Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
Multiple Choice
1. Which of the following is NOT a characteristic of common stock?
a.
It has no maturity date.
b.
It is considered a permanent form of long-term financing.
c.
It has claims on assets prior to those of preferred stock.
d.
It is a residual form of ownership.
2. Stockholders’ equity includes all of the following EXCEPT _____.
a.
common stock
b.
treasury stock
c.
contributed capital in excess of par
d.
preferred stock
3. The book value per share of common stock is calculated by dividing ____ by the number of shares outstanding.
a.
market value of common stock
b.
total assets
c.
total stockholders’ equity plus preferred stock
d.
total common stockholders’ equity
4. The market value of common stock is primarily based on _____.
a.
the firm’s future earnings
b.
book value
c.
total assets
d.
retained earnings
5. Common stockholders have a number of general rights, including all of the following EXCEPT ____:
a.
voting rights
b.
management rights
c.
asset rights
d.
dividend rights
6. Which of the four common stockholder rights exists in only a minority of firms?
a.
dividend rights
b.
asset rights
c.
preemptive rights
d.
voting rights
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
7. In a reverse stock split, ____.
a.
the number of shares are decreased
b.
the market value is decreased
c.
retained earnings decrease
d.
par value decreases
a
8. Which of the following is NOT an advantage of common stock financing?
a.
no fixed dividend obligation
b.
lowers the firm’s weighted cost of capital
c.
a greater degree of flexibility for the firm in financial planning
d.
relatively high flotation costs
9. AVIX has 6.8 million shares outstanding and the firm’s charter provides for a majority voting procedure. The company
has seven directors up for reelection. What is the minimum number of shares needed to ensure the election of one
director?
a.
850,001
b.
5,950,001
c.
3,400,001
d.
None of these are correct
c
10. Management usually opposes cumulative voting because this type of voting _____.
a.
is over twice as likely as majority voting to result in a proxy fight
b.
is more complicated than majority voting and takes longer to process
c.
often leaves the stockholders who hold minority viewpoints with no representation on the board of directors
d.
makes it easier for stockholders with minority viewpoints to elect sympathetic board members
11. In the constant growth dividend valuation model, the required rate of return must be ____ the dividend growth rate in
order for the formula price to be meaningful.
a.
less than
b.
equal to
c.
greater than
d.
proportional to
c
12. In the constant growth dividend valuation model, the required rate of return on a common stock can be shown to be
equal to the sum of the dividend yield plus ____.
a.
yield-to-maturity
b.
cost of capital
c.
present value yield
d.
price appreciation yield
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
13. Each of the following is a reason why the valuation of common stock is considerably more complicated than that of
bonds or preferred stocks EXCEPT _____.
a.
the returns can take two forms: annual cash payments and price appreciation
b.
the cash flows from common stocks are generally more uncertain than the cash flows from other types of
securities
c.
the returns from common stocks are generally larger and more certain than the returns from bonds and
preferred stocks
d.
None of these are correct
c
14. Many preferred stocks are treated as ____ in determining their values.
a.
fixed assets
b.
perpetuities
c.
convertible securities
d.
constant growth securities
15. In the valuation of common stock, the simple annuity and perpetuity formulas used in the valuation of bonds and
preferred stock are not generally applicable because _____.
a.
investors buy common stock for much different reasons than they buy bonds or preferred stock
b.
returns accruing to common stock should never be capitalized (discounted) in order to determine a price
c.
unlike bonds and preferred stock, common stock is a short-term investment
d.
unlike payments on most bonds and preferred stock, common stock dividends are normally expected to grow
over time
16. One of the assumptions of the constant growth dividend valuation model is that the _____.
a.
investor’s required rate of return is equal to the expected dividend yield
b.
required rate of return is greater than the dividend growth rate
c.
required rate of return increases at a constant rate
d.
dividend rate (in dollars) will remain constant
17. The most important factor to be considered in the valuation of a closely held firm is _____.
a.
earnings growth
b.
book value of the firm
c.
earnings capacity
d.
the general economic outlook
c
18. Stockholders’ equity includes _____.
a.
both preferred stock and common stock
b.
total claims
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
c.
additional paid-in capital plus capital surplus
d.
total liabilities and total surplus
a
19. A common stock’s book value is calculated _____.
a.
as a multiple of the stock’s price / earnings ratio
b.
on the basis of income statement ratios
c.
on the basis of balance sheet figures
d.
on the value of income statement figures
c
20. When a stock is split 2 for 1, then the ____ figure on the firm’s balance sheet is cut in half.
a.
value of the common stock
b.
par value
c.
capital surplus
d.
retained earnings
21. From an accounting standpoint, stock dividends involve a transfer from the _____.
a.
common stock account
b.
cash account
c.
retained earnings account
d.
capital surplus account
c
22. Which one of the following is NOT a reason a firm may decide to repurchase its own stock?
a.
future corporate needs
b.
financial restructuring
c.
investment
d.
disposition of excess warrants
23. Dillinger Inc. is planning to raise additional capital for expansion by selling 500,000 common shares at $16 each. The
existing stockholders’ equity section of its balance sheet is shown below. What will the retained earnings figure be
immediately after the sale of the new equity?
