1 . Two seats on a boardof directors are to be elected. A voting system in which the owner of 100shares may cast 100 votes in each of the board elections is a:
A)cumulative votingsystem.
B)statutory votingsystem.
C)proportional votingsystem.
The correct answer wasB
In a statutory votingsystem, a shareholder can vote in each separate board election based on thenumber of shares she owns. Under cumulative voting, the shareholder may chooseto cast her total number of votes (200 in this example) for a candidate in oneof the elections.
2 . The preferredstock of the Delco Investments Company has a par value of $150 and a dividendof $11.50. A shareholder’s required return on this stock is 14%. What is themaximum price he would pay?
A)$150.00.
B)$54.76.
C)$82.14.
The correct answer wasC
Value of preferred = D/ kp = $11.50 / 0.14 = $82.14
3 . Use the followinginformation on Brown Partners, Inc. to compute the current stock price.
§ Dividend just paid = $6.10
§ Expected dividend growth rate = 4%
§ Expected stock price in one year = $60
§ Risk-free rate = 3%
§ Equity risk premium = 12%
A)$59.55.
B)$57.70.
C)$57.48.
The correct answer wasB
The current stockprice is equal to (D1 + P1) / (1 + ke). D1 equals $6.10(1.04) = $6.34. Theequity discount rate is 3% + 12% = 15%. Therefore the current stock price is($6.34 + $60)/(1.15) = $57.70
4 . One advantage tousing the price/book value (P/B) ratio over using the price/earnings (P/E)ratio is that P/B can be used when:
A)earnings or cashflows are negative.
B)stock markets arevolatile.
C)the firm is in aslow growth phase.
The correct answerwas: A
When earnings arenegative, P/E ratios cannot be used but P/B ratios can be used. The firm's rateof growth and the volatility of markets do not suggest advantages of using P/Bratios rather than P/E ratios.
5 . Cheryl Brower andTodd Sutter each own 100 shares of Hills Company stock. In a recent proxy vote,Brower had 100 votes but Sutter had 10 votes. The most likely reason for thisdifference in voting rights is that:
A)Brower is a directorof Hills Company.
B)Brower and Sutterown different classes of stock.
C)Hills Company uses astatutory voting method