Question 1

Preferred stock is sometimes treated like a debt security because:

Accepted Answer

A)   legally preferred stock is a debt security.
B)   preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings.
C)   preferred dividends are deductible from taxable income just like interest payments on bonds.
D)   preferred stock holders receive a residual value and not a stated value.

Question 2

For investors, the function of secondary markets is to provide marketability for the securities they own at a fair price.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is true?

Accepted Answer

A)   Preferred stockholders are considered to be the true owners of public corporations.
B)   Dividends paid to preferred stockholders are not fixed.
C)   Preferred stockholders do not typically have voting rights.
D)   Preferred stock can never be converted to common stock.

Question 4

Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects its growth rate to be at a constant rate of 7 percent. If the required rate of return is 15 percent, what is the current market price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

A)   $69.41
B)   $93.63
C)   $57.54
D)   $80.29

Question 5

Which of the following is NOT a widely known stock market index?

Accepted Answer

A)   The Dow Jones Industrial Average
B)   The OTQ Composite Index
C)   The New York Stock Exchange Index
D)   The Standard and Poor's 500 Index

Question 6

Which of the following statements is NOT true about preferred stock?

Accepted Answer

A)   Preferred stock represents ownership in the firm.
B)   Preferred stockholders are not eligible for guaranteed dividend payments by the firm.
C)   Preferred stock dividends are paid by the issuer with after-tax dollars.
D)   Preferred stock holders have limited voting privileges relative to common-stock owners.

Question 7

Which of the following statements is NOT true about preferred stock?

Accepted Answer

A)   Preferred dividend payments are paid by the issuer with after-tax dollars.
B)   Preferred dividends are tax deductible just like the interest on bonds.
C)   Preferred stock holders have limited voting privileges relative to common-stock owners.
D)   Preferred stocks are generally viewed as perpetuities because they have no fixed maturity.

Question 8

Which of the following statements is NOT true about broker markets?

Accepted Answer

A)   Brokers bring buyers and sellers together to earn a fee, called a commission.
B)   Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves.
C)   Investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search.
D)   Brokers can guarantee an order because they have an inventory of securities.

Question 9

Preferred stock with no fixed maturity can be valued as a perpetuity.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is NOT true about common stock?

Accepted Answer

A)   Common-stock holders have the right to vote on the election of the board of directors of their company.
B)   Common stock is considered to have no fixed maturity.
C)   Owners of common stock are guaranteed dividend payments by the firm.
D)   Common-stock holders have limited liability toward the obligations of the corporation.

Question 11

Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions.

Accepted Answer

A) True 
 B)False

Question 12

Preferred dividend payments are fixed obligations of the firm, similar to the interest payments on corporate bonds.

Accepted Answer

A) True 
 B)False

Question 13

An active secondary market for debt or equity securities makes raising new capital less expensive for firms.

Accepted Answer

A) True 
 B)False

Question 14

The constant-growth dividend model will provide invalid solutions when:

Accepted Answer

A)   the growth rate of the stock exceeds the required rate of return for the stock.
B)   the growth rate of the stock is less than the required rate of return for the stock.
C)   the growth rate of the stock is equal to the risk-free rate.
D)   None of the above.

Question 15

The bond valuation model can be used to value perpetual preferred stocks.

Accepted Answer

A) True 
 B)False  False

Question 16

Dealer markets are characterized by:

Accepted Answer

A)   no time-consuming search for a fair deal.
B)   a guarantee of order fulfillment because the dealer holds an inventory of securities.
C)   improved market efficiency because dealers provide continuous bid and ask prices for securities.
D)   All of the above characterize dealer markets. D

Question 17

Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock? (Round to the nearest dollar.)

Accepted Answer

A)   $74
B)   $32
C)   $80
D)   $60

Question 18

Discuss the significance of an active secondary market to both issuers of securities and to investors.

