finance chapter 7

True T or F The ownership in a corporation is divided into shares of stock, which carry rights to a share in the profits of the firm through future dividend payments.
D What are dividend payments?A) payments made to a company by investors for a share of the ownership of that companyB) incremental increases in the value of the stock held by an investor due to rises in share priceC) the difference between the original cost price of a share and the price an investor receives when that share is soldD) a share of the profits paid to each shareholder on the basis of the number of shares they hold
Dividends ___________ are periodic payments given out by the firm to shareholders. It is not necessary for a firm to declare dividends, but mature firms tend to pay out dividends.
False T or F A floor broker is a person at the NASDAQ with a trading license who represents orders on the floor.
B You placed an order to purchase stock where you specified the maximum price you were willing to pay. This type of order is known as a ________.A) Maximum OrderB) Limit OrderC) Floor OrderD) Market Order
100 A “round lot” consists of how many shares?
True T or F The Valuation Principle states that the value of a stock is equal to the present value (PV) of both the dividends and future sale price of that stock which the investor will receive.
C Which of the following will be a source of cash flows for a shareholder of a certain stock?I. Sale of the shares at a future dateII. The firm in which the shares are held paying out cash to shareholders in the form of dividendsIII. The firm in which the shares are held increasing the total number of shares outstanding through a stock split
True T or F A firm can either pay its earnings to its investors, or it can keep them and reinvest them.
A Which of the following is NOT a way that a firm can increase its dividend?A) by increasing its retention rateB) by decreasing its shares outstandingC) by increasing its earnings (net income)D) by increasing its dividend payout rate
A Which of the following statements is FALSE regarding profitable and unprofitable growth?A) If a firm wants to increase its share price, it must diversify.B) If a firm retains more earnings, it will pay out less of those earnings, reducing its dividends.C) A firm can increase its growth rate by retaining more of its earnings.D) Cutting a firm’s dividend to increase investment will raise the stock price if the new investment has a positive net present value (NPV).
D 4) Which of the following statements is FALSE?A) Estimating dividends, especially for the distant future, is difficult.B) A firm can only pay out its earnings to investors or reinvest their earnings.C) Successful young firms often have high initial earnings growth rates.D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.
A ) Which of the following statements is FALSE of the dividend-discount model?A) We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth.B) As firms mature, their growth slows to rates more typical of established companies.C) The dividend-discount model values the stock based on a forecast of the future dividends paid to shareholders.D) The simplest forecast for the firm’s future dividends states that they will grow at a constant rate, i.e., forever.
D Which of the following statements is FALSE about dividend payout and growth?A) A common approximation is to assume that in the long run, dividends will grow at a constant rate.B) The dividend each year is the firm’s earnings per share (EPS) multiplied by its dividend payout rate.C) There is a tremendous amount of uncertainty associated with any forecast of a firm’s future dividends.D) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.
B) Total return equals earnings multiplied by the dividend payout rate. Which of the following statements is FALSE?A) As firms mature, their earnings exceed their investment needs and they begin to pay dividends.B) Total return equals earnings multiplied by the dividend payout rate.C) Cutting the firm’s dividend to increase investment will raise the stock price if, and only if, the new investments have a positive net present value (NPV).D) We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.
D Which of the following formulas is INCORRECT?A) g = Retention Rate × Return on New InvestmentB) Divt = EPSt × Dividend Payout RateC) P0 = Div1 / (rE – g)D) rE = (Div1 / P0) – g
B Which of the following formulas is INCORRECT?A) Divt = EPSt × Dividend Payout RateB) PN = (rE – g) × DivN+1C) earnings growth rate = retention rate × return on new investmentD) rE = (Divt / P0) + g
A Which of the following will NOT increase a company’s dividend payments?A) It can issue more shares.B) It can increase its earnings.C) It can decrease the number of shares outstanding.D) It can increase its dividend payout rate.
decrease increasing dividend-payout ratio will do what to retention and growth rate
True True or False Forecasting dividends requires forecasting the firm’s earnings, dividend payout rate, and future share count.
False stocks that do not pay a dividend must have a value of $0
A Which of the following is a limitation of the dividend-discount model? A) It cannot handle negative growth rates. B) It requires accurate dividend forecasts, which is not possible. C) It requires that the growth rate always be higher than the required rate of return, which is not realistic.D) It does not consider past earnings and performance.
B.) 25.78 ) Sinclair Pharmaceuticals, a small drug company, develops a vaccine that will protect against Helicobacter pylori, a bacteria that is the cause of a number of diseases of the stomach. It is expected that Sinclair Pharmaceuticals will experience extremely high growth over the next three years and will reinvest all of its earnings in expanding the company over this time. Earnings were $1.10 per share before the development of the vaccine and are expected to grow by 40% per year for the next three years. After this time, it is expected that growth will drop to 5% and stay there for the expected future. Four years from now Sinclair will pay dividends that are 75% of its earnings. If its equity cost of capital is 12%, what is the value of a share of Sinclair Pharmaceuticals today?A) $20.62B) $25.78C) $33.96D) $33.51
C) 52.38 ) Sunnyfax Publishing pays out all its earnings and has a share price of $37. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 13%. If the reinvestment does not affect Sunnyfax’s equity cost of capital, what is the expected share price as a consequence of this decision?A) $36.67B) $41.90C) $52.38D) $62.86
C) 41.36 ) You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean’s equity cost of capital is 10%, then the price of a share of Bean’s stock is closest to ________.A) $24.82B) $16.54C) $41.36D) $66.18
B ) Which of the following models directlyi values all of the firm’s equity, rather than a single share?I. Dividend-discount modelII. Total payout modelIII. Discounted cash flow modelA) I onlyB) II only C) III onlyD) II and III

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