FM11_Ch_07_Test_Bank - CHAPTER 7 STOCKS AND THEIR VALUATION...

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CHAPTER 7 STOCKS AND THEIR VALUATION (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: Total stock returns Answer: b Diff: E 1 . The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold. a. True b. False Common stock cash flows Answer: a Diff: E 2 . The cash flows associated with common stock are difficult to evaluate due to the uncertainty and variability associated with them. a. True b. False Constant growth model Answer: a Diff: E 3 . The constant growth model used for evaluating the price of a share of common stock may also be used to find the price of perpetual preferred stock or any other perpetuity. a. True b. False Supernormal growth stock Answer: a Diff: E 4 . According to the textbook model, under conditions of nonconstant growth, the discount rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period. a. True b. False Stock valuation Answer: b Diff: E 5 . According to the basic stock valuation model, the value an investor assigns to a share of stock is dependent upon the length of time the investor plans to hold the stock. a. True b. False Chapter 7 - Page 1
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Efficient markets hypothesis Answer: b Diff: E 6 . If security markets were truly strong-form efficient, you would never be able to realize a rate of return on a security greater than the marginal investor's expected (or required) rate of return. a. True b. False Proxy Answer: a Diff: E 7 . A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock. A proxy can be an important tool relating to control of the firm. a. True b. False Classified stock Answer: a Diff: E 8 . Classified stock is one tool companies can use to meet special needs such as when owners of a start-up firm need capital but don't want to relinquish control of the firm. a. True b. False Founders' shares Answer: a Diff: E 9 . Founders' shares is a type of classified stock where the shares are owned by the firm's founders and they retain the sole voting rights to those shares but have restricted dividends for a specified time period. a. True b. False Preemptive right Answer: a Diff: E 10 . The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares sold by the firm. This right protects current stockholders against both dilution of control and dilution of value. a. True b. False Preemptive right Answer: b Diff: E 11 . If a firm's stockholders are given the preemptive right , this means that a group of stockholders can call for a meeting to replace the management. Without the preemptive right, dissident stockholders would have to seek to oust management through a proxy fight . a. True
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This note was uploaded on 04/20/2010 for the course FCBA MBA608 taught by Professor Dr. during the Spring '10 term at Baptist College of Health Sciences.

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FM11_Ch_07_Test_Bank - CHAPTER 7 STOCKS AND THEIR VALUATION...

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