Essentials of Corporate Finance Australia 2nd Edition Ross Test Bank

Essentials of Corporate Finance
Australia 2nd Edition Ross Test Bank

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Chapter 07 testbank - static
Student: ___________________________________________________________________________
1. Tellite Ltd, a telecommunication company, did not pay a dividend in the last financial year. However, the
company has indicated that it expects to earn $1 per share in this financial year and to pay out 20% of these
earnings in dividends. Financial analysts expect that Tellite's earnings per share and dividend per share will
grow at a rate of 10% a year. The rate of return required by investors has been estimated at 12% per annum.
Estimate the present value of the share.
A. $11
B. $10
C. $5
D. $50
E. $5.50
2. The company share market price is $25, its next-period expected dividend is $1 and investors in that market
require a rate of return at 14% per annum. What is the implied rate of growth in dividends at this time?
A. 14%
B. 12%
C. 10%
D. 8%
E. 9%
3. Fujian Tea company shares have a current price of $20 per share and paid a dividend of $1.40 per share
during the year. Compute the dividend yield.
A. –6.25%
B. 6.25%
C. 7%
D. 12.50%
E. 14%
4. The Australian Securities Exchange (ASX):

A. is principally owned by the Reserve Bank of Australia
B. consists of a primary market only
C. is a market solely for small and medium enterprises
D. is a dealer market with a trading floor
E. is one of the world's top 10 listed exchange groups, measured by its market capitalisation
5. What is true about a preference share?
A. All of the given answers are true.
B. Holders of the preference shares usually have no voting rights.
C. The preference share is a form of equity from a legal standpoint.
D. Unpaid preference share dividends are not debts of the company.
E. The preference share has preference over ordinary shares in the payment of dividends.
6. The stock valuation process which determines the price of a stock by dividing the next period's dividend by
the discount rate less the dividend growth rate is called the:
A. pricing formula
B. stock price model
C. dividend growth model
D. gains formula
E. capital gain model
7. Next year's expected annual dividend divided by today's stock price is called the stock's:
A. required return
B. capital return
C. capital gains yield
D. maturity yield
E. dividend yield
8. The rate at which the value of an investment grows is called the:

A. required return
B. capital return
C. maturity yield
D. dividend yield
E. capital gains yield
9. The authority granted by a shareholder that permits another individual to vote that shareholder's shares is
called a:
A. statement
B. straight vote
C. proxy
D. preference
E. cumulative vote
10. The market in which new securities are originally sold to investors is called the _____ market.
A. secondary
B. open
C. initial public
D. free
E. primary
11. The market where one shareholder sells shares to another shareholder is called the _____ market.
A. secondary
B. dealer
C. free
D. open
E. primary
12. A dealer is an agent who:

A. buys and sells securities but never takes title to the securities
B. transacts buy and sell orders on a commission basis
C. arranges transactions on a fee basis
D. trades solely on behalf of a floor broker
E. buys and sells securities from inventory
13. An agent who arranges security transactions among investors is a called a:

A. specialist
B. dealer
C. member
D. floor trader
E. broker
14. The current price of a share is based:

A. solely on the anticipated future dividends
B. on the present value of all the future cash flows from that stock
C. strictly on the anticipated future stock price
D. primarily on the future value of the cash flows derived from the stock
E. on the present value of the dividends and the repayment of the principal
15. The required return:
A. tends to be low for the share of a firm which is experiencing rapid growth
B. provides an estimate of the return an investor might expect if he or she purchases a share at today's market
price
C. places more emphasis on the capital gains yield than on the dividend yield
D. is based on the assumption that a share will maintain a constant dividend
E. is based on the projected dividend and share price for next year
16. If shareholders are granted a preemptive right they will be:

A. granted shares that receive additional voting privileges
B. given the choice of receiving dividends in cash or in additional shares of stock
C. paid dividends prior to the preferred shareholders during the pre-emptive period
D. able to determine who the candidates should be for any open seats on the board
E. given the first right to purchase any new shares that are issued
17. The common stock of Connor, Inc. is selling for $16 a share and has a dividend yield of 3.5 per cent. What
is the dividend amount?
A. $0.56
B. $2.24
C. $0.46
D. $1.84
E. $0.92
18. Marble Books, Inc. is expected to pay an annual dividend of $1.80 per share next year. The required return
is 16 per cent and the growth rate is 4 per cent. What is the expected value of this stock five years from now?
A. $18.25
B. $16.80
C. $18.98
D. $15.60
E. $15.00
19. The common stock of Wetmore Industries is valued at $10.08 a share. The company increases their dividend
by 3.5 per cent annually and expects their next dividend to be $1.24. What is the required rate of return on this
stock?
A. 16.23 per cent
B. 16.53 per cent
C. 16.35 per cent
D. 16.49 per cent
E. 15.80 per cent
20. What is the name given to the model that computes the present value of a stock by dividing next year's
annual dividend amount by the difference between the discount rate and the rate of change in the annual
dividend amount?
A. dividend growth model
B. capital gain model
C. present value model
D. equity pricing model
E. stock pricing model
21. The price of a stock at year 4 can be expressed as:

A. D4 / (R-g).
B. D0 ´ (1 + R)5.
C. D0 / (R + G4).
D. D1 ´ (1 + R)5.
E. D5 / (R-g).
22. Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend
for year 5 if the firm increases its dividend by 2 per cent annually?
A. $1.50 ´ (1.02)4
B. $1.50 ´ (1.02)2
C. $1.50 ´ (1.02)3
D. $1.50 ´ (1.02)
E. $1.50 ´ (1.02)1
23. Computing the present value of a growing perpetuity is most similar to computing the current value of
which one of the following?
A. stock with irregular dividends
B. stock with growing dividends for a limited period of time
C. non-dividend-paying stock
D. stock with a constant growth dividend
E. stock with a constant dividend
24. Keller Metal's common stock is selling for $36 a share and has a dividend yield of 3.2 per cent. What is the
dividend amount?
A. $0.32
B. $11.52
C. $3.49
D. $1.15
E. $11.25
25. The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that
future dividends will increase by 2.8 per cent annually. What is the amount of the expected dividend in year
five?
A. $2.46
B. $2.39
C. $2.41
D. $2.58
E. $2.53
26. The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay
for one share if you require a 15 per cent rate of return?
A. $11.38
B. $7.86
C. $8.33
D. $11.04
E. $10.87
27. Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share.
What is the rate of return?
A. 5.39 per cent
B. 5.61 per cent
C. 6.91 per cent
D. 6.63 per cent
E. 4.56 per cent
28. Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future
dividends will be increased by 2.8 per cent annually. What is one share of this stock worth to you if you require
a 14 per cent rate of return?
A. $12.56
B. $13.68
C. $12.95
D. $14.07
E. $13.31
29. Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday,
the firm announced the dividend will increase next year by 10 per cent and will stay at the level through year
three, after which time the dividends will increase by 2 per cent annually. The required return on this stock is 12
per cent. What is the current value per share?
A. $25.51
B. $26.02
C. $24.57
D. $26.84
E. $26.08
30. Auto Transmissions is expected to pay annual dividends of $1.90 and $2.10 over the next two years,
respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is the value of
this stock at a required return of 15 per cent?
A. $15.60
B. $14.21
C. $15.08
D. $14.83
E. $13.67
31. General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend
is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for five
years. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 per
share. What is the current value of this stock if the required return is 18 per cent?
A. $3.55
B. $4.88
C. $4.27
D. $3.01
E. $3.89
32. Business Services, Inc. is expected to pay its first annual dividend of $0.80 per share three years from now.
Starting in year six, the company is expected to start increasing the dividend by 2 per cent per year. What is the
value of this stock today at a required return of 12 per cent?
A. $7.22
B. $6.16
C. $6.63
D. $7.47
E. $6.47
33. New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of
$0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to
increase by 5 per cent annually. The last annual dividend the firm paid was $0.40 a share. What is the current
value of this stock if the required return is 16 per cent?
A. $9.67
B. $8.50
C. $12.23
D. $10.46
E. $12.49
34. The Market Place recently announced that it will pay its first annual dividend two years from today. The
first dividend will be $0.50 a share with that amount doubling each year for the following two years. After that,
the dividend is expected to increase by 4 per cent annually. What is the value of this stock today if the required
return is 15 per cent?
A. $12.47
B. $14.02
C. $11.68
D. $12.99
E. $14.94
35. A firm expects to increase its annual dividend by 20 per cent per year for the next two years and by 15 per
cent per year for the following two years. After that, the company plans to pay a constant annual dividend of
$3.00 a share. The last dividend paid was $1.00 a share. What is the current value of this stock if the required
rate of return is 12 per cent?
A. $20.50
B. $21.69
C. $18.97
D. $21.08
E. $17.71
36. Which one of the following types of securities has no priority in a bankruptcy proceeding?
A. ordinary Shares
B. senior debt
C. straight bond
D. preferred stock
E. convertible bond
37. Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf
to the managers of the firm. Which one of the following terms is used to describe the method by which Kate's
shares were voted?
A. consent-form
B. in absentia
C. cumulative
D. proxy
E. straight
38. Newly issued securities are sold to investors in which one of the following markets?
A. primary
B. stated value
C. inside
D. secondary
E. proxy
39. What is the market called that allows shareholders to resell their shares to other investors?
A. inside
B. initial
C. proxy
D. secondary
E. primary
40. Ordinary shareholders have all the following rights except:

A. the right to priority in the event of company liquidation
B. the right to share proportionally in dividends paid
C. the right to share proportionally in assets remaining after liabilities have been paid in a company liquidation
D. the right to vote on matters of great importance as set out in the constitution of the company
E. the right to elect directors
41. Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and
maintains the right to a dividend payment, even if that payment is deferred?
A. cumulative preference shares
B. ordinary shares
C. non-cumulative preference shares
D. promisary notes
E. corporate bonds
42. The stream of customer instructions to buy and sell securities is called the:
A. buyer's stream
B. market maker
C. order flow
D. operations flow
E. execution stream
43. Palm Beach Beachwear has $100 preference shares that pay a dividend of $7.50 per annum. If investors
require a return of 9 per cent on shares of a similar risk what price would you expect to pay for these preference
shares?
A. $100.00
B. $120.00
C. $91.74
D. $107.50
E. $83.33
44. Palm Beach Beachwear has ordinary shares that are listed on the ASX and have just paid a dividend of
$1.25. They have announced that next year's dividend will be increased to $1.50 but that this dividend will not
change in the foreseeable future. Current investors have indicated that they expect a return of 12 per cent. Based
on this information, at what price would you expect the share to trade at immediately after this announcement?
A. $12.50
B. $10.41
C. $21.50
D. $10.00
E. $10.50
45. Manly Cove Manufacturing Company is listed on the ASX and has released information that details its
expansion plans for the next decade. The information release indicates that next year's dividend will be
increased to $1.10 and is expected to grow at a constant rate of 5% per annum thereafter. The required rate of
return for this type of company is considered to be 13 per cent. Based on this information, what price would you
expect the share to trade at after the release of the information?
A. $13.75
B. $7.50
C. $6.11
D. $22.00
E. $8.46
46. Aussie Investors Pty Ltd is considering investing in a new biotech company. The biotech company has
indicated that the first dividend payment will be at the end of year four. This maiden dividend will be $5.00 per
share and is forecast to grow at 8 per cent per year for the foreseeable future. Aussie Investors requires a rate of
return of 25 per cent on this risky investment. What is the maximum price that Aussie Investors will pay for this
share?
A. $29.41
B. $62.50
C. $20.00
D. $15.06
E. $12.05
47. Get Rich Quick, a funds management company, is considering an investment in a new pharmaceutical
company. The company will be unable to pay a dividend until the end of year six but if a new product is
successfully developed for sale at that time the dividends will be significant. The year-six dividend will be
$8.00, the year-seven dividend will be $10.00 and dividends will grow by 8 per cent thereafter. If the required
rate of return is 18 per cent, what is the maximum price Get Rich Quick should pay?
A. $100.00
B. $40.01
C. $58.75
D. $40.75
E. $38.59
48. The Oz Printing Company's ordinary shares are trading at $32.60 a share based on a 14 per cent rate of
return. What is the amount of the next annual dividend if the dividends are increasing by 2.5 per cent annually?
A. $3.57
B. $3.75
C. $3.52
D. $3.66
E. $3.48
49. The Queensland Border Company has just paid an annual dividend of $4.20 per share and is expected to pay
annual dividends of $4.40 and $4.50 per share for the next two years, respectively. After that, the firm expects
to maintain a constant dividend growth rate of 2 per cent per year. What is the value of this stock today if the
required return is 14 per cent?
A. $30.04
B. $33.33
C. $32.18
D. $35.80
E. $36.75
50. The Australian Clean Energy Company is growing fast. It has just paid a maiden dividend of $1.05. Next
year's dividend is forecast to grow by 20 per cent, followed by another 20 per cent growth in year two. The
dividend in year three will grow by 10 per cent, followed by another 5 per cent in year four. From year five
onwards dividends are expected to grow by 2 per cent per annum, indefinitely. If investors require a rate of
return of 15 per cent for investments of this type what is the maximum price you would pay for a share in this
company?
A. $12.17
B. $11.27
C. $13.07
D. $10.83
E. $13.70
Chapter 07 testbank - static Key
1. Tellite Ltd, a telecommunication company, did not pay a dividend in the last financial year. However, the
company has indicated that it expects to earn $1 per share in this financial year and to pay out 20% of these
earnings in dividends. Financial analysts expect that Tellite's earnings per share and dividend per share will
grow at a rate of 10% a year. The rate of return required by investors has been estimated at 12% per annum.
Estimate the present value of the share.
A. $11
B. $10
C. $5
D. $50
E. $5.50
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
Graduate Attribute: Problem solving
Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.
Section: 7.1 Ordinary share valuation
2. The company share market price is $25, its next-period expected dividend is $1 and investors in that market
require a rate of return at 14% per annum. What is the implied rate of growth in dividends at this time?
A. 14%
B. 12%
C. 10%
D. 8%
E. 9%
AACSB: Analytic
Difficulty: Medium
EQUIS: Analyse
3. Fujian Tea company shares have a current price of $20 per share and paid a dividend of $1.40 per share
during the year. Compute the dividend yield.
A. –6.25%
B. 6.25%
C. 7%
D. 12.50%
E. 14%
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
4. The Australian Securities Exchange (ASX):

