the issuer
A firm just paid its annual dividend of $1.80 and expects to increase that dividend each year. The discount rate is 11 percent. Which one of these correctly identifies an error when computing the current value of this firm's stock?
P0=$1.80/(0.11-0.025); The value of D1 is incorrect as $1.80 equals D0
Which one of these best summarizes stock valuation?
Stock valuation is an estimate of a stock's value given a certain set of assumptions.
Which one of the following is the key financial market feature that must be present if investors are to be attracted to equity securities?
Market liquidity
Which one of these firms are considered to be incorrectly priced? Select all that apply.
High growth, low P/E; Low growth, high P/E
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A young firm has a P/E of 36 as compared to its industry average P/E of 21. Which one of these is the best explanation for the firm's higher P/E?
The young firm may be expected to grow faster than its industry.
Mary placed an order to purchase 100 shares of ABC stock at the going price. The order was filled as soon as it reached the floor of the exchange. What type of order did Mary place?
market buy order
Just before the market closes, ABC stock is selling for $43 a share, so you place a market sell order for 300 shares. The order reaches the trading floor after the market closes for the day. The next morning, ABC stock opens at a price of $28 a share. What happens to your order?
the order is executed at a price of $28 a share
which of these services should you expect to receive from a full-service brokerage firm?
- investment advice
- in-depth research on individual stocks
which one of these applies to stock valuation?
the value of a stock today equals the discounted value of the future expected cash flows
which of these is correct?
dealers are willing to sell stocks at the ask price
which of the terms best describes the trading process used by NASDAQ?
multiple market maker system
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in a stock valuation formula, what does the symbol D1 represent?
estimated dividend in time period 1, or next year's dividend when solving for the current price
which statements are correct?
- a market order will execute immediately, regardless of the price
- a limit sell order may never be executed
- a limit sell order will only execute at the limit price or higher
what is the key premise upon which the dividend discount model is based?
all future cash flows from a stock are dividend payments
what is an advantage of a market order?
the order will execute immediately
which of these accurately recaps dividend growth estimations and limitations as they apply to the dividend growth model?
- dividends can grow quickly in the short-run but cannot exceed the overall economic growth rate over the long run
- dividend growth can be estimated based on historical data, dividend trends, or analyst's forecasts
which one of these defines the current value of a stock?
discounted value of both the future dividends and the future stock price
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T/F: a dealer will buy stock from an investor at the ask price
false
which one of these generally applies to preferred stock?
higher dividend yields than common stock issued by the same issuer
assume you are computing P0, which is the current price of a stock. What discount factor will you use to discount the dividend in year 3?
(1+i)^3
which one of these best defines the dividend discount model?
a stock valuation method based on the present value of all future dividends
the overall rate of growth for a firm and its industry is 3.5 percent. which of these combinations of dividend growth rates are acceptable when computing the current value of the firm's stock?
short-run growth= 15%; long-run growth= 3%
which one of these applies to stock valuation?
the value of a stock today equals the discounted value of the future expected cash flows
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a preferred stock has which of these characteristics?
zero dividend growth
how can a preferred stock be valued?
- preferred stock can be valued as a perpetuity, PV=PMT/i
- preferred stock can be valued using the constant-growth model
how is the discount rate used to value a stock related to the expected return on the stock? assume the stock price fairly reflects the stock's value
the discount rate should equal the expected rate of return
which one of these defines the current value of a stock?
discounted value of both the future dividends and the future stock price
a stock has an expected rate of return of 10.6 percent based on a 9 percent rate of growth. what will the expected rate of return be if analysts revise the firm's growth rate to 7.5 percent?
9.1%
explanation: dividend yield= expected rate of return-rate of growth; expected rate of return= dividend yield + (new) growth rate
which one of these generally applies to preferred stock?
higher dividend yields than a common stock issued by the same issuer
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which of these applies to the valuation of a preferred stock?
- preferred dividend payments are assumed to be infinite
- preferred dividends are assumed to be a constant dollar amount
which of these are basic assumptions of a variable growth rate valuation?
