Shareholder Rights practice test

Answer Options:
$58.33
$72.18
$65.08
$81.96
$54.44

Answer: C — $65.08

Question: If the required return on all equity securities rises, then the value of all dividend-paying stocks should, all else constant:

Answer Options:
increase
remain unchanged
decrease
become equal to book value
increase only for high-growth firms

Answer: C — decrease

Question: A stock has a dividend yield of 5 percent and a total return of 3 percent. Which one of the following must be true?

Answer Options:
The stock has a positive capital gains yield
The stock has a zero capital gains yield
The stock has a negative capital gains yield
The stock is overvalued
The stock does not pay a constant dividend

Answer: C — The stock has a negative capital gains yield

Question: The two-stage dividend growth model assumes dividends will:

Answer Options:
remain constant forever
grow at one rate forever and then stop
grow at one rate for a finite period and then at a different constant rate forever
be paid only every other year
grow faster than the required return forever

Answer: C — grow at one rate for a finite period and then at a different constant rate forever

Question: A firm just paid a dividend of $2.10 per share. Dividends grow at 4 percent annually, and the required return is 12 percent. What should the stock sell for 3 years from now, just after the Year 3 dividend is paid?

Answer Options:
$28.88
$30.71
$26.91
$33.16
$35.66

Answer: B — $30.71

Question: Between two firms with identical required returns, the one with the higher constant dividend growth rate will have the higher:

Answer Options:
coupon rate
capital gains yield
current yield
bond rating
par value

Answer: B — capital gains yield

Question: A stock has earnings per share of $2.30 and a benchmark PE ratio of 13.4. What is the estimated current stock price using the PE approach?

Answer Options:
$26.42
$30.82
$28.13
$33.40
$27.09

Answer: B — $30.82

Question: A firm has an EPS of $3.10, an expected growth rate of 4 percent, and a benchmark PE ratio of 11.5. What is the estimated share price 5 years from now?

Answer Options:
$39.76
$41.25
$43.37
$45.63
$47.18

Answer: C — $43.37

Question: Preemptive rights grant shareholders the right to:

Answer Options:
vote before preferred shareholders
purchase a proportional share of newly issued stock
sell shares directly back to the corporation
receive guaranteed dividends
elect management officers

Answer: B — purchase a proportional share of newly issued stock

Question: Which one of the following rights belongs primarily to common shareholders rather than preferred shareholders?

Answer Options:
Priority in dividend payments
Fixed dividend rate
Residual claim on income after all other claims are paid
Preference in liquidation over bondholders
Priority over debenture holders

Answer: C — Residual claim on income after all other claims are paid

Question: An investor who buys a stock on or after the ex-dividend date will:

Answer Options:
receive the declared dividend
receive double the declared dividend
not receive the declared dividend
receive the dividend only if the stock is preferred
automatically receive a stock dividend instead

Answer: C — not receive the declared dividend

Question: A cash dividend becomes a liability of the corporation on the:

Answer Options:
record date
payment date
declaration date
ex-dividend date
settlement date

Answer: C — declaration date

Question: Which one of the following statements about dividends is correct?

Answer Options:
Dividends are deductible to the corporation
Dividends are never taxable to shareholders
Corporate shareholders may receive a tax break on part of dividend income
The CEO alone declares dividends
Dividends are fixed obligations like bond interest

Answer: C — Corporate shareholders may receive a tax break on part of dividend income

Question: All else constant, the price of preferred stock will:

Answer Options:
move directly with the required return
move inversely with the required return
remain constant because the dividend is fixed
increase only when inflation rises
equal par value at all times

Answer: B — move inversely with the required return

Question: The capital budgeting method most directly tied to maximizing shareholder wealth is:

Answer Options:
payback
average accounting return
net present value
discounted payback
accounting profit margin

Answer: C — net present value

Question: A firm has 900,000 shares outstanding selling for $12.41 per share. A project has an NPV of $241,000. All else constant, if the project is accepted, the stock price should increase to approximately:

Answer Options:
$12.14
$12.41
$12.52
$12.68
$12.92

Answer: D — $12.68

Question: A firm is expected to pay a dividend of $1.96 next year. If the required return is 10.2 percent and dividends grow at 2.7 percent forever, what is the current stock price?

Answer Options:
$26.13
$28.88
$30.42
$35.66
$24.91

Answer: A — $26.13

Question: A firm just paid a dividend of $2.00. Dividends will grow at 12 percent for four years and then at 4 percent forever. If the required return is 10 percent, what is the current stock price?

Answer Options:
$39.76
$45.63
$30.71
$26.91
$58.33

Answer: B — $45.63

Question: A preferred stock will pay $11.25 per year forever, with the first payment occurring 9 years from now. If the required return is 9.4 percent, what is the stock worth today?

Answer Options:
$65.08
$58.33
$72.18
$81.96
$54.44

Answer: B — $58.33

Question: A firm just paid a dividend of $2.25. If dividends grow at 4.1 percent forever and the required return is 11.8 percent, what is the current stock price?

Answer Options:
$28.88
$35.66
$26.13
$30.42
$33.16

Answer: D — $30.42

Question: A preferred stock will pay an annual dividend of $12 per share in perpetuity beginning 5 years from now. If the required return is 10 percent, what is the current stock price?

Answer Options:
$120.00
$81.96
$75.13
$98.42
$66.92

Answer: B — $81.96