A. is principally owned by the Reserve Bank of Australia
B. consists of a primary market only
C. is a market solely for small and medium enterprises
D. is a dealer market with a trading floor
E. is one of the world's top 10 listed exchange groups, measured by its market capitalisation
Difficulty: Easy
Learning Objective: 07-03 Explain how the stock markets work.
Section: 7.3 The share markets
5. What is true about a preference share?

A. All of the given answers are true.
B. Holders of the preference shares usually have no voting rights.
C. The preference share is a form of equity from a legal standpoint.
D. Unpaid preference share dividends are not debts of the company.
E. The preference share has preference over ordinary shares in the payment of dividends.
Difficulty: Easy
Section: 7.2 Some features of ordinary and preference shares
6. The stock valuation process which determines the price of a stock by dividing the next period's dividend by
the discount rate less the dividend growth rate is called the:
A. pricing formula
B. stock price model
C. dividend growth model
D. gains formula
E. capital gain model
Difficulty: Easy
7. Next year's expected annual dividend divided by today's stock price is called the stock's:
A. required return
B. capital return
C. capital gains yield
D. maturity yield
E. dividend yield
Difficulty: Easy
8. The rate at which the value of an investment grows is called the:

A. required return
B. capital return
C. maturity yield
D. dividend yield
E. capital gains yield
Difficulty: Easy
9. The authority granted by a shareholder that permits another individual to vote that shareholder's shares is
called a:
A. statement
B. straight vote
C. proxy
D. preference
E. cumulative vote
Difficulty: Easy
Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.
10. The market in which new securities are originally sold to investors is called the _____ market.
A. secondary
B. open
C. initial public
D. free
E. primary
Difficulty: Easy
11. The market where one shareholder sells shares to another shareholder is called the _____ market.
A. secondary
B. dealer
C. free
D. open
E. primary
Difficulty: Easy
12. A dealer is an agent who:

A. buys and sells securities but never takes title to the securities
B. transacts buy and sell orders on a commission basis
C. arranges transactions on a fee basis
D. trades solely on behalf of a floor broker
E. buys and sells securities from inventory
Difficulty: Easy
13. An agent who arranges security transactions among investors is a called a:

A. specialist
B. dealer
C. member
D. floor trader
E. broker
Difficulty: Easy
14. The current price of a share is based:
A. solely on the anticipated future dividends
B. on the present value of all the future cash flows from that stock
C. strictly on the anticipated future stock price
D. primarily on the future value of the cash flows derived from the stock
E. on the present value of the dividends and the repayment of the principal
Difficulty: Easy
15. The required return:

A. tends to be low for the share of a firm which is experiencing rapid growth
B. provides an estimate of the return an investor might expect if he or she purchases a share at today's market
price
C. places more emphasis on the capital gains yield than on the dividend yield
D. is based on the assumption that a share will maintain a constant dividend
E. is based on the projected dividend and share price for next year
Difficulty: Easy
16. If shareholders are granted a preemptive right they will be:

A. granted shares that receive additional voting privileges
B. given the choice of receiving dividends in cash or in additional shares of stock
C. paid dividends prior to the preferred shareholders during the pre-emptive period
D. able to determine who the candidates should be for any open seats on the board
E. given the first right to purchase any new shares that are issued
Difficulty: Medium
17. The common stock of Connor, Inc. is selling for $16 a share and has a dividend yield of 3.5 per cent. What
is the dividend amount?
A. $0.56
B. $2.24
C. $0.46
D. $1.84
E. $0.92
Difficulty: Easy
18. Marble Books, Inc. is expected to pay an annual dividend of $1.80 per share next year. The required return
is 16 per cent and the growth rate is 4 per cent. What is the expected value of this stock five years from now?
A. $18.25
B. $16.80
C. $18.98
D. $15.60
E. $15.00
AACSB: Analytic
Difficulty: Medium
EQUIS: Analyse
19. The common stock of Wetmore Industries is valued at $10.08 a share. The company increases their dividend
by 3.5 per cent annually and expects their next dividend to be $1.24. What is the required rate of return on this
stock?
A. 16.23 per cent
B. 16.53 per cent
C. 16.35 per cent
D. 16.49 per cent
E. 15.80 per cent
AACSB: Analytic
Difficulty: Medium
EQUIS: Analyse
20. What is the name given to the model that computes the present value of a stock by dividing next year's
annual dividend amount by the difference between the discount rate and the rate of change in the annual
dividend amount?
A. dividend growth model
B. capital gain model
C. present value model
D. equity pricing model
E. stock pricing model
Difficulty: Easy
21. The price of a stock at year 4 can be expressed as:
A. D4 / (R-g).
B. D0 ´ (1 + R)5.
C. D0 / (R + G4).
D. D1 ´ (1 + R)5.
E. D5 / (R-g).
Difficulty: Easy
22. Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend
for year 5 if the firm increases its dividend by 2 per cent annually?
A. $1.50 ´ (1.02)4
B. $1.50 ´ (1.02)2
C. $1.50 ´ (1.02)3
D. $1.50 ´ (1.02)
E. $1.50 ´ (1.02)1
Difficulty: Easy
23. Computing the present value of a growing perpetuity is most similar to computing the current value of
which one of the following?
A. stock with irregular dividends
B. stock with growing dividends for a limited period of time
C. non-dividend-paying stock
D. stock with a constant growth dividend
E. stock with a constant dividend
Difficulty: Easy
24. Keller Metal's common stock is selling for $36 a share and has a dividend yield of 3.2 per cent. What is the
dividend amount?
A. $0.32
B. $11.52
C. $3.49
D. $1.15
E. $11.25
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
25. The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that
future dividends will increase by 2.8 per cent annually. What is the amount of the expected dividend in year
five?
A. $2.46
B. $2.39
C. $2.41
D. $2.58
E. $2.53
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
26. The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay
for one share if you require a 15 per cent rate of return?
A. $11.38
B. $7.86
C. $8.33
D. $11.04
E. $10.87
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
27. Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share.
What is the rate of return?
A. 5.39 per cent
B. 5.61 per cent
C. 6.91 per cent
D. 6.63 per cent
E. 4.56 per cent
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
28. Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future
dividends will be increased by 2.8 per cent annually. What is one share of this stock worth to you if you require
a 14 per cent rate of return?
A. $12.56
B. $13.68
C. $12.95
D. $14.07
E. $13.31
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
29. Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday,
the firm announced the dividend will increase next year by 10 per cent and will stay at the level through year
three, after which time the dividends will increase by 2 per cent annually. The required return on this stock is 12
per cent. What is the current value per share?
A. $25.51
B. $26.02
C. $24.57
D. $26.84
E. $26.08
AACSB: Analytic
Difficulty: Medium
EQUIS: Analyse
30. Auto Transmissions is expected to pay annual dividends of $1.90 and $2.10 over the next two years,
respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is the value of
this stock at a required return of 15 per cent?
A. $15.60
B. $14.21
C. $15.08