- g1 applies to a designated number of years
- g2 < i
- g1 can be negative, positive, or equal to zero
how is the discount rate used to evaluate a security related to the security's level of risk?
the higher the level of risk, the higher the discount rate needs to be
a stock has a dividend yield of 1.4 percent. what is the expected return if the growth rate is 4 percent? what if the growth rate is 8 percent?
5.4 percent; 9.4 percent
why do you have to use the dividend at time n + 1 to compute the terminal price in the two-stage growth
valuation model?
the terminal price is the time n price. the dividend used to compute a price must always be one time period ahead of the price
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what is the best definition of the variable-growth rate stock valuation method?
stock valuation method used when a firm's current growth rate is expected to change in the future
T/F: a P/E is a measure of relative value
true
what is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock value formula?
to replace all of the dividends paid in stage 2
if you want to estimate a future price, Pn, using the P/E valuation formula, you should use the estimated earnings for which year?
Year n
which of these is a correct interpretation of a P/E ratio?
the stock with the lowest P/E has the lowest current price per dollar of earnings
what does it mean when a P/E is designated as a trailing P/E?
the earnings used in the P/E calculation were for the past four quarters
what is the primary purpose of the P/E valuation formula?
estimate the future price of a stock
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a firm is expected to have net earnings of $4.00 per share of stock outstanding. the firm's current P/E ratio is 14 and it is expected to remain at that level. what is the firm's expected stock price for year 2?
$56.00
explanation: P2= P/E ratio x per-share earnings (14x4.00)
T/F: a forward P/E is less accurate than a trailing P/E
true
a firm is expected to have net earnings of $1,480,000 three years from now. there are 500,000 shares of stock outstanding. the firm's current P/E ratio is 18 and it is expected to remain that level. what is the firm's expected stock price for year 3?
$53.28
explanation: P/E ratio x (expected net earnings/outstanding stocks)
young firm may be expected to grow faster than its industry.
Stock quote shows a P/E of 18. Ratio is defined as
current stock price. Last four quarters of earnings
Key difference between a floor broker on AMEX and a dealer on NASDAQ
....
Dealer buys and sells only from his own inventory while a floor broker executes trades both for himself and others
price-earnings ratio
share price / earnings per share
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brokers
located around the perimeter of the floor of the stock exchange, act as agents for those buying and selling stocks
Publicly issued common stock consists of
1. Ownership position
2.Stock value depends on the issuer's business success
3.Value determined on the stock exchanges
Common stock
ownership stake in a corporation
An investor makes money by investing in stocks when?
1. when company pays dividends
2. price of stock goes up
An investor loses money investing in stocks when
1. stock price goes down
2. residual claimants (due to bankruptcy)
Difference between bondholders and stockholders
bondholders get coupon payments semiannually not dividends
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Market value of a firm common stock depends on what factors?
1. company profitability
2. growth prospects for the future
3. current market interest rates
4. conditions in the overall stock market
Common stockholders vote for who?
vote to elect board of directors, also vote on other proposals
stock exchange provides
liquidity
New York Stock Exchange
largest equities marketplace in the world >2400 companies listed acquired American Stock Exchange in 2008 (large and prestigious stock exchange with a trading floor)
NASDAQ
electronic stock market without a physical trading floor lists>3500 domestic and foreign companies and 2nd largest equity market in the world
trading posts
trading location on the floor of a stock exchange
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Stock indexes
used to measure the performance of a particular group of stocks
Examples are Dow Jones Industrial Average (DJIA), Standard & Poor 500, NASDAQ Composite index
Dow Jones Industrial Average(DJIA)
tracks 30 large, industry-leading firms
Standard & Poor 500(S&P 500)
index tracks 500 large companies representing 10 different economic sectors
NASDAQ composite index
technology firm-weighted index of all stocks listed on NASDAQ
Market capitalization
stock price x shares outstanding
Quoted bid
the highest price that a market maker offers to pay for the stock (investors sell at the bid price
Quoted ASK
lowest price at which a market maker will sell a stock (investors buy at the ask price)
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Market order
A stock buy or sell order to be immediately executed at the current market price
A market order to buy will be filled at the current?
