Question: Firm X currently pays an annual dividend of $3.22 per share and plans on increasing that amount by 2.5 percent annually. Firm Y currently pays an annual dividend of $2.84 per share and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of Firm Y has a higher ___ than the stock of Firm X.
Answer Options:
market price
dividend yield
capital gains yield
total return
real return
Answer: C — capital gains yield
Question: An analyst is applying the dividend growth model. If she expects the market rate of return to increase on all equity securities in the market, then she should also expect:
Answer Options:
an increase in all stock values
all stock values to remain constant
a decrease in all stock values
dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value
dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value
Answer: C — a decrease in all stock values
Question: A firm has a dividend yield of 6.2 percent and a total return for the year of 5.9 percent. Which one of the following must be true?
Answer Options:
The dividend must be constant
The stock has a negative capital gains yield
The capital gains yield must be zero
The required rate of return for this stock increased over the year
The firm is experiencing supernormal growth
Answer: B — The stock has a negative capital gains yield
Question: The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:
Answer Options:
pay an increasing dividend for a period of time and then cease paying dividends altogether
increase the dividend amount every other year
pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year
grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely
pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time
Answer: D — grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely
Question: Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? The right to:
Answer Options:
elect the board of directors
receive a distribution of the company’s profits
vote either for or against a proposed merger or acquisition
determine the amount of the dividend per share to be paid
have the first chance to purchase any new equity shares that may be offered
Answer: D — determine the amount of the dividend per share to be paid
Question: An investor owns 30 shares of stock of a firm and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. At present, the company is voting to elect three new directors. Given this information, which one of the following statements must be true?
Answer Options:
Regardless of the voting procedure, the investor does not own enough shares to gain a seat on the board
If straight voting applies, the investor is assured a seat on the board
If straight voting applies, the investor can control all of the open seats
If cumulative voting applies, the investor is assured one seat on the board
If cumulative voting applies, the investor can control all of the open seats
Answer: D — If cumulative voting applies, the investor is assured one seat on the board
Question: A firm is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?
Answer Options:
17 percent
20 percent plus one vote
25 percent plus one vote
50 percent plus one vote
51 percent
Answer: D — 50 percent plus one vote
Question: A firm has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following scenarios is the most likely outcome of this situation given that some shareholders are happy with the existing management?
Answer Options:
Negotiated settlement where each side is granted control over one of the open seats
Protracted legal battle over control of the board of directors
Arbitrated settlement where the arbitrator determines who will be elected to the board
Control of the board decided without your influence
Proxy fight for control of the board
Answer: E — Proxy fight for control of the board
Question: A firm pays a constant annual dividend of $4 per share of common stock. The firm has 5,000 shares of stock outstanding. The company:
Answer Options:
must always show a current liability of $20,000 for dividends payable
must still declare each dividend before it becomes an actual company liability
is obligated to pay $4 per share each year in perpetuity
will be declared in default if it does not pay at least $4 per share per year on a timely basis
incurs a liability that must be paid at a later date should the company miss paying an annual dividend payment
Answer: B — must still declare each dividend before it becomes an actual company liability
Question: Which one of the following statements related to corporate dividends is correct?
Answer Options:
Dividends are nontaxable income to shareholders
Dividends reduce the taxable income of the corporation
The chief executive officer of a corporation is responsible for declaring dividends
The chief financial officer of a corporation determines the amount of dividend to be paid
Corporate shareholders may receive a tax break on a portion of their dividend income
Answer: E — Corporate shareholders may receive a tax break on a portion of their dividend income
Question: A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a:
Answer Options:
floor trader
floor post
designated market maker
floor broker
commission broker
Answer: C — designated market maker
Question: Which one of the following transactions would occur in the primary market?
Answer Options:
Purchase of 1,000 shares of Target stock from a current shareholder
Gift of 1,000 outstanding shares to a charitable organization
Gift of 500 shares of stock by a mother to her daughter
Purchase of newly issued stock from the issuer
Coca-Cola’s purchase of Target stock from a dealer
Answer: D — Purchase of newly issued stock from the issuer