1. (p. 67) Dividend growth rate for a stable firm can be estimated as:
a. Plow back rate / the return on equity (ROE)
B. Plow back rate * the return on equity (ROE)
c. Plow back rate + the return on equity (ROE)
d. Plow back rate - the return on equity (ROE)
2. (p. 72) Ocean Co. has paid a dividend $2 per share out of earnings of $4 per share. If the
book value per share is $25, what is the
expected growth rate in dividends (g)?
a. 16%
b. 12%
C. 8%
d. 4%
g = (1- 0.5) (4/25) = 0.08 or 8%
3. (p. 420) Generally, the announcement of an increase in dividends is interpreted by the
investors as:
a. Bad news and the stock price drops
B. Good news and the stock price increases
c. A non-event and does not affect the stock price
4. (p. 425)C ompany X has 100 shares outstanding. It earns $1,000 per year and expects to pay
all of it as dividends. If the firm expects
to maintain this dividend forever, calculate the stock price today. (the required rate of return is
10%)
a. $110
b. $ 90
C. $100
d. None of the above
Dividends = 1000/100 =$10 ; P = 10/0.1 =$100
5. (p. 370) Exploitation of minority shareholders by the majority shareholders is called:
a. reverse stock split
B. tunneling
c. exploitation
d. none of the above
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6. (p. 373) Preference in position among creditors when it comes to repayment is called:
A. Seniority
b. Security
c. Liquidation preference
d. Absolute priority
7. (p. 417) Which of the following dividends is never in the form of cash?
(I) Regular dividend
(II) Special dividend
(III) Stock dividend
(IV) Liquidating dividend
a. I only
b. II only
C. III only
d. I, II, and IV only
8. (p. 65W) ill Co. is expected to pay a dividend of $4 per share at the end of year one and the
dividends are expected to grow at a
constant rate of 4% forever. If the current price of the stock is $25 per share calculate the
required rate of return or the market
capitalization rate for the firms' stock.
a. 4%
b. 16%
C. 20%
d. None of the above.
r = (4/25) + 0.04 = 20%
9. (p. 376) The following are the main characteristics of financial intermediaries except:
(I) they may raise money in special ways
(II) they invest in financial assets
(III) they mainly invest in real assets
a. I only
b. I and II only
c. II only
D. III only
10. (p. 389) State laws that regulate sales of securities within the state are called:
a. Red herring
b. Registration laws
c. Rule 415
D. Blue-sky laws
1. (p. 65) The required rate of return or the market capitalization rate is estimated as follows:
a. Dividend yield - expected rate of growth in dividends
B. Dividend yield + expected rate of growth in dividends
c. Dividend yield / expected rate of growth in dividends
d. (Dividend yield) * (expected rate of growth in dividends)
2. (p. 72) Ocean Co. has paid a dividend $2 per share out of earnings of $4 per share. If the
book value per share is $25, what is the
expected growth rate in dividends (g)?
a. 16%
b. 12%
C. 8%
d. 4%
g = (1- 0.5) (4/25) = 0.08 or 8%
3. (p. 370) If a group of outsiders solicits the authority to vote shares to replace existing
management, then it is called a:
a. Tender offer
B. Proxy contest
c. Vote of confidence
d. None of the above
4. (p. 75) The following stocks are examples of income stocks except:
a. Citigroup
b. J.C. Penny
C. Starbucks
d. General Motors
e. All of the above are income stocks
5. (p. 369)I f you own 1,000 shares of common stock of a firm and there are five directors
being elected, what is the maximum number
of votes you can cast for a particular director under majority voting?
a. 5,000
B. 1,000
c. 200
d. None of the above
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6. (p. 369) A modification to the company charter that requires 75% shareholder approval for a
merger is called a(n):
a. Majority voting amendment
b. Cumulative voting amendment
c. Proxy voting amendment
D. Supermajority amendment
7. (p. 417) Which of these dates occurs last in time (when arranged in the chronological order)?