ASK price
Market order to sell will be filled at?
current bid price
Limit order
a stock buy or sell order at a specific price (only executed if price conditions are met, might not fill)
Stock valuation
requires finding the present value of future dividends and the future selling price
dividend discount model
valuation approach based on future dividend income (theory requires estimation of an infinite number of future dividends)
Constant-growth model
valuation method based on constantly growing dividends
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Stock value =
next year dividends/ (discount rate-growth rate)
Preferred stock
hybrid security that has characteristics of both long-term debt and common stock
difference between common stock and preferred stock
Preferred stock has priority over common stock in bankruptcy proceedings, and pays a constant dividend, largely owned by other companies due to dividends receiving a tax deduction, valued using a constant-growth model
Price of preferred stock=
dividend/interest
Discount rate
should reflect the investment risk level (higher risk means higher interest rates)
One method for determining what return stocks investors require from a stock is to use
a constant-growth-rate model
Variable growth rate
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company grows fast at first and then has a slower growth rate
Characteristics of New York Stock Exchange (NYSE)
1. specialists (operating at trading posts located on trading floor)
2. physical trading floor
3. broker (floor traders who act as agents to execute trades)
Which of these terms best describes the trading process used by NASDAQ?
multiple market maker system
Which of these characteristics apply to the American Stock Exchange but not to NASDAQ?
1. one designated market maker overseeing the process for an individual stock on a trading floor
2. physical trading floor (AMEX has a physical trading floor NASDAQ does not)
Which of these services should you expect to receive from a full-service brokerage firm?
1. in-depth research on individual stocks
2. investment advice
If you purchase shares of stock on NASDAQ, who is the most likely seller of those shares?
dealer (buy order is filled on NASDAQ by the dealer who offers the best price)
A dealer will buy stock from an investor at what price?
dealers buy at the bid and sell at the ask. Investors buy at the ask and sell at the bid
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What is the disadvantage of a market order?
The execution price is unknown in advance (market orders execute immediately at the best price available. There is no price specified on a market order)
Which one of the following characteristics most applies to a discount brokerage firm?
investors place trades on the firms Internet site
Which one of these defines the current value of a stock?
discounted value of both the future dividends and the future stock price
Which one of these applies to stock valuation?
The value of a stock today equals the discounted value of the future expected cash flows
Basic assumption of constant-growth model
if the dividend amount changes each year it does so by a constant percentage. (dividend amount can change forever as long as the rate of change is a constant percentage this model also works for a growth rate of zero).
dividend discount model
stock valuation method based on the present value of all future dividends
A preferred stock has which of these characteristics?
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zero dividend growth (preferred stock generally does not carry any voting rights, preferred stock is largely owned by other companies due to corporate tax break)
How can a preferred stock be valued?
1. preferred stock can be valued using the constant-growth model
2. preferred stock can be valued as a perpetuity, PV=PMT/i
Which of these accurately recaps dividend growth estimations and limitations as they apply to the dividend growth model
1. dividends can grow quickly in the short-run but cannot exceed the overall economic growth rate over the long-run
2. dividend growth can be estimated based on historical data, dividend trends, or analysts forecasts
How is the dividend yield on a constant-dividend preferred stock defined?
last four quarters of dividend income/ current stock price
what applies to preferred stock?
higher dividend yields than common stock issued by the same issuer
Which of these applies to the valuation of a preferred stock?
1. preferred dividend payments are assumed to be infinite
2. preferred dividends are assumed to be a constant dollar amount
How is the discount rate used to evaluate a security related to the security's level of risk?
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the higher the level of risk, the higher the discount rate needs to be
Which of these are basic assumptions of a variable growth rate valuation?