Common stock; $1 par value; authorized, 3,000,000 shares; issued and
outstanding, 3,000,000 shares
$3,000,000
Additional paid-in capital
$6,500,000
Retained earnings
$4,752,000
Total stockholders’ equity
$14,252,000
a.
$12,252,000
b.
$14,000,000
c.
$4,752,000
d.
$3,500,000
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
c
24. The returns investors receive from holding common stocks may be in two forms. They are ____.
a.
cash dividend payments and capital gains
b.
future earnings and treasury stock
c.
stock splits and stock dividends
d.
cash dividends and stock dividends
a
25. The constant growth dividend valuation model does not hold when _____.
a.
ke is greater than g
b.
dividends are growing faster than 4 percent
c.
g is greater than ke
d.
the current dividend is known
c
26. Proxy fights typically occur when _____.
a.
stockholders receive more than one proxy statement
b.
a firm is performing poorly
c.
a firm is in the middle of a takeover attempt
d.
All of these are correct
27. Some corporations issue dual classes of stock with unequal voting power. One justification offered by supporters of
the dual class system is that it _____.
a.
favors long-term business health over short-term profits
b.
is more democratic than most single class systems
c.
is more positively correlated with business success than are other systems
d.
induces a greater number of investors to purchase stock in the firm
a
28. The zero growth dividend valuation model is used when a firm’s future dividends are expected to remain constant
_______.
a.
so the value of the firm should also remain constant
b.
so the required rate of return should also remain constant
c.
and the firm cannot be valued
d.
forever
29. When evaluating a firm based on price/earnings multiples, the evaluator must determine the price/earnings multiple
for _____.
a.
the general market
b.
the S&P 500
c.
firms in the same industry
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
d.
small capitalization firms
30. The rights of stockholders to share equally on a per-share basis in any distributions of corporate earnings is known as
____ rights.
a.
preemptive
b.
voting
c.
asset
d.
dividend
31. ____ result in what is known as treasury stock.
a.
Stock dividends
b.
Stock repurchases
c.
Stock splits
d.
Reverse stock splits
32. A firm that wishes to raise additional equity capital by selling a portion of the existing owners’ stock while
maintaining control of the firm should consider a ____.
a.
stock split
b.
stock dividend
c.
share repurchase
d.
separate class of nonvoting stock
33. A firm may use a stock repurchase ____.
a.
as part of a financial restructuring
b.
to dispose of excess cash
c.
to reduce takeover risk
d.
All of these are correct
34. In the constant growth dividend valuation model, the required rate of return on a common stock is equal to the sum of
the ____.
a.
capital gains yield and cost of capital
b.
present value yield and dividend yield
c.
cost of capital and dividend yield
d.
capital gains yield and dividend yield
35. In the constant growth dividend valuation model, it is assumed that the ____.
a.
dividend growth rate exceeds the required rate of return
b.
firm’s future dividend payments are expected to grow at a constant rate forever
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
c.
dividend cannot be forecast for any future time
d.
firm is experiencing a period of poor performance, after which normal growth is expected
36. An arrangement whereby an investment banker agrees to purchase an entire new issue of securities is called ____.
a.
competitive bidding
b.
syndication
c.
a negotiated bid
d.
underwriting
37. The difference between the selling price to the public of a new issue and the net the issuing firm actually receives is
known as the _____.
a.
negotiating spread
b.
underwriting spread
c.
bid spread
d.
SEC cost
38. A ____ is a group of underwriters who agree to underwrite a new issue in order to spread the risk.
a.
purchasing syndicate
b.
cartel
c.
bidding group
d.
financial institution
a
39. All of the following are advantages of private security placements (over a public offering) EXCEPT _____.
a.
reduced flotation costs
b.
greater flexibility
c.
lower interest rates
d.
fewer delays
c
40. A firm may sell its common stock directly to its existing stockholders through a _____.
a.
private placement
b.
cash offering
c.
rights offering
d.
direct placement
c
41. Direct issuance costs are _____.
a.
higher for common stock than for preferred stock issues
b.
dependent on the quality of the issue
c.
dependent on the size of the issue
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
d.
All of these are correct
42. In marketing a new security issue, the investment banker assumes the risk of not being able to sell the security at a
favorable price in each of the following cases EXCEPT _____.
a.
a best efforts offering
b.
a negotiated underwriting
c.
a competitively bid underwriting
d.
