Chapter 7 Flashcards
(22 cards)
What is the major difference between stock and bond
Stock represents ownership
Bond is a loan
Which of the following typically applies to common stock but not to preferred stock?
A. par value
B. Dividend yield
C. legally considered as equity in the firm
D. Voting rights
D
Which of the following is true of common stocks?
A) The common stock of a corporation can be either privately or publicly owned.
B) Firms often issue common stock with no par value.
C) Preemptive rights often result in a dilution of ownership.
D) A firm’s corporate charter indicates the rate at which dividends are paid.
D
Which of the following is true of common stock ?
A) It is often considered quasi-debt due to fixed payment obligation.
B) It has less restrictive covenants than debt.
C) It gives the holder voting rights which permit selection of the firm’s directors.
D) Its holders have priority over preferred stockholders in the event of liquidation of assets.
C
Which of the following is typically a feature of common stock?
A) Most common stocks are callable.
B) Most common stocks are cumulative.
C) Common stocks have a maturity value.
D) Common stocks may or may not pay dividends.
D
Holders of equity have claims on both income and assets that are secondary to the claims of creditors
T
Unlike creditors, equityholders are owners of the firm.
T
Which of the following is a difference between common stock and bonds?
A) Bondholders have a voice in management, common stockholders do not.
B) Bondholders have a senior claim on assets and income relative to stockholders.
C) Stocks have a stated maturity but bonds do not.
D) Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not
B
Common stock can be either privately owned by private investors or publicly owned by public investors.
T
In the case of liquidation, bondholders are paid first, followed by preferred stockholders, followed by common stockholders.
T
Preferred stock has characteristics of debt since it provides a fixed periodic cash payment.
T (perpetual bond)
Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm’s creditors.
T
Which of the following is typically a feature of common stock?
A) Most common stocks are callable.
B) Most common stocks are cumulative.
C) Common stocks have a maturity value.
D) Common stocks may or may not pay dividends.
D
________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.
A) Preferred stockholders
B) Common stockholders
C) Bondholders
D) Creditors
A
Which of the following are the potential sources of cash flows for a one-year investor who owns a stock?
A) Interest payments and capital gains
B) Dividends and selling shares
C) Rental income and dividends
D) Royalty payments and stock options
B
valuation of a stock
determine the expected cash flows that an investor can receive by owning it
What relationship does the equation “Dividend payout Rate + Retention Rate = 1” represent in the context of a firm’s earnings?
A) The sum of the Dividend payout Rate and Retention Rate is always equal to 0.
B) It shows that a firm can only pay out dividends and cannot retain or reinvest earnings.
C) It indicates that a firm can choose to pay out earnings as dividends or retain and reinvest them, with these two options totaling 100%.
C
In the context of managers trying to maximize the value of the firm (P) and the tradeoff between dividends and growth, which of the following statements is true?
A) Increasing Div9 (Dividend) will always result in an increase in g (Growth).
B) Increasing Div9 (Dividend) will always result in a decrease in g (Growth).
C) Increasing g (Growth) will always result in an increase in Div9 (Dividend).
D) There is a tradeoff, increasing Div9 (Dividend) will decrease g (Growth), and increasing g (Growth) will decrease Div9 (Dividend).
D
Limitations of the dividend-discount model
- Uncertain Dividend Forecasts
- Non-Dividend- Paying Stocks
2: Which of the following statements is FALSE?
A. 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.
B. Estimating dividends, especially for the distant future, is difficult.
C. A firm can only pay out its earnings to investors or reinvest their earnings.
D. Successful young firms often have high initial earnings growth rates.
A
3: Which of the following will NOT increase a company’s dividend payments?
A. It can decrease the number of shares outstanding.
B. It can increase its earnings.
C. It can issue more shares.
D. It can increase its dividend payout rate.
C
