IFM10 Ch 05 Test Bank

IFM10 Ch 05 Test Bank - CHAPTER 5 BASIC STOCK VALUATION...

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CHAPTER 5 BASIC STOCK VALUATION (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: (5.1) Preemptive right Answer: a Diff: E 1 . 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 (5.1) Preemptive right Answer: b Diff: E 2 . 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 b. False (5.1) Closely held stock Answer: a Diff: E 3 . When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is "closely held." a. True b. False (5.1) Public company Answer: a Diff: E 4 . A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions. a. True b. False (5.1) Proxy Answer: a Diff: E 5 . 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 Chapter 5: Basic Stock Valuation Page 1
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(5.2) Founders' shares Answer: a Diff: E 6 . 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 (5.2) Classified stock Answer: a Diff: E 7 . 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 (5.4) Total stock returns Answer: b Diff: E 8 . 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 (5.4) Common stock cash flows Answer: a Diff: E 9 . The cash flows associated with common stock are difficult to evaluate due to the uncertainty and variability associated with them. a. True b. False (5.4) Stock valuation Answer: b Diff: E 10 . 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 (5.5) Constant growth model Answer: a Diff: E 11 . 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
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IFM10 Ch 05 Test Bank - CHAPTER 5 BASIC STOCK VALUATION...

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