Equity Market

Question 1

You just bought a stock for $60. The stock will pay you a dividend next year and the dividend growth is expected to be 2% forever. If the appropriate discount rate is 6%, how much will you receive as dividend?

Answer 1

$2.40

Question 2

Which of the following statements regarding preferred stock is true?

A. Preferred stock is considered a hybrid security.

B. Failure to pay preferred stock dividends results in bankruptcy.

C. Dividends on preferred stock are considered tax deductible.

D. When one corporation buys the preferred stock of another corporation, it pays taxes on only 40% of the dividends received.

Answer 2

A

Question 3

Which of the following statements regarding common stock is true? A. A private corporation must report financial statements to the government. B. The board of directors is in charge of most day-to-day business decision in a publicly held corporation. C. Of all those who have a claim over the firm’s assets, common stockholders are paid first. D. The most shareholders can lose in the event of bankruptcy is their original investment.

Answer 3

D

Question 4

Which of the following statements regarding equity financing is true? A. Issuing new stock has favorable market perceptions about the firm’s financial prospects.

B. Skipping a dividend payment has the same legal implications as skipping interest payments on debt.

C. Selling new stock dilutes the power and earnings of existing stockholders.

D. Equity financing increases the financial risk of the firm.

Answer 4

C

Question 5

A stock that is expected to pay a dividend of $3.5 next year. If the dividend growth is expected to be 2% forever and the appropriate discount rate is 5%, what is the price of the stock today?

Answer 5

$116.67

Question 6

Which of the following statements regarding the constant-growth (or Gordon) model is false?

A. The model can only be used if the anticipated growth rate is less than the discount rate.

B. The model assumes constant dividend growth in perpetuity.

C. The model is designed to explain short-term movements in the stock price.

D. Constant dividend growth is an acceptable assumption in mature, low-risk firms.

Answer 6

C