Missouri Southern State University ECON 350 Financial Management Chapter 7 Quiz 1)Holders of equity capital A) own the firm

Missouri Southern State University

ECON 350

Financial Management

Chapter 7 Quiz

1)Holders of equity capital

A) own the firm.

2. receive interest payments.
3. receive guaranteed income.
4. have loaned money to the firm.

2. All of the following features may be characteristic of preferred stock EXCEPT
   1. callable.
   2. no maturity date.

C) tax-deductible dividends.

D) convertible.

3. An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of                     .

A) $4.00

B) $8.00 C) $8.80

D) $80.00

4. Shares of stock currently owned by the firm's shareholders are called
   1. authorized.
   2. issued.

C) outstanding.

D) treasury shares.

5. Treasury stock results from the
   1. firm selling stock for greater than its par value.
   2. cumulative feature on preferred stock.

C) repurchase of outstanding stock.

D) authorization of additional shares of stock by the board of directors.

6. Advantages of issuing common stock versus long-term debt include all of the following EXCEPT

A) the effects of dilution on earnings and voting power.

2. no maturity.
3. it increases a firm's borrowing power.
4. there is no fixed payment obligation.

7. All of the following are characteristics of common stock EXCEPT
   1. voting rights which permit selection of the firm's directors.
   2. claims on income and assets which are subordinate to the creditors of the firm.

C) fully tax-deductible dividends.

D) no fixed payment obligation.

8. A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is                                    .

A) $120

B) $10

C) $12

D) $100

9. The                              is utilized to value preferred stock.
   1. constant growth model
   2. variable growth model

C) zero-growth model

D) Gordon model

10. Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is

                           .

A) $28.00

B) $56.00 C) $22.40

D) $18.67

11. According to the efficient market theory,
    1. prices of actively traded stocks can be under- or over-valued in an efficient market, and bear searching out.
    2. prices of actively traded stocks can only be under-valued in an efficient market.

C) prices of actively traded stocks do not differ from their true values in an efficient market.

D) prices of actively traded stocks can only be over-valued in an efficient market.

12. If expected return is less than required return on an asset, rational investors will
    1. buy the asset, which will drive the price up and cause the expected return to reach the level of the required return.

B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.

3. sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.
4. buy the asset, since the price is expected to increase.

13.                             is the value of the firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.
    1. Liquidation value

B) Book value

3. The P/E multiple
4. The present value of the common stock

14. The use of the                              is especially helpful in valuing firms that are not publicly traded.
    1. liquidation value
    2. book value

C) P/E multiple

D) present value of the dividends

15.                             in the beta coefficient normally causes                                 in the required return and therefore

                            in the price of the stock, all else remaining the same.

1. 1. An increase; an increase; an increase
   2. An increase; a decrease; an increase

C) An increase; an increase; a decrease

D) A decrease; a decrease; a decrease