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## chapter 7 finance

 which one of the following types of securities has the lowest priority in a bankruptcy proceeding? common stock Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of \$13.16 a share, and a required return of 14 percent. What is the amount of the last dividend this company paid? R = D/P + g 14 = x/13.16 + 0.056D = 1.05 Breakfast Hut pays a constant annual dividend of \$1.39 per share. How much are you willing to pay for one share if you require a rate of return of 14.6 percent? P = D/R. 1.39/0.146 Healthy Foods just paid its annual dividend of \$1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent? P = D1/R – g1.62 / 0.157-0.021 = 12.16 An agent who buys and sells securities from inventory is called a: dealer NASDAQ is best described as: an electronic network of securities dealers. dividend yield D1/P0 For the past six years, the price of Slippery Rock stock has been increasing at a rate of 8.21 percent a year. Currently, the stock is priced at \$43.40 a share and has a required return of 11.65 percent. What is the dividend yield? R = Dividend yield * capital gains 0.1165 = x. + 0.0821 X = 3.44 sully corp. has currently has an EPS of 2.35 and the benchmark PE ratio for the company is 21. Earnings are expected to grow at 7% per year. What is the target stock price in one year. 2.35(1.07) *21 52.80 the dividend yield on a stock will increase if the stock price decreases. When valuing a stock using the constant-growth model, D1 represents the: When valuing a stock using the constant-growth model, D1 represents the: The capital gains yield equals which one of the following? Dividend growth rate There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting. straight Kate could not attend the last shareholders’ meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority? proxy Newly issued securities are sold to investors in which one of the following markets? primary A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a: floor broker Which one of the following will increase the current value of a stock? Increase in the capital gains yield The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year? dividend yield + capitals gains yield Which one of the following must equal zero if a firm pays a constant annual dividend? capital gains yield If shareholders are granted a preemptive right they will: have priority in the purchase of any newly issued shares. On which one of the following dates do dividends become a liability of the issuer for accounting purposes? On the date the board declares the dividend Dividends are: Paid out of aftertax profits Opulance Corp. common stock is selling for \$44.25 a share and has a dividend yield of 1.9 percent. What is the dividend amount? 0.019*44.25 The Glass Ceiling paid an annual dividend of \$1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 6? 1.64 *(1.013)^6 Gator Tires pays a constant annual dividend of \$1.21 per share. How much are you willing to pay for one share if you require a rate of return of 9.3 percent? 1.21/0.093 Sweet Treats pays a constant annual dividend of \$2.38 a share and currently sells for \$52.60 a share. What is the rate of return? 2.38/52.60 Dry Dock Marina is expected to pay an annual dividend of \$1.58 next year. The stock is selling for \$18.53 a share and has a total return of 9.48 percent. What is the dividend growth rate? g = .0948 − (\$1.58/\$18.53) = .0095, or .95 percent River City Recycling just paid its annual dividend of \$1.15 per share. The required return is 12.3 percent and the dividend growth rate is 0.75 percent. What is the expected value of this stock five years from now? P5 = [\$1.15 × (1 + .0075)6] / (.123 − .0075) = \$10.41 This morning, you purchased a stock that will pay an annual dividend of \$1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now? P0 = \$1.90 / (.12 − .035) = \$22.35P3 = [\$1.90 × (1.035)3] / (.12 − .035) = \$24.78Capital gain = \$24.78 − 22.35 = \$2.43 River Rock, Inc., just paid an annual dividend of \$2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent? P6 = (\$2.80 × 1.0257) / (.16 − .025) = \$24.65
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## Personal Finance

 Explain the difference between the two major kinds of checking accounts Regular has a low starting rate and low interest rate, Interest has a high starting rate and hight interest rate. If you wish to transfer ownership of a check from yourself to another person, would you use a blank, a special or a restrictive endorsement? Explain Special- On the back of the check you would write: Pay to the order of…. and sign under it. Which endorsement would you use to limit the use of your payroll check to being deposited in your bank account? Restrictive. What is the purpose of check stubs or a check register? To keep track of what you have vs. what the bank has. You could have transactions that haven’t gone through yet. A form that accompanies a deposit and lists the items deposited-Currency, coins, or checks. Deposit slips Written evidence that you received payment or that you transferred your right of receiving payment to someone else. Endorsement A separate form on which the depositor keeps a record of deposits and checks. Check Register A card, kept by a bank, that shows the signatures of all individuals authorized to draw checks against the account. Signature Card A bank account that is used by two or more people. Joint account An endorsement that limits the use of a check to the purpose given in the endorsement Restrictive endorsement A fee a bank charges for handling a checking account Service charge An endorsement including the name of the person to whom the check has been transferred. Special Endorsement An endorsement consisting of only the endorser’s name Blank endorsement What are the three parties involved with a check? Drawer, Payee, drawee Under what conditions might you stop payment on a check? If you addressed it to the wrong person, or if you don’t have enough money in the account. What is the difference between a certified check and a cashier’s check? A certified check is the bank verifying that someone is good for their check. A cashier’s check is the bank paying the amount out of their own account/ Give an example of an electronic funds transfer. paying bills, paying someone back, any online purchases, debit cards. The owner of the account and the person who signs the check. Drawer/payor A form designed for the traveler to use in making payments. Traveler’s checks A check dated later than the date on which it is written. postdate The person to whom the check is written. Payee The bank or other financial institution in which the account is held. drawee The form instructing a bank not to pay a certain check. Stop payment order A check that a bank draws on its own in-house funds. Cashier check. Writing a check for more money than is in one’s account. Overdraw A personal check for which a bank has guaranteed payment. Certified check. A form of payment that orders the issuing agency to pay the amount printed on the form to another party. Money Order Checks that have not been deducted from the bank-statement balance. Outstanding checks A statement showing how the checkbook balance and the bank statement were brought into agreement. Bank reconciliation A report sent by the bank to a depositor showing the status of his or her account. Bank statement
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## Finance 325 Chs. 1-3, 5-6

 Which one business types is best suited to raising large amounts of capital? Corporations Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?A. Decrease in the per unit production costs.B. Increase in the number of shares outstanding.C. Decrease in the net working capital.D. Increase in the market value per share.E. Increase in the amount of the quarterly dividend. D. Why should financial managers strive to maximize the current value per share of the existing stock?Doing so guarantees the company will grow in size at the maximum possible rate.A. Doing so increases employee salaries.B. Because they have been hired to represent the interests of the current shareholders.C. Because this will increase the current dividends per share.D. Because managers often receive shares of stock as part of their compensation.E. Doing so guarantees the company will grow in size at the maximum possible rate. B. The Sarbanes-Oxley Act of 2002 is a governmental response to:A. Decreasing corporate profits.B. The terrorists attacks on 9/11/2001.C. A weakening economy.D. Deregulation of the stock exchanges.E. Management greed and abuses. E. Which one of the following is an unintended result of the Sarbanes-Oxley Act?A. More detailed and accurate financial reporting.B. Increased management awareness of internal controls.C. Corporations delisting from major exchanges.D. Increased responsibility for corporate officers.E. Identification of internal control weaknesses. C. Which one of the following is an agency cost?Accepting an investment opportunity that will add value to the firm.A. Accepting an investment opportunity that will add value to the firm.B. Increasing the quarterly dividend.C. Investing in a new project that creates firm value.D. Hiring outside accountants to audit the company’s financial statements.E. Closing a division of the firm that is operating at a loss. D. Financial managers should primarily focus on the interests of:A. Stakeholders.B. The vice president of finance.C. Their immediate supervisor.D. Shareholders.E. The board of directors. D. Which term is defined as the management of a firm’s long-term investments? Capital Budgeting which term is defined as the mixture of a firm’s debt and equity financing? Capital Structure A business created as a distinct legal entity and treated as a legal “person” is called a:Corporation.Sole proprietorship.General partnership.Limited partnership.Unlimited liability company. Corporation What is an agency relationship? The relationship between the stockholders and management What are agency problems and how do they come about? What are agency costs? Agency Problems are those between the stockholders (principal) and management (agent). They come about when management doesn’t have the stockholder’s interest as their own. An agency cost is the cost of the conflict of interest between the two parties (lost opportunities or corporate expenditure benefitting management but costing the stockholders) What are corporate finance’s three main areas of concern? Capital budgeting: What long-term investments should the firm take?Capital structure: Where will the firm get the long-term financing to pay for its investments? In other words, what mixture of debt and equity should the firm use to fund operations?Working capital management: How should the firm manage its everyday financial activities? The balance sheet is a: snapshot of the firm
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