Fundamentals of Corporate Finance, 12e (Ross)
Chapter 8 Stock Valuation
1) What is the model called that determines the market value of a stock based on its next annual
dividend, the dividend growth rate, and the applicable discount rate?
A) Maximal-growth model
B) Constant-growth model
C) Capital pricing model
D) Realized-earnings model
E) Realized-growth model
2) The annual dividend yield is computed by dividing ________ annual dividend by the current
stock price.
A) this year’s
B) last year’s
C) next year’s
D) the past 5-year average
E) the next 5-year average
3) Which one of following is the rate at which a stock’s price is expected to appreciate?
A) Current yield
B) Total return
C) Dividend yield
D) Capital gains yield
E) Coupon rate
4) National Trucking has paid an annual dividend of $1 per share on its common stock for the
past 15 years and is expected to continue paying a dollar a share long into the future. Given this,
one share of the firm’s stock is:
A) basically worthless as it offers no growth potential.
B) equal in value to the present value of $1 paid one year from today.
C) priced the same as a $1 perpetuity.
D) valued at an assumed growth rate of 1 percent.
E) worth $1 a share in the current market.
5) A forward PE is based on:
A) the last four quarterly dividend payments.
B) the last dividend payment multiplied by 2.
C) historical earnings.
D) estimated future earnings.
E) industry averages.
6) A decrease in which of the following will increase the current value of a stock according to
the dividend growth model?
A) Dividend amount
B) Number of future dividends, provided the total number of dividends is less than infinite
C) Dividend growth rate
D) Discount rate
E) Both the discount rate and the dividend growth rate
7) Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that
amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a
share and plans on increasing its dividend by 3.1 percent annually. Given this information, you
know for certain that the stock of Northern Culture has a higher ________ than the stock of
Dixie South.
A) market price
B) dividend yield
C) capital gains yield
D) total return
E) real return
8) The dividend growth model:
A) assumes dividends increase at a decreasing rate.
B) only values stocks at Time 0.
C) cannot be used to value constant dividend stocks.
D) can be used to value both dividend-paying and non-dividend-paying stocks.
E) requires the growth rate to be less than the required return.
9) Which one of the following applies to the dividend growth model?
A) An individual stock has the same value to every investor.
B) Even if the dividend amount and growth rate remain constant, the value of a stock can vary.
C) Zero-growth stocks have no market value.
D) Stocks that pay the same annual dividend will have equal market values.
E) The dividend growth rate is inversely related to a stock’s market price.
10) Answer this question based on the dividend growth model. If you expect the market rate of
return to increase across the board on all equity securities, then you should also expect:
A) an increase in all stock values.
B) all stock values to remain constant.
C) a decrease in all stock values.
D) dividend-paying stocks to maintain a constant price while non-dividend paying stocks
decrease in value.
E) dividend-paying stocks to increase in price while non-dividend paying stocks remain constant
in value.
11) When using the two-stage dividend growth model:
A) g1 cannot be negative.
B) Pt = Dt/R.
C) g1 must be greater than g2.
D) g1 can be greater than R.
E) R must be less than g1 but greater than g2.
12) Which one of the following statements is correct?
A) Stocks can only be assigned one dividend growth rate.
B) Preferred stocks generally have variable growth rates.
C) Dividend growth rates must be either zero or positive.
D) All stocks can be valued using the dividend discount models.
E) Stocks can have negative growth rates.
13) Supernormal growth is a growth rate that:
A) is both positive and follows a year or more of negative growth.
B) exceeds a firm’s previous year’s rate of growth.
C) is generally constant for an infinite period of time.
D) is unsustainable over the long term.
E) applies to a single, abnormal year.
14) Which one of the following represents the capital gains yield as used in the dividend growth
model?
A) D1
B) D1/P0
C) P0
D) g
E) g/P0
15) Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent.
Which one of the following must be true?
A) The dividend must be constant.
B) The stock has a negative capital gains yield.
C) The capital gains yield must be zero.
D) The required rate of return for this stock increased over the year.
E) The firm is experiencing supernormal growth.
16) The two-stage dividend growth model evaluates the current price of a stock based on the
assumption a stock will:
A) pay an increasing dividend for a period of time and then cease paying dividends altogether.