A. Payment date
b. Ex-dividend date
c. Record date
d. Dividend declaration date
8. (p. 400) Generally, there is a drop in the price of equity subsequent to the announcement of a
new issue. This is attributed to:
a. An increase in the supply of shares
B. Information effect
c. Both a and b
d. None of the above
9. (p. 402) If the old stock price is $50/share and ex-rights price is $49/share then the value of a
right is:
a. $50/right
b. $49/right
C. $1/right
d. Cannot be determined
Value of a right = 50-49 = $1/right
10. (p. 70M) ichigan Co. is currently paying a dividend of $2.20 per share. The dividends are
expected to grow at 25% per year for the
next four years and then grow 5% per year thereafter. Calculate the expected dividend in year
5.
a. $5.37
b. $2.95
C. $5.64
d. $8.39
Div6=2.2 * (1.25^4) * (1.05) = 5.64
1. (p. 72) The value of the stock:
a. Increases as the dividend growth rate increases
b. Increases as the required rate of return decreases
c. Increases as the required rate of return increases
D. Both A and B
2. (p. 72) Ocean Co. has paid a dividend $3 per share out of earnings of $5 per share. If the
book value per share is $40, what is the
expected growth rate in dividends?
a. 12.5%
b. 8%
c. 40%
D. 5%
g = (1- 3/5)(5/40) = .05 or 5%;
3. (p. 373) Preference in position among creditors when it comes to repayment is called:
A. Seniority
b. Security
c. Liquidation preference
d. Absolute priority
4. (p. 399) Generally, which of the following issues have the lowest total direct costs of issuing
as a percentage of gross proceeds?
a. Initial public offerings (IPOs)
b. Seasoned equity offerings (SEOs)
c. Convertible bonds
D. Straight bonds
5. (p. 383) A business plan generally contains:
(I) a description of the proposed products
(II) a description of the potential market
(III) a description of the underlying technology
(IV) resources needed
a. I only
b. I and II only
c. II and III only
D. I, II, III, and IV
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6. (p. 372) The following are characteristics of preferred stock except:
(I) pays fixed dividends
(II) has cumulative feature
(III) has voting rights
a. I only
b. I and II only
C. III only
d. II only
7. (p. 362) Generally (during the years 1989-2003), non-financial US corporations have
financed their capital expenditures mostly
through:
a. By issuing new equity
b. Debt
c. Working capital
D. Internally generated cash
8. (p. 62)C K Company stockholders expect to receive a year-end dividend of $10 per share
and then be sold for $122 dollars per share.
If the required rate of return for the stock is 20%, what is the current value of the stock?
a. $100
b. $122
c. $132
D. $110
P = (122+10)/1.2 = 110
9. (p. 417) Greenmail refers to the practice of a company purchasing its stock from:
a. Small shareholders who are unhappy with performance of the firm
B. A hostile shareholder who threatens to take over the firm
c. Large shareholders who are unhappy with performance of the firm
d. None of the above
10. (p. 367) Shares of stock that have been repurchased by the corporation are called
a. Authorized shares
b. Repurchase agreements
C. Treasury stock
d. Retained equity
1. (p. 72) Ocean Co. has paid a dividend $2 per share out of earnings of $4 per share. If the
book value per share is $25, what is the
expected growth rate in dividends (g)?
a. 16%
b. 12%
C. 8%
d. 4%
g = (1- 0.5) (4/25) = 0.08 or 8%
2. (p. 65) The required rate of return or the market capitalization rate is estimated as follows:
a. Dividend yield - expected rate of growth in dividends
B. Dividend yield + expected rate of growth in dividends
c. Dividend yield / expected rate of growth in dividends
d. (Dividend yield) * (expected rate of growth in dividends)
3. (p. 374) Which of the following instruments gives the owner the right to purchase securities
directly from the firm at a fixed price
during a specified period of time?
A. Warrant
b. Call option
c. American option
d. European option
4. (p. 389) Generally, underwriters provide the following services to the issuing firm:
(I) Provide advice
(II) Buy new issue
(III) Reselling the issue to the public
a. I only
b. I and II only
C. I, II, and III
5. (p. 420) Generally, a reduction in dividend is interpreted by investors as:
A. Bad news and the stock price drops
b. Good news and the stock price increases
c. A non-event and does not affect the stock prices
Page 2
6. (p. 374) US dollars deposited in a German bank are called:
a. Deutsche dollars
b. American depositing receipts
C. Eurodollars
d. None of the above
7. (p. 75) The relationship between P/E ratio and market capitalization rate can be described by
the following statements:
(I) EPS/Po measures r, only if PVGO = 0
(II) High P/E ratios indicate low r
(III) There is no reliable association between the P/E ratio and r
a. I only
b. II only
c. III only
D. I and III only
8. (p. 430) If both dividends and capital gains are taxed at the same ordinary income tax rate,
the effect of tax is different because:
a. Capital gains are actually taxed, while dividends are taxed on paper only
B. Dividends are taxed when distributed while capital gains are deferred until the stock is
sold
c. Both dividends and capital gains are taxed every year
d. Both A and C
9. (p. 75) A high proportion of the value a growth stock comes from:
a. Past dividend payments
b. Past earnings
C. PVGO (Present Value of the Growth Opportunities)
d. Both A and B
10. (p. 402I)m age Corporation has #1,000,000 shares outstanding. It wishes to issue 250,000
new shares using rights issue. If the current
stock price is $50 and the subscription price is $45/share, calculate the value of a right?
