Question 1

An asset characterized by cash flows that increase at a constant rate forever is called a:

Accepted Answer

A growing perpetuity is an asset that generates cash flows that grow at a constant rate indefinitely.

Question 2

The dividend growth model:

Accepted Answer

The dividend growth model values a stock by considering both the dividend yield (the expected annual dividend divided by the current stock price) and the capital gains yield (the rate at which the value of the investment grows). This model is based on the premise that the value of a stock is the present value of all future dividends it is expected to provide, which inherently includes both current dividends (dividend yield) and the growth of those dividends (capital gains yield).

Question 3

You wish to be on the board of directors of a company. If you wish to buy as low a percentage of the total outstanding shares as is necessary to guarantee yourself a seat on the board, you should look for a firm that has ____________.

Accepted Answer

Cumulative voting common stock gives minority shareholders a better chance of gaining representation on the board of directors by allowing them to concentrate their votes on fewer candidates. This means you would need to buy a lower percentage of the total outstanding shares to guarantee yourself a seat on the board compared to other voting methods, such as straight voting.

Question 4

Supernormal growth refers to a firm that increases its dividend by:

Accepted Answer

Supernormal growth refers to a growth rate that is unusually high and not sustainable over the long term. It exceeds what is normally expected and is typically not maintainable due to various factors such as market saturation, increased competition, or resource limitations.

Question 5

Dividends on common stock:

Accepted Answer

Dividends on common stock become a liability for the firm only after they have been declared by the board of directors. They are not automatically paid, do not have to be paid in cash, are not considered in default if not declared, and are not tax deductible for the corporation.

Question 6

The underlying assumption of the dividend growth model is that a stock is worth:

Accepted Answer

The dividend growth model (DGM) posits that the value of a stock is equal to the present value of all future dividends it is expected to provide. This approach fundamentally views a stock's worth as the sum of its future income streams, discounted back to their present value.

Question 7

The term __________ is usually applied to stock that has no special preference either in paying dividends or in bankruptcy.

Accepted Answer

Common stock typically has no special preferences in terms of dividend payments or claims on assets in the event of bankruptcy, distinguishing it from preferred stock and other securities.

Question 8

Which one of the following statements is correct concerning the differences between preferred and common stock?

Accepted Answer

Common shareholders typically have voting rights that allow them to exert more control over the corporation, such as electing the board of directors, compared to preferred shareholders who usually do not have these rights.

Question 9

The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.

Accepted Answer

The Dividend Growth Model, also known as the Gordon Growth Model, calculates the value of a stock by dividing the next year's dividends by the discount rate minus the dividend growth rate. This model assumes that dividends will continue to grow at a constant rate indefinitely.

Question 10

Which of the following does NOT correctly complete this sentence: Preferred stock is much like debt in that ______________.

Accepted Answer

Preferred stock and debt have different tax treatments for the issuing firm. Interest payments on debt are tax-deductible, while dividends on preferred stock are not.

Question 11

Currently, you own 5% of the common stock of Alberta Industries. The right which grants you the ability to maintain your current level of ownership should the company opt to issue additional shares of stock is called the _____ right.

Accepted Answer

The right that allows current shareholders to maintain their proportional ownership in a company when new shares are issued is known as the preemptive right. This means if you own 5% of the company and new shares are issued, you have the right to purchase enough of those new shares to maintain your 5% ownership.

Question 12

The stock valuation model that determines the current stock price as the next dividend divided by the (discount rate less the dividend growth rate) is called the:

Accepted Answer

The Dividend Growth Model, also known as the Gordon Growth Model, calculates the value of a stock by dividing the next expected dividend by the difference between the discount rate and the dividend growth rate. This model assumes that dividends will continue to grow at a constant rate indefinitely.

Question 13

Which of the following would be considered a violation of the rights of one or more classes of a firm's stakeholders?

Accepted Answer

Paying common dividends while preferred dividends are in arrears violates the rights of preferred shareholders, who are entitled to receive their dividends before any dividends are paid to common shareholders.

Question 14

Which of the following typically applies to preferred stock but NOT to common stock?

Accepted Answer

Preferred stock often features cumulative dividends, meaning if dividends are not paid in one year, they accumulate and must be paid out before any dividends can be distributed to common stockholders. Common stock does not have this feature.

Question 15

As a common shareholder in a firm, which of the following allows you to share proportionately in any new stock sold?

Accepted Answer

Preemptive right allows existing shareholders to maintain their proportional ownership in a company by giving them the opportunity to buy additional shares before the company offers them to the public, ensuring they can avoid dilution of their ownership stake.

Question 16

It is easier for an outsider to gain control over a corporation when:

Accepted Answer

Cumulative voting allows shareholders to concentrate their votes on a single candidate, which can make it easier for an outsider to gain control over a corporation by amassing enough votes to secure a position on the board.

Question 17

The Zilo Corp. has 1,000 shareholders and is preparing to elect three new board members. You do not own enough shares to control the elections but are determined to oust the current leadership. The most likely result of this situation is a:

Accepted Answer

A proxy fight is a strategy used by minority shareholders who are trying to gain control or influence over a company's decisions, including the election of board members, without having to buy a majority of shares. This approach involves persuading other shareholders to vote their shares in favor of the minority shareholder's preferred candidates or proposals. Given the scenario where you do not own enough shares to control the elections but are determined to oust the current leadership, a proxy fight is the most likely and effective strategy to attempt to change the board's composition.

Question 18

You just voted against a merger proposal made by another corporation. You must own:

Accepted Answer

Common stockholders have voting rights, which include voting on mergers and other significant corporate decisions.

Question 19

The dividend yield on a common stock is most similar to which yield on a bond?

Accepted Answer

The dividend yield on a common stock is similar to the current yield on a bond, as both are calculated by dividing the annual income (dividends or interest) by the current market price.

Question 20

Which of the following items does NOT usually appear in a National Post common stock quote?

Accepted Answer

Capital gains rate does not usually appear in a National Post common stock quote. Stock quotes typically include information such as dividend yield, closing price, high and low prices for the trading day, and the volume of shares traded, but not the capital gains rate, as this is determined by the difference between the purchase and selling price of the stock, and can vary widely among individual investors.

Quiz 8: Stock Valuation