Accepted Answer

Most secondary market transactions do not directly affect the firm which issues the securities. The presence of a secondary market does, however, affect the issuer indirectly. Simply put, investors will pay a premium price for primary securities that have an active secondary market because most investors do not hold securities forever. Thus, the marketability provided by secondary markets is an important service to the issuers. Financial managers are well aware of the importance of secondary markets for the sale of their firm's primary securities, and as a result, they encourage investment banking firms to establish secondary markets for their securities. The presence of an active secondary market allows firms to sell their new debt or equity issues at a lower funding cost than firms selling similar securities that have no secondary market. From an investor's perspective, the function of secondary markets is to provide marketability for the shares of securities they own at a fair price.

Question 19

Direct search markets provide the best price information.

Accepted Answer

A) True 
 B)False

Question 20

In comparison to the NYSE,

Accepted Answer

A)   NASDAQ has less company listed.
B)   total share volume is lower on the NASDAQ.
C)   firms listed on the NASDAQ tend to be smaller.
D)   NASDAQ firms exceed NYSE listed firms in total capitalization.

Exam 9: Stock Valuation

Preferred stock is sometimes treated like a debt security because:

Correct Answer
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For investors, the function of secondary markets is to provide marketability for the securities they own at a fair price.

Correct Answer
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Which of the following statements is true?

Correct Answer
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Correct Answer
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Which of the following is NOT a widely known stock market index?

Correct Answer
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Which of the following statements is NOT true about preferred stock?

Correct Answer
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Which of the following statements is NOT true about preferred stock?

Correct Answer
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Which of the following statements is NOT true about broker markets?

Correct Answer
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Preferred stock with no fixed maturity can be valued as a perpetuity.

Correct Answer
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Which of the following statements is NOT true about common stock?

Correct Answer
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Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions.

Correct Answer
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Preferred dividend payments are fixed obligations of the firm, similar to the interest payments on corporate bonds.

Correct Answer
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An active secondary market for debt or equity securities makes raising new capital less expensive for firms.

Correct Answer
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The constant-growth dividend model will provide invalid solutions when:

Correct Answer
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The bond valuation model can be used to value perpetual preferred stocks.

Correct Answer
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False

Dealer markets are characterized by:

Correct Answer
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D

Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock? (Round to the nearest dollar.)

Correct Answer
verified

Discuss the significance of an active secondary market to both issuers of securities and to investors.

Direct search markets provide the best price information.

Correct Answer
verified

In comparison to the NYSE,

Correct Answer
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Exam 9: Stock Valuation

Preferred stock is sometimes treated like a debt security because:

Correct AnswerverifiedShow Answer

For investors, the function of secondary markets is to provide marketability for the securities they own at a fair price.

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is NOT a widely known stock market index?

Correct AnswerverifiedShow Answer

Which of the following statements is NOT true about preferred stock?

Correct AnswerverifiedShow Answer

Which of the following statements is NOT true about preferred stock?

Correct AnswerverifiedShow Answer

Which of the following statements is NOT true about broker markets?

Correct AnswerverifiedShow Answer

Preferred stock with no fixed maturity can be valued as a perpetuity.

Correct AnswerverifiedShow Answer

Which of the following statements is NOT true about common stock?

Correct AnswerverifiedShow Answer

Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions.

Correct AnswerverifiedShow Answer

Preferred dividend payments are fixed obligations of the firm, similar to the interest payments on corporate bonds.

Correct AnswerverifiedShow Answer

An active secondary market for debt or equity securities makes raising new capital less expensive for firms.

Correct AnswerverifiedShow Answer

The constant-growth dividend model will provide invalid solutions when:

Correct AnswerverifiedShow Answer

The bond valuation model can be used to value perpetual preferred stocks.

Correct AnswerverifiedFalse

Dealer markets are characterized by:

Correct AnswerverifiedD

Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock? (Round to the nearest dollar.)

Correct AnswerverifiedShow Answer

Discuss the significance of an active secondary market to both issuers of securities and to investors.

Direct search markets provide the best price information.

Correct AnswerverifiedShow Answer

In comparison to the NYSE,

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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False

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D

Correct Answer
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Correct Answer
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