Question 1: When the __________ is less than the yield to maturity, the bond sells at a/the __________ the par value.
A. coupon rate; premium over
B. coupon rate; discount to
C. time to maturity; discount to
D. time to maturity; same price as
Question 2: Blackburn Inc. has issued 30-year, $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9%. The annual interest payment for the bond is:
A. $100.
B. $90.
C. $50.
D. $45.
Question 3: When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the:
A. stockholders.
B. sinking fund holders.
C. junior debtholders.
D. senior debtholders.
Question 4: The dividend model requires that a firm has a cash dividend history and that the dividend history shows a:
A. constant dividend or a constant growth in price where constant growth can be either positive or negative.
B. positive dividend or a negative growth in dividends.
C. constant dividend or a positive growth in dividends.
D. constant price or a positive growth in dividends.
Question 5: If we know the dividend stream, the future price of the stock, the future selling date of the stock, and the required return, we can price stocks just as we priced:
A. annuities.
B. perpetuities.
C. bonds.
D. preferred stocks.
Question 6: Which of the statements below is true?
A. A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks.
B. A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts dividends.
C. A problem with using the dividend growth model is that it produces a positive expected return whenever a firm cuts dividends.
D. A problem with using the dividend growth model is that it produces a negative expected return whenever a firm increases its dividends.
Question 7: Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive than the dividend models and provides expected returns for companies based on aspects besides their historical dividend patterns. Which of the below is NOT one of these aspects?
A. The company's risk
B. The premium for taking on risk
C. The reward for waiting
D. Stable dividends
Question 8: Which of the statements below is FALSE?
A. If an investor purchases 20% of the initial issue of the company, the investor then owns 20% of the company, given the one vote/one share norm.
B. After an initial offering, the company can sell more shares to the public at a later date. If the investor who originally purchased 20% does not purchase 20% of the subsequent issue, his or her ownership is diluted below 20%.
C. A preemptive right enables one to maintain one's proportional level of ownership.
D. A preemptive right is never particularly valuable to shareholders with large ownership percentages.
Question 9: Which of the statements below is FALSE?
A. In estimating the current price using the constant growth dividend model, we let g be the growth rate on the dividend stream and r be the rate of return required by the potential buyer of the stock.
B. Constant growth means that the percentage increase in the dividend is the same each year.
C. Div0 refers to the dividends that were just been paid to the current owner of the stock.
D. One unlikely dividend pattern is to raise or grow dividends by a fixed amount at fixed intervals.
Question 10: There are two typical ways to alter the one vote/one share standard. One way is:
A. to have companies buy back nonvoting common stock.
B. to not have companies pay dividends.
C. to have companies issue classes of stock whereby one or more classes have super voting rights.
D. to not have companies issue bonds.
Question 11: A typical practice of many companies is to distribute part of the earnings to shareholders through:
A. quarterly stock splits.
B. quarterly cash dividends.
C. semiannual cash dividends.
D. annual stock dividends.
Question 12: The __________ are quite dynamic in terms of processing trades and incorporating information in prices and thus are considered very efficient markets.
A. domestic bond markets
B. equity markets
C. fixed income markets
D. foreign bond markets
Question 13: The __________ is the market of first sale in which companies first sell their authorized shares to the public.
A. primary market
B. secondary market
C. bull market
D. Nasdaq market
Question 11: Which of the statements below is true?
A. Buying of shares is the selling of ownership in the company.
B. A company is said to go "private" when it opens up its ownership structure to the general public through the sale of common stock.
C. Private companies choose to sell stock to attract permanent financing through equity ownership of the company.
D. Most companies have the resident expertise to complete an initial public offering (IPO), or first public equity issue.
Question 12: What if the company goes out of business in 15 years and thus pays an annual dividend of $2.10 for only those 15 years? What is the present value of a share for this company if we want a 10% return on the stock?
A. $15.97
B. $16.97
C. $17.97
D. $18.97
Question 13: Which of the following statements is true?
A. The dealers of stock are not allowed to make money on the difference between what they buy the stock for and what they sell it for.
B. A bear market is a prolonged rising market, one in which stock prices in general are increasing.
C. The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy.
D. A bull market is a prolonged declining market, one in which stock prices in general are decreasing.
Question 14: Dividend models suggest that the value of a financial asset is determined by the __________ the owner is entitled to while holding the asset.
A. present cash flows
B. past cash flows
C. future cash flows
D. past and present cash flows
Question 15: The value of a financial asset is the:
A. present value of all of the future cash flows that will be received.
B. sum of all previous cash flows received.
C. future value of just the capital gains but not the dividends.
D. present value of just the capital gains but not the dividends.