B) increase the dividend amount every other year.
C) pay a constant dividend for the first two quarters of each year and then increase the dividend
the last two quarters of each year.
D) grow at a fixed rate for a period of time after which it will grow at a different rate
indefinitely.
E) pay increasing dividends for a fixed period of time, cease paying dividends for a period of
time, and then commence paying increasing dividends for an indefinite period of time.
17) Which one of the following sets of dividend payments best meets the definition of two-stage
growth as it applies to the two-stage dividend growth model?
A) No dividends for five years, then increasing dividends forever
B) $1 per share annual dividend for two years, then $1.25 annual dividends forever
C) Decreasing dividends for six years followed by one final liquidating dividend payment
D) Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed
by a constant dividend thereafter
E) Dividend payments that increase by 10 percent per year for five years followed by dividends
that increase by 3 percent annually thereafter
18) Which one of the following rights is never directly granted to all shareholders of a publicly
held corporation?
A) Electing the board of directors
B) Receiving a distribution of company profits
C) Voting either for or against a proposed merger or acquisition
D) Determining the amount of the dividend to be paid per share
E) Having first chance to purchase any new equity shares that may be offered
19) Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of
directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote.
Presently, the company is voting to elect three new directors. Which one of the following
statements must be true given this information?
A) Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the
board.
B) If straight voting applies, Jen is assured a seat on the board.
C) If straight voting applies, Jen can control all of the open seats.
D) If cumulative voting applies, Jen is assured one seat on the board.
E) If cumulative voting applies, Jen can control all of the open seats.
20) The Blue Marlin is owned by a group of five shareholders who all vote independently and
who all want personal control over the firm. What is the minimum percentage of the outstanding
shares one of these shareholders must own if he or she is to gain personal control over this firm
given that the firm uses straight voting?
A) 17 percent
B) 20 percent plus one vote
C) 25 percent plus one vote
D) 50 percent plus one vote
E) 51 percent
21) Chemical Mines has 5,000 shareholders and is preparing to elect two new board members.
You do not own enough shares to personally control the elections but are determined to oust the
current leadership. Likewise, no other single shareholder owns sufficient shares to personally
control the outcome of the election. Which one of the following is the most likely outcome of
this situation given that some shareholders are happy with the existing management?
A) Negotiated settlement where each side is granted control over one of the open seats
B) Protracted legal battle over control of the board of directors
C) Arbitrated settlement where the arbitrator determines who will be elected to the board
D) Control of the board decided without your influence
E) Proxy fight for control of the board
22) Hardy Lumber has a capital structure that includes bonds, preferred stock, and common
stock. Which one of the following rights is most apt to be granted to the preferred shareholders?
A) Right to share in company profits prior to other shareholders
B) Right to elect the corporate directors
C) Right to vote on proposed mergers
D) Right to all residual income after the common dividends have been paid
E) Right to a permanent seat on the board of directors
23) Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of
$2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:
A) must always show a current liability of $2,400 for dividends payable.
B) must still declare each dividend before it becomes an actual company liability.
C) is obligated to pay $2.40 per share each year in perpetuity.
D) will be declared in default if it does not pay at least $2.40 per share per year on a timely basis.
E) incurs a liability that must be paid at a later date should the company miss paying an annual
dividend payment.
24) Which one of the following statements related to corporate dividends is correct?
A) Dividends are nontaxable income to shareholders.
B) Dividends reduce the taxable income of the corporation.
C) The chief executive officer of a corporation is responsible for declaring dividends.
D) The chief financial officer of a corporation determines the amount of dividend to be paid.
E) Corporate shareholders may receive a tax break on a portion of their dividend income.
25) Which one of these statements related to preferred stock is correct?
A) Preferred shareholders normally receive one vote per share of stock owned.
B) Preferred shareholders determine the outcome of any election that involves a proxy fight.
C) Preferred shareholders are considered to be the residual owners of a corporation.
D) Preferred stock normally has a stated liquidating value of $1,000 per share.
E) Cumulative preferred shares are more valuable than comparable noncumulative shares.