1. g1 applies to a designated number of years
2. g2<i
3. g1 can be negative, positive, or equal to zero
How is the discount rate used to value a stock related to the expected return on the stock?
the discount rate should equal the expected rate of return
What is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock valuation formula?
to replace all of the dividends paid in stage 2
A stock has a dividend yield of 1.4 percent. What is the expected return if the growth rate is 4 percent? What if the growth rate is 8 percent?
expected return= 1.4%+4%=5.4% Expected return =1.4%+8%=9.4%
What is the best definition of the variable-growth rate stock valuation method
stock valuation method used when a firms current growth rate is expected to change in the future
Why do you have to use the dividend at time n + 1 to compute the terminal price in the two-stage growth valuation model?
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The terminal price is the time n price. The dividend used to compute a price must always be one time period ahead of the price.
Which of these is a correct interpretation of a P/E ratio?
the stock with the lowest P/E has the lowest current price per dollar of earnings
What is the primary purpose of the P/E valuation formula?
estimate the future price of a stock
True or false
a forward P/E is less accurate than a trailing P/E (true)
What does it mean when a P/E is designated as a trailing P/E?
the earnings used in the P/E calculation were for the past four quarters
Which of these indicates a value stock?
value stocks have high dividend yield low P/B ratio and a low P/E ratio
Example: Low P/E, high growth
A value stock is considered to be
bargain stock
Which of these descriptions apply to common stock? Select all that apply.
A security that provides the potential for its owner to receive both dividends and capital gains
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A security that provides voting privileges
An equity security that offers ownership benefits in a corporation
The textbook lists four key factors that affect the market value of a firm's common stock. Which of these is one of those four factors?
The company's future growth prospects
The stakeholders that are at the very bottom of the financing hierarchy and are also known as residual claimants are Blank______.
the shareholders
Which of the following are expressions of value of a company's underlying success?
large residual cash flows
growth
dividends
How important is the liquidity provided by stock exchanges to the equity markets?
Very important
Which of these apply to publicly-issued common stock? Select all that apply.
Stock value depends on the issuer's business success
Ownership position
Value determined on the stock exchanges
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Which of the following are two of the four key factors listed in the textbook that affect the value of a stock?
Current market interest rates and overall stock market conditions
In the event of a corporation going bankrupt equity holders have a residual claim on the corporation's assets. This means that they will get paid Blank______.
last
Which one of these is the primary basis for a stock's value?
The profitability and success of the issuer
Which of these is the key service provided by stock exchanges that attracts investors?
Liquidity
A stock quote displays the last price as 28.13, down 0.10. What was the previous day's closing price?
$28.23
Reason:
Prior day's close = $28.13 + $0.10 = $28.23
That ability to convert shares of stock into cash quickly and at their value is an expression of .
Blank 1: liquidity
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, located around the perimeter of the floor of the stock exchange, act as agents for those buying and selling stocks.
Blank 1: Brokers
Which one of these is a factor that has minimum requirements which a firm must meet to be listed on the NYSE?
Number of stockholders
Which of these characteristics apply to the American Stock Exchange but not to NASDAQ? Select all that apply.
One designated market maker overseeing the process for an individual stock on a trading floor
Physical trading floor
Which one of the following is the key financial market feature that must be present if investors are to be attracted to equity securities?
Market liquidity
A(n) symbol is the unique code for a company on a stock exchange. It consists of one to five letters.
Blank 1: ticker
Which of these characteristics apply to the New York Stock Exchange (NYSE)? Select all that apply.
Physical trading floor
Specialists
Brokers
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What is the key difference between a floor broker on AMEX and a dealer on NASDAQ?
A dealer buys and sells only from his own inventory while a floor broker executes trades both for himself and others.
Which of these terms best describes the trading process used by NASDAQ?
Multiple market maker system
Which of these are current trends related to stock trading?
Exchanges are becoming more global in nature.
International trading of securities is rising.
Exchanges are relying more on electronic trading and less on open-outcry.
If you purchase shares of stock on NASDAQ, who is the most likely seller of those shares?
Dealer
Which one of these is most apt to disappear as a part of the stock trading process if current trends continue?
Trading posts
Which one of these is the oldest stock index?
Dow Jones Industrial Average (DJIA)
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True or false: The value of a firm as measured by its market capitalization is solely dependent upon the market value of the firm's stock.