D. $14.83
E. $13.67
AACSB: Analytic
Difficulty: Medium
EQUIS: Analyse
31. General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend
is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for five
years. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 per
share. What is the current value of this stock if the required return is 18 per cent?
A. $3.55
B. $4.88
C. $4.27
D. $3.01
E. $3.89
AACSB: Analytic
Difficulty: Hard
EQUIS: Analyse
32. Business Services, Inc. is expected to pay its first annual dividend of $0.80 per share three years from now.
Starting in year six, the company is expected to start increasing the dividend by 2 per cent per year. What is the
value of this stock today at a required return of 12 per cent?
A. $7.22
B. $6.16
C. $6.63
D. $7.47
E. $6.47
AACSB: Analytic
Difficulty: Hard
EQUIS: Analyse
33. New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of
$0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to
increase by 5 per cent annually. The last annual dividend the firm paid was $0.40 a share. What is the current
value of this stock if the required return is 16 per cent?
A. $9.67
B. $8.50
C. $12.23
D. $10.46
E. $12.49
AACSB: Analytic
Difficulty: Hard
EQUIS: Analyse
34. The Market Place recently announced that it will pay its first annual dividend two years from today. The
first dividend will be $0.50 a share with that amount doubling each year for the following two years. After that,
the dividend is expected to increase by 4 per cent annually. What is the value of this stock today if the required
return is 15 per cent?
A. $12.47
B. $14.02
C. $11.68
D. $12.99
E. $14.94
AACSB: Analytic
Difficulty: Hard
EQUIS: Analyse
35. A firm expects to increase its annual dividend by 20 per cent per year for the next two years and by 15 per
cent per year for the following two years. After that, the company plans to pay a constant annual dividend of
$3.00 a share. The last dividend paid was $1.00 a share. What is the current value of this stock if the required
rate of return is 12 per cent?
A. $20.50
B. $21.69
C. $18.97
D. $21.08
E. $17.71
AACSB: Analytic
Difficulty: Hard
EQUIS: Analyse
36. Which one of the following types of securities has no priority in a bankruptcy proceeding?
A. ordinary Shares
B. senior debt
C. straight bond
D. preferred stock
E. convertible bond
Difficulty: Easy
37. Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf
to the managers of the firm. Which one of the following terms is used to describe the method by which Kate's
shares were voted?
A. consent-form
B. in absentia
C. cumulative
D. proxy
E. straight
Difficulty: Easy
Learning Objective: 07-02 Identify the different ways corporate directors are elected to office.
38. Newly issued securities are sold to investors in which one of the following markets?
A. primary
B. stated value
C. inside
D. secondary
E. proxy
Difficulty: Easy
39. What is the market called that allows shareholders to resell their shares to other investors?
A. inside
B. initial
C. proxy
D. secondary
E. primary
Difficulty: Easy
40. Ordinary shareholders have all the following rights except:
A. the right to priority in the event of company liquidation
B. the right to share proportionally in dividends paid
C. the right to share proportionally in assets remaining after liabilities have been paid in a company liquidation
D. the right to vote on matters of great importance as set out in the constitution of the company
E. the right to elect directors
Difficulty: Easy
41. Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and
maintains the right to a dividend payment, even if that payment is deferred?
A. cumulative preference shares
B. ordinary shares
C. non-cumulative preference shares
D. promisary notes
E. corporate bonds
Difficulty: Easy
42. The stream of customer instructions to buy and sell securities is called the:
A. buyer's stream
B. market maker
C. order flow
D. operations flow
E. execution stream
Difficulty: Easy
43. Palm Beach Beachwear has $100 preference shares that pay a dividend of $7.50 per annum. If investors
require a return of 9 per cent on shares of a similar risk what price would you expect to pay for these preference
shares?
A. $100.00
B. $120.00
C. $91.74
D. $107.50
E. $83.33
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
44. Palm Beach Beachwear has ordinary shares that are listed on the ASX and have just paid a dividend of
$1.25. They have announced that next year's dividend will be increased to $1.50 but that this dividend will not
change in the foreseeable future. Current investors have indicated that they expect a return of 12 per cent. Based
on this information, at what price would you expect the share to trade at immediately after this announcement?
A. $12.50
B. $10.41
C. $21.50
D. $10.00
E. $10.50
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
45. Manly Cove Manufacturing Company is listed on the ASX and has released information that details its
expansion plans for the next decade. The information release indicates that next year's dividend will be
increased to $1.10 and is expected to grow at a constant rate of 5% per annum thereafter. The required rate of
return for this type of company is considered to be 13 per cent. Based on this information, what price would you
expect the share to trade at after the release of the information?
A. $13.75
B. $7.50
C. $6.11
D. $22.00
E. $8.46
AACSB: Analytic
Difficulty: Easy
EQUIS: Analyse
46. Aussie Investors Pty Ltd is considering investing in a new biotech company. The biotech company has
indicated that the first dividend payment will be at the end of year four. This maiden dividend will be $5.00 per
share and is forecast to grow at 8 per cent per year for the foreseeable future. Aussie Investors requires a rate of
return of 25 per cent on this risky investment. What is the maximum price that Aussie Investors will pay for this
share?
A. $29.41
B. $62.50
C. $20.00
D. $15.06
E. $12.05
AACSB: Analytic
Difficulty: Medium
EQUIS: Analyse
47. Get Rich Quick, a funds management company, is considering an investment in a new pharmaceutical
company. The company will be unable to pay a dividend until the end of year six but if a new product is
successfully developed for sale at that time the dividends will be significant. The year-six dividend will be
$8.00, the year-seven dividend will be $10.00 and dividends will grow by 8 per cent thereafter. If the required
rate of return is 18 per cent, what is the maximum price Get Rich Quick should pay?
A. $100.00
B. $40.01
C. $58.75
D. $40.75
E. $38.59
AACSB: Analytic
Difficulty: Medium
EQUIS: Analyse
48. The Oz Printing Company's ordinary shares are trading at $32.60 a share based on a 14 per cent rate of
return. What is the amount of the next annual dividend if the dividends are increasing by 2.5 per cent annually?
A. $3.57
B. $3.75
C. $3.52
D. $3.66
E. $3.48
AACSB: Analytic
Difficulty: Medium
EQUIS: Analyse
49. The Queensland Border Company has just paid an annual dividend of $4.20 per share and is expected to pay
annual dividends of $4.40 and $4.50 per share for the next two years, respectively. After that, the firm expects
to maintain a constant dividend growth rate of 2 per cent per year. What is the value of this stock today if the
required return is 14 per cent?
A. $30.04
B. $33.33
C. $32.18
D. $35.80
E. $36.75
AACSB: Analytic
Difficulty: Medium
EQUIS: Analyse
50. The Australian Clean Energy Company is growing fast. It has just paid a maiden dividend of $1.05. Next
year's dividend is forecast to grow by 20 per cent, followed by another 20 per cent growth in year two. The
dividend in year three will grow by 10 per cent, followed by another 5 per cent in year four. From year five
onwards dividends are expected to grow by 2 per cent per annum, indefinitely. If investors require a rate of
return of 15 per cent for investments of this type what is the maximum price you would pay for a share in this
company?
A. $12.17
B. $11.27
C. $13.07
D. $10.83
E. $13.70
AACSB: Analytic
Difficulty: Hard
EQUIS: Analyse
Chapter 07 testbank - static Summary
Category # of Questions
AACSB: Analytic 25
Difficulty: Easy 34
Difficulty: Hard 6
Difficulty: Medium 10
EQUIS: Analyse 25
Graduate Attribute: Problem solving 25
Learning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth. 40
Learning Objective: 07-02 Identify the different ways corporate directors are elected to office. 2
Learning Objective: 07-03 Explain how the stock markets work. 8
Section: 7.1 Ordinary share valuation 35
Section: 7.2 Some features of ordinary and preference shares 7
Section: 7.3 The share markets 8

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Essentials of Corporate Finance Australia 2nd Edition Ross Test Bank

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Essentials of Corporate Finance

Australia 2nd Edition Ross Test Bank

4. The Australian Securities Exchange (ASX):

8. The rate at which the value of an investment grows is called the:

12. A dealer is an agent who:

13. An agent who arranges security transactions among investors is a called a:

14. The current price of a share is based:

16. If shareholders are granted a preemptive right they will be:

21. The price of a stock at year 4 can be expressed as:

40. Ordinary shareholders have all the following rights except:

4. The Australian Securities Exchange (ASX):

5. What is true about a preference share?

8. The rate at which the value of an investment grows is called the:

12. A dealer is an agent who:

13. An agent who arranges security transactions among investors is a called a:

15. The required return:

16. If shareholders are granted a preemptive right they will be:

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