All of these cases have the assumption of risk
a
43. An investment banker is generally thought to be qualified to advise a corporation on a variety of matters, including all
the following EXCEPT _____.
a.
long-range financial planning
b.
the marketing of securities
c.
the timing of securities
d.
the firm’s new product marketing decisions
44. In addition to direct costs, there are other costs associated with new security offerings. These other costs include all of
the following EXCEPT _____.
a.
incentives such as the “Green Shoe” option
b.
overpricing
c.
stock price declines
d.
management time
45. A procedure that allows a firm to file a master registration statement with the SEC and then sell an offering of
common stock in small increments is known as ____.
a.
a Green Shoe option
b.
an IPO
c.
rule 215
d.
a shelf registration
46. Which of the following are reasons a large multinational corporation might sell equity in international markets rather
than selling stock only in the country in which they are domiciled?
a.
Global equity offerings resulting in higher price per share
b.
The existence of a 12-hour per day trading schedule
c.
Higher positive returns around the time of the announcement to sell in global markets
d.
Private placements not being an option
47. The P/E ratio indicates _____.
a.
how much investors are willing to pay for $1 of current earnings
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
b.
the current yield
c.
the current price
d.
how risky the stock is
a
48. Common stock dividends normally are paid _____.
a.
monthly
b.
quarterly
c.
semiannually
d.
annually
49. In stock quotations, the last column, showing the net change, indicates the net change in _____.
a.
a share’s price during the day
b.
the dividend yield
c.
the closing price from the previous day’s close
d.
a share’s high price during the day
c
50. What is the value of a share of stock of HOV Inc. to an investor who requires a 12 percent rate of return if HOV’s
current dividend is $1.20? Assume earnings and dividends are expected to grow at a compound annual rate of 7 percent.
a.
$24.00
b.
$18.34
c.
$25.68
d.
$19.62
c
51. The current price of Zebar is $32.00 and the current dividend is $0.60. What is an investor’s required rate of return on
Zebar if dividends are expected to grow perpetually at a compound annual rate of 8 percent?
a.
9.88%
b.
11.38%
c.
18.75%
d.
10.03%
52. Fast Wheels Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound
annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of stock of Fast
Wheels to an investor who requires a 14 percent rate of return?
a.
$9.00
b.
$5.14
c.
$9.54
d.
$8.16
a
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
53. What is the current value of the common stock of Clump Dump Kitty Litter, Ltd., if you know the current dividend
yield is 6.14%, the PE is 16, and the annual dividend is $1.35?
a.
$21.60
b.
$21.99
c.
$8.29
d.
$98.24
54. Bellbottom Gongs, Inc. pays a quarterly dividend of $0.70, has a PE ratio of 14, and closed yesterday at $48.25. What
is the dividend yield?
a.
5.45%
b.
1.45%
c.
5.8%
d.
7.25%
c
55. If the common stock of Comdisco pays an annual dividend of $0.28, has a PE ratio of 11, and closed at 25, what are
the current earnings per share?
a.
$3.08
b.
$2.27
c.
$7.00
d.
$1.12
56. If Night Owl Lamps pays an annual dividend of $1.54, has a PE of 13, and its last closing price was 40, then its
dividend yield must be _____.
a.
11.85%
b.
3.85%
c.
15.40%
d.
3.25%
57. Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing
at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is an investor’s required
rate of return on Zero-Sum if the current price is $12?
a.
12.3%
b.
12.0%
c.
10.0%
d.
10.3%
58. Assume Zero-Sum Enterprise pays an annual dividend of $1.40 per share and that neither earnings nor dividends are
expected to grow in the future. What is the value of Zero-Sum’s stock to an investor who requires a 14 percent rate of
return?
a.
$14
Name:
Class:
Date:
Chapter 07: Common Stock: Characteristics, Valuation, and Issuance
b.
$10
c.
$20
d.
$0
59. Over the past 7 years the dividends of Sunshine Mining have grown from $0.24 to the current level of $0.53. What is
the approximate annual compound growth rate of Sunshine’s dividends?
a.
20.8%
b.
12.0%
c.
9.5%
d.
10.0%
60. Assume that the dividend ($3.25) on Central Power Company’s common stock issue is paid annually at the end of the
year. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor
who requires a 12 percent rate of return.
a.
$3.25
b.
$39
c.
$12
d.
$27.08
61. During the past 8 years, Beef Wellington Cattle Company’s common stock dividends have grown from $2.00 to $3.19.
Estimate the compound annual dividend growth rate over the 8-year period.
a.
59.5%
b.
6%
c.
12%
d.
19%
62. Moonshine Company, a producer of fine liqueurs, has earnings and common stock dividends have been growing at an
annual rate of 4 percent over the past several years. The firm currently (t = 0) pays an annual dividend of $4.00. Assuming
that Moonshine’s common stock dividends continue growing at the past rate for the foreseeable future, determine the
value of the company’s common stock to an investor who requires a 13 percent rate of return on these securities.
a.
$44.44
b.
$36.81
c.
$46.22
d.
$48.62
c
63. What is the rate of return to an investor in the stock of Bajo Inc. if the current dividend of $0.80 is not expected to
change in the foreseeable future? The current price of Bajo is $13.25.
a.
6.04%
b.
8.0%
c.
24.15%