False
Approximately how much of a decline occurred in the NASDAQ Composite index in the two and a half years following its peak in March of 2000?
Approximately how much of a decline occurred in the NASDAQ Composite index in the two and a half years following its peak in March of 2000?
Approximately 78 percent
Which of these are current trends related to stock trading? Select all that apply.
International trading of securities is rising.
Exchanges are relying more on electronic trading and less on open-outcry.
Exchanges are becoming more global in nature.
Which of these indexes is the most technology-oriented?
NASDAQ Composite
Which of these services should you expect to receive from a full-service brokerage firm? Select all that apply.
In-depth research on individual stocks
Investment advice
What is the definition of market capitalization?
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Current Stock Price times the Number of Shares Outstanding
Which one of these statements is correct?
The DJIA, S&P 500, and NASDAQ Composite tend to be positively related.
The DJIA, S&P 500, and NASDAQ Composite tend to be positively related.
A forward P/E is less accurate than a trailing P/E.
True or false: A dealer will buy stock from an investor at the ask price.
False
Mary placed an order to purchase 100 shares of ABC stock at the going price. The order was filled as soon as it reached the floor of the exchange. What type of order did Mary place?
Market buy order
Which one of the following characteristics most applies to a discount brokerage firm?
Investors place trades on the firm's Internet site
Which one of these is an advantage of a market order?
The order will execute immediately.
Which of these is correct?
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Dealers are willing to sell stocks at the ask price.
Marcos owns 1,500 shares of ABC stock which he purchased at $44 a share. The stock has been steadily decreasing in value and he wants to cut his losses now as he expects the stock price to decline further. Which type of order should Marcos place?
Market sell order for 1,500 shares
Which statements are correct? Select all that apply.
A market order will execute immediately, regardless of the price.
A limit sell order may never be executed.
A limit sell order will only execute at the limit price or higher.
What is the disadvantage of a market order?
The execution price is unknown in advance.
Yesterday, Beth placed a limit sell order on ABC stock at $36. The market price ranged from $34.80 to $35.50 yesterday. This morning, ABC opened at $36.50 a share. What is the status of Beth's order?
Beth sold her shares for $36.50, which illustrates an advantage of limit orders.
You own 500 shares of ABC stock. The stock has been declining in price and is now selling for $30 a share. You decide to sell all your shares and place a limit sell order at a price of $30 a share. When you order reaches the trading desk, the market price has declined to $29 a share. The next day the price falls to $18 a share. What is the status of your order?
The order has not executed. You still own 500 shares.
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What is the key advantage of a limit order?
The order will only execute at the limit price or better.
Just before the market closes, ABC stock is selling for $43 a share, so you place a market sell order for 300 shares. The order reaches the trading floor after the market closes for the day. The next morning, ABC stock opens at a price of $28 a share. What happens to your order?
The order is executed at a price of $28 a share.
Which one of these defines the current value of a stock?
Discounted value of both the future dividends and the future stock price
Yesterday, Trevor placed a limit buy order at a price of $35 on 100 shares of ABC stock. Since the order was placed, the market price of ABC stock has ranged from $35.10 to $36.30 a share. What is the status of Trevor's order?
The order has not executed.
What is the primary disadvantage of a limit order?
A limit order may not execute.
Assume you are computing P0, which is the current price of a stock. What discount factor will you use to discount the dividend in year 3?
(1 + i)3
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A stock is expected to pay a dividend of $2 in year 2, $3 in year 3, and sell for $40 at the end of year 3. The discount rate is 11 percent. Which one of these is the correct formula for computing the current stock price?
P0 = $2/1.11^2 + [($3 + $40)/1.11^3]
Which one of these applies to stock valuation?
The value of a stock today equals the discounted value of the future expected cash flows.
True or false: Stock valuation can really only be meaningfully viewed from a long-term perspective.
True
What is the key premise upon which the dividend discount model is based?
All future cash flows from a stock are dividend payments.
In a stock valuation formula, what does the symbol D1 represent?
Estimated dividend in time period 1, or next year's dividend when solving for the current price
A firm just paid its annual dividend of $1.80 and expects to increase that dividend each year. The discount rate is 11%. Which one of these correctly identifies an error when computing the current value of this firm's stock?
P0 = $2.02/(0.11 - 0.12); The growth rate exceeds it limitation for using this formula.
A stock is expected to pay annual dividends of $1.20 and sell for $42.60 three years from today. Which of
these is the correct formula for computing the value of the stock today if the discount rate is 9 percent?
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P0 = ($1.20/1.09) + ($1.20/1.092) + [($1.20 + $42.60)/1.093]
A stock is expected to pay a dividend of $1.42 next year and increase that amount by 3 percent annually thereafter. The discount rate is 12 percent. How do you compute the current price?
P0 = $1.42/(0.12 - 0.03)
Which one of these best summarizes stock valuation?
Stock valuation is an estimate of a stock's value given a certain set of assumptions.
Which one of these best defines the dividend discount model?
A stock valuation method based on the present value of all future dividends
A firm just paid its annual dividend of $1.80 and expects to increase that dividend each year. The discount rate is 11 percent. Which one of these correctly identifies an error when computing the current value of this firm's stock?
P0 = $1.80/(0.11 - 0.025); The value of D1 is incorrect as $1.80 equals D0.
Which of these is a limitation that applies to the constant-growth dividend model?
g < i
A firm just paid an annual dividend of $1.40 and increases that dividend by 2 percent each year. How do you find the price of the firm's stock at year 4 if the discount rate is 13 percent?
P4 = ($1.40 × 1.02^5)/(0.13 - 0.02)
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The overall rate of growth for a firm and its industry is 3.5 percent. Which of these combinations of dividend growth rates are acceptable when computing the current value of the firm's stock?
Short-run growth = 15 percent; Long-run growth = 3 percent
What is the basic assumption of the constant-growth model?
If the dividend amount changes each year, it does so by a constant percentage.
A stock just paid its annual dividend of $1.20. Future dividends are expected to increase by 2 percent annually and the discount rate is 9 percent. Which of these is the correct formula for computing the current stock price?
P0 = ($1.20 × 1.02)/(0.09 - 0.02)
Which one of these generally applies to preferred stock?
Higher dividend yields than common stock issued by the same issuer
Which of these applies to the valuation of a preferred stock? Select all that apply.
Preferred dividends are assumed to be a constant dollar amount.
Preferred dividend payments are assumed to be infinite.
Which of these accurately recaps dividend growth estimations and limitations as they apply to the dividend growth model? Select all that apply.
Dividends can grow quickly in the short-run but cannot exceed the overall economic growth rate over the long-run.
Dividend growth can be estimated based on historical data, dividend trends, or analyst's forecasts.
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A preferred stock has which of these characteristics?
Zero dividend growth
How can a preferred stock be valued? Select all that apply.
Preferred stock can be valued using the constant-growth model.
Preferred stock can be valued as a perpetuity, PV = PMT/i
A preferred stock is currently selling for $68 a share. What will happen to the stock price if market interest rates increase?
The stock price will decrease.
How is the dividend yield on a constant-dividend preferred stock defined?
Last four quarters of dividend income/Current stock price
How is the discount rate used to value a stock related to the expected return on the stock? Assume the stock price fairly reflects the stock's value.
The discount rate should equal the expected rate of return.
A stock has an expected rate of return of 10.6 percent based on a 9 percent rate of growth. What will the
expected rate of return be if analysts revise the firm's growth rate to 7.5 percent?
9.1 percent
Reason:
Dividend yield = 10.6% - 9% = 1.6%; Expected rate of return = 1.6% + 7.5% = 9.1%
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A preferred stock is currently selling for $68 a share. What must be the dividend if the interest rate is 7%?
$4.76
Reason:
Div = P X i
Lew's increases its annual dividend by 2 percent annually. The last dividend paid was $1.42 and the stock
price is $46. How is the expected rate of return computed?
i = [($1.42 × 1.02)/$46] + 0.02
Assume a preferred stock pays a constant annual dividend. Which of these is a correct computation of the dividend yield? Select all that apply.
Dividend yield = D1/P0
Dividend yield = D0/P0
Dividend yield = D/P0
How is the discount rate used to evaluate a security related to the security's level of risk?
The higher the level of risk, the higher the discount rate needs to be.
A stock has a dividend yield of 1.4 percent. What is the expected return if the growth rate is 4 percent? What if the growth rate is 8 percent?
5.4 percent; 9.4 percent
Reason:
Expected return = 1.4% + 4% = 5.4%; Expected return = 1.4% + 8% = 9.4%
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Assume an industry is growing at an average rate of 3.2 percent annually. Given four companies in this industry and their rates of growth, which company's stock would be classified as a growth stock?
Company A; 3.5 percent
Which of these are basic assumptions of a variable growth rate valuation? Select all that apply.
g1 can be negative, positive, or equal to zero
g1 applies to a designated number of years
g2 < i
A stock just announced that its next annual dividend will be $1.02 and it expects to increase that dividend by 2.5 percent annually. The stock is currently selling for $28 a share. How do you compute the expected rate of return?
i = ($1.02/$28) + 0.025
For a two stage variable growth stock, the stock's value is based on which of the following?
Present value of each dividend during the first growth stage
Present value of each dividend during the second growth stage
What is the definition of a growth stock?
Stock of a company with above-average rates of increases in revenues, earnings, and/or dividends
What is the best definition of the variable-growth rate stock valuation method?
Stock valuation method used when a firm's current growth rate is expected to change in the future
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A stock just paid an annual dividend of $0.70. The dividend is expected to increase by 10 percent per year for the next three years and by 2 percent per year thereafter. What is the current price at a discount
rate of 9 percent?
$12.62
Reason:
P0 = $0.70(1.1)1.09$0.70(1.1)1.09 + $0.70(1.1)21.092$0.70(1.1)21.092 + $0.70(1.1)3+
$0.70(1.1)3(1.02)0.09−0.021.093$0.70(1.1)3+$0.70(1.1)3(1.02)0.09-0.021.093 = $12.62
Why do you have to use the dividend at time n + 1 to compute the terminal price in the two-stage growth valuation model?
The terminal price is the time n price. The dividend used to compute a price must always be one time period ahead of the price.
A stock just paid an annual dividend of $1.10. The dividend is expected to increase by 10 percent per year for the next two years and then increase by 2 percent per year thereafter. The discount rate is 14 percent. Which of these correctly computes the current stock price?
P0 = $1.10(1.1)1.14$1.10(1.1)1.14 + $1.10(1.1)2+$1.10(1.1)2(1.02)0.14−0.021.142$1.10(1.1)2+
$1.10(1.1)2(1.02)0.14-0.021.142
Which of these is a correct interpretation of a P/E ratio?
The stock with the lowest P/E has the lowest current price per dollar of earnings.
What is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock valuation formula?
To replace all of the dividends paid in stage 2
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If you want to estimate a future price, Pn, using the P/E valuation formula, you should use the estimated earnings for which year?
Year n
A stock just paid an annual dividend of $0.40 per share. The firm expects to increase the dividend by 20 percent per year for the next four years and 3 percent per year thereafter. The discount rate is 11 percent. Which one of these is correct regarding the two-stage growth formula?
g2 = 0.03
What does it mean when a P/E is designated as a trailing P/E?
The earnings used in the P/E calculation were for the past four quarters.
True or false: A P/E is a measure of relative value.
True
What is the primary purpose of the P/E valuation formula?
Estimate the future price of a stock
Which of these firms are considered to be incorrectly priced? Select all that apply.
Low growth, high P/E
High growth, low P/E
Which of these indicates a value stock?
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Low P/E, high growth
A firm is expected to have net earnings of $4.00 per share of stock outstanding. The firm's current P/E ratio is 14 and it is expected to remain at that level. What is the firm's expected stock price for year 2?
$56.00
Reason:
P2 = 14 × $4.00 = $56.00
A young firm has a P/E of 36 as compared to its industry average P/E of 21. Which one of these is the best explanation for the firm's higher P/E?
The young firm may be expected to grow faster than its industry.
True or false: A growth stock is considered to be a bargain stock.
False
A firm is expected to have net earnings of $1,480,000 three years from now. There are 500,000 shares of stock outstanding. The firm's current P/E ratio is 18 and it is expected to remain at that level. What is the firm's expected stock price for year 3?
$53.28
Reason:
P3 = 18 × ($1,480,000/500,000) = $53.28
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Related Documents
Related Questions
Please see attached image
arrow_forward
Which of the following describes preferred stock?
a.
Stock that sells for a very high price
b.
Stock that is purchased by the corporation for investment purposes
c.
Stock that is sold to employees of the company as a performance incentive
d.
Stock which gives shareholders certain preferences and advantages over common stock
Clear my choice
Question 10
Not yet answered
Marked out of 1.00
Flag question
Question text
Supper Company Ltd., reported the following stockholders’ equity on its balance sheet at June 30, 2021:
Supper Company Ltd.
Stockholders’ Equity
June 30,2021
Paid-in Capital
Preferred stock, 10%,? par, 650,000 shares authorized, 280,000 shares issued
$ 1,400,000
Common stock, par value $? per share, 5,000,000 shares authorized,
1,000,000 shares issued and outstanding
2,000,000
Paid-in capital in excess of par—common
6,000,000
Retained Earnings
12,300,000
Which of the following is the correct total…
arrow_forward
When a company issues a stock dividend, which of the following would be affected?
Group of answer choices
Total liabilities.
Total assets.
Earnings per share.
Total shareholders' equity.
arrow_forward
Match the following stockholders' equity concepts to the appropriate term (a-h).
Question 12 options:
Cash distribution of a company’s earnings to stockholders
The date when dividends are actually distributed to stockholders
Shares of common stock that were issued and then reacquired by a company
Account used when shares are issued for an amount greater than par value
The day of the event that creates a liability to company
Equity account reflecting shares “owed” to stockholders
Owners of this class of stock are entitled to receive dividends first
The date that is used to determine the owners of stock who will receive the current dividend
1.
cash dividend
2.
date of record
3.
Stock Dividends Distributable
4.
date of declaration
5.
treasury stock
6.
preferred stock
7.
date of payment
8.
Paid-In Capital in Excess of Par
arrow_forward
Which of the following is a registration statement used by large companies that already have a significant following in the stock market?a. Form 8–Kb. Form 10–Kc. Form S–1d. Form S–3
arrow_forward
From page 10-2 of the VLN, the common stock account amount is determined
Group of answer choices
A. Par value x issued shares
B. Par value x outstanding shares
C. Par value x authorized shares
D. Par value x unissued shares
arrow_forward
The value of a share of stock can be found
from which of the following equations?
a. (Value of the firm – value of warrants -
value of employee stock options) / (number of
common shares outstanding).
b. (Value of equity – value of warrants – value
of employee stock options) / (number of
common shares outstanding).
c. (Value of the firm) / (number of common
shares outstanding).
d. (Value of equity - value of debt) / (number
of common shares outstanding).
arrow_forward
I need this question answer financial accounting question
arrow_forward
How should a company record a stock dividend that exceed 25℅ of existing shares?
arrow_forward
Choose the correct. Which of the following is a registration statement used by large companies that already have a significant following in the stock market?a. Form 8–Kb. Form 10–Kc. Form S–1d. Form S–3
arrow_forward
What is par value?
Select one:
a. The price at which a company's stock is sold
b. The dollar amount credited to capital stock when issued
c. The lowest price at which a company's stock may be issued
d. The highest price at which a company's stock may be issued
arrow_forward
Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as:
O A footnote
O An increase in current liabilities
O An increase in current liabilities for the current portion and long-term liabilities for the long-term portion
O An increase in stockholders' equity
arrow_forward
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