a. $0.25/right
b. $5.00/right
c. $2.50/right
D. $1.00/right
Value of a right = (50-45)/(4+1) = $1/right
1. (p. 434) According to middle-of-the-roaders, a firms value is not affected by its dividend
policy because:
a. of the clientele effect
b. of the tax loopholes available to wealthy stockholders
c. well-managed companies prefer to signal their worth by paying high dividends
D. All of the above
2. (p. 417) Which of the following dividends is never in the form of cash?
(I) Regular dividend
(II) Special dividend
(III) Stock dividend
(IV) Liquidating dividend
a. I only
b. II only
C. III only
d. I, II, and IV only
3. (p. 75) The relationship between P/E ratio and market capitalization rate can be described by
the following statements:
(I) EPS/Po measures r, only if PVGO = 0
(II) High P/E ratios indicate low r
(III) There is no reliable association between the P/E ratio and r
a. I only
b. II only
c. III only
D. I and III only
4. (p. 370) Stockholders usually have the following rights:
a. To elect board members, authorize issue of new shares and vote on matters of great
importance like mergers
b. To share proportionally in regular and liquidating dividends
c. To share proportionally in any new stock sold
D. All of the above
5. (p. 389) Generally, underwriters provide the following services to the issuing firm:
(I) Provide advice
(II) Buy new issue
(III) Reselling the issue to the public
a. I only
b. I and II only
C. I, II, and III
6. (p. 75) The following stocks are examples of income stocks except:
a. Citigroup
b. J.C. Penny
C. Starbucks
d. General Motors
e. All of the above are income stocks
7. (p. 430) If investors have a marginal tax rate of 20% and a firm has announced a dividend of
$5;
A. The price of stock should decrease by $4 on the ex-dividend date
b. The price of the stock should decrease by $5 on the ex-dividend date
c. The price of the stock should increase by $5 on the ex-dividend date
d. The price of the stock should increase by $4 on the ex-dividend date
8. (p. 435A) firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of
$3 per share (30% tax rate) in taxes. The
firm pays the remaining $A7 in dividends to a shareholder in 30% tax bracket. What is the
amount of tax paid by the
shareholder under the imputation tax system?
a. $A2.10
B. Zero
c. $3.00
d. None of the above
9. (p. 70)M ichigan Co. is currently paying a dividend of $2.20 per share. The dividends are
expected to grow at 25% per year for the
next four years and then grow 5% per year thereafter. Calculate the expected dividend in year
5.
a. $5.37
b. $2.95
C. $5.64
d. $8.39
Div6=2.2 * (1.25^4) * (1.05) = 5.64
10. (p. 72) Ocean Co. has paid a dividend $3 per share out of earnings of $5 per share. If the
book value per share is $40, what is the
expected growth rate in dividends?
a. 12.5%
b. 8%
c. 40%
D. 5%
g = (1- 3/5)(5/40) = .05 or 5%;
1. (p. 72) Ocean Co. has paid a dividend $3 per share out of earnings of $5 per share. If the
book value per share is $40, what is the
expected growth rate in dividends?
a. 12.5%
b. 8%
c. 40%
D. 5%
g = (1- 3/5)(5/40) = .05 or 5%;
2. (p. 65) The required rate of return or the market capitalization rate is estimated as follows:
a. Dividend yield - expected rate of growth in dividends
B. Dividend yield + expected rate of growth in dividends
c. Dividend yield / expected rate of growth in dividends
d. (Dividend yield) * (expected rate of growth in dividends)
3. (p. 368) Minority shareholders can also be represented on the board of directors under:
a. Majority voting
B. Cumulative voting
c. Straight voting
d. None of the above
4. (p. 396) A security issue sold directly to the public is called:
a. A rights offer
B. A general cash offer
c. A private placement
d. An uniform-price auction
5. (p. 75) The relationship between P/E ratio and market capitalization rate can be described by
the following statements:
(I) EPS/Po measures r, only if PVGO = 0
(II) High P/E ratios indicate low r
(III) There is no reliable association between the P/E ratio and r
a. I only
b. II only
c. III only
D. I and III only
Page 2
6. (p. 373) Preference in position among creditors when it comes to repayment is called:
A. Seniority
b. Security
c. Liquidation preference
d. Absolute priority
7. (p. 383) A business plan generally contains:
(I) a description of the proposed products
(II) a description of the potential market
(III) a description of the underlying technology
(IV) resources needed
a. I only
b. I and II only
c. II and III only
D. I, II, III, and IV
8. (p. 398) A security issued in the United States that represents shares of stock in a foreign
company is called:
a. Euros
B. American Depositing Receipts (ADRs)
c. A bought deal
d. None of the above
9. (p. 70G) reat Motor Company is currently paying a dividend of $1.50 per year. The
dividends are expected to grow at a rate of 20%
for the next three years and then a constant rate of 6 % thereafter. What is the expected
dividend per share in year 5?
A. $2.91
b. $2.59
c. $2.00
d. $1.50
D5 = (1.5) * (1.2^3) * (1.06^2) = 2.91
10. (p. 396) An equity issue sold to the firm's existing stockholders is called:
A. A rights offer
b. A general cash offer
c. A private placement
d. A discriminatory-price auction
1. (p. 70T) he NetTech Co. has just paid a dividend of $1 per share. The dividends are expected
to grow at 20% per year for the next
three years and at the rate of 5% per year thereafter. If the required rate of return on the stock
is 15%(APR), what is the current
value of the stock?
a. $18.14
b. $11.93
C. $15.20
d. None of the above
P = (1.2/1.15) + (1.44/1.15^2) + (1.728/1.15^3) + (1.8144/((1.15^3) * (0.15 - 0.05)) = 15.20
2. (p. 72O) cean Co. has paid a dividend $3 per share out of earnings of $5 per share. If the
book value per share is $40 and the share
value is 52.50 per share, calculate the required rate of return on the stock. (Use the calculated
'g' from the previous problem to
answer this question)
a. 12%
B. 11%
c. 5%
d. 6%
g = (1- 0.6) (5/40) = .05 or 5%; r = [(3*1.05)/52.50] + 0.05 = 0.11 = 11%.
3. (p. 389) Generally, underwriters provide the following services to the issuing firm:
(I) Provide advice
(II) Buy new issue
(III) Reselling the issue to the public
a. I only
b. I and II only
C. I, II, and III
4. (p. 366) Generally, the book value of the shareholders' equity is represented by:
a. The total assets minus the current liabilities
b. The total assets minus the net worth
c. The sum of preferred stock, debt and the capital surplus
D. The sum of the par value of common stock, the capital surplus and the accumulated
retained earnings
Page 2
5. (p. 374) When an entire security issue is directly sold to qualified institutional investors,
such an issue is called a:
a. Public issue
B. Private placement
c. Securitization
d. Commercial paper
6. (p. 75) The relationship between P/E ratio and market capitalization rate can be described by
the following statements:
(I) EPS/Po measures r, only if PVGO = 0
(II) High P/E ratios indicate low r
(III) There is no reliable association between the P/E ratio and r
a. I only
b. II only
c. III only
D. I and III only
7. (p. 388) Registration statements are filed with the:
a. Federal Reserve Board (FED)
b. Office of the Comptroller of the Currency (OCC)
C. Securities and Exchange Commission (SEC)
d. Environmental Protection Agency (EPA)
8. (p. 418) Which of the following is true?
a. Firms have long-run target dividend payout ratios
b. Dividend changes follows shifts in long-term, sustainable earnings
c. Managers are reluctant to make dividend changes that might have to be reversed
D. All of the above
9. (p. 75) A high proportion of the value a growth stock comes from:
a. Past dividend payments
b. Past earnings
C. PVGO (Present Value of the Growth Opportunities)
d. Both A and B
10. (p. 41T7)h e procedure where the firm states a series of prices at which it is prepared to
repurchase stock. Shareholders submit offers
indicting how many shares they wish to sell at each price. The firm then calculates the lowest
price at which it is able to buy
the desired number of shares. This procedure is known as:
a. Open market transaction
b. Dutch auction
C. Green mail
d. None of the above