26) You own one share of a cumulative preferred stock that pays quarterly dividends. The firm
has recently suffered some financial setbacks and has failed to pay the last two dividends.
However, new funding has been arranged and the firm intends to restore all dividends, both
common and preferred, this quarter. As a preferred shareholder, you should expect to receive the
equivalent of ________ quarter(s) of dividends when the next dividend is paid.
A) 0
B) 1
C) 2
D) 3
E) either 1, 2, or 3
27) Preferred stock may have all of the following characteristics in common with bonds with the
exception of:
A) the lack of voting rights.
B) a possible conversion option into common stock.
C) annuity payments.
D) a fixed liquidation value.
E) tax-deductible payments.
28) Which one of the following types of stock is defined by the fact that it receives no
preferential treatment in respect to either dividends or bankruptcy proceedings?
A) Dual class
B) Cumulative
C) Non-cumulative
D) Preferred
E) Common
29) A company has four open seats on its board of directors. There are seven candidates vying
for these four positions. There will be a single election to determine the winners. As the owner of
100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all
400 of your votes for a single candidate. What is this type of voting called?
A) Democratic
B) Cumulative
C) Straight
D) Deferred
E) Proxy
30) You want to be on the board of directors of Uptown Communications. Since you are the only
shareholder who will vote for you, you will need to own more than half of the outstanding shares
of stock if you are to be elected to the board. What is the type of voting called that requires this
level of stock ownership to be successfully elected?
A) Democratic
B) Cumulative
C) Straight
D) Deferred
E) Proxy
31) You cannot attend the shareholder’s meeting for Alpha United so you authorize another
shareholder to vote on your behalf. What is the granting of this authority called?
A) Alternative voting
B) Cumulative voting
C) Straight voting
D) Indenture voting
E) Voting by proxy
32) What are the distributions of either cash or stock to shareholders by a corporation called?
A) Coupon payments
B) Retained earnings
C) Dividends
D) Capital payments
E) Diluted profits
33) Browning, Inc. owns 50,000 shares of preferred stock in Omega, Inc. What percentage, if
any, of the dividend income received by Browning, Inc. from this investment is excluded from
federal income taxation in 2018?
A) 0 percent
B) 100 percent
C) 25 percent
D) 70 percent
E) 50 percent
34) Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity
shares for sale to the general public. This sale will definitely occur in which one of the following
markets?
A) Private
B) Auction
C) Tertiary
D) Secondary
E) Primary
35) The secondary market is best defined as the market:
A) in which subordinated shares are issued and resold.
B) conducted solely by brokers.
C) dominated by dealers.
D) where outstanding shares of stock are resold.
E) where warrants are offered and sold.
36) An agent who maintains an inventory from which he or she buys and sells securities is called
a:
A) broker.
B) trader.
C) capitalist.
D) principal.
E) dealer.
37) An agent who arranges a transaction between a buyer and a seller of equity securities is
called a:
A) broker.
B) floor trader.
C) capitalist.
D) principal.
E) dealer.
38) The owner of a trading license for the NYSE is called a:
A) broker.
B) member.
C) agent.
D) specialist.
E) dealer.
39) A person on the floor of the NYSE who executes buy and sell orders on behalf of customers
is called a(n):
A) designated market maker.
B) dealer.
C) specialist.
D) supplemental liquidity provider.
E) floor broker.
40) A member who acts as a dealer in a limited number of securities on the floor of the NYSE is
called a:
A) floor trader.
B) floor post.
C) designated market maker.
D) floor broker.
E) commission broker.
41) A floor broker on the NYSE does which one of the following?
A) Supervises the commission brokers of a specific financial firm
B) Trades for his or her own personal inventory
C) Executes orders on behalf of customers
D) Maintains an inventory and assumes the role of a market maker
E) Is charged with maintaining a liquid, orderly market
42) An individual on the floor of the NYSE who owns a trading license and buys and sells for his
or her personal account is called a:
A) floor trader.
B) exchange customer.
C) specialist.
D) floor broker.
E) market maker.
43) Which one of the following is an electronic system used by the NYSE for directly
transmitting orders to designated market makers?
A) Garage order flow
B) Pillar system
C) Big Room system
D) SLP network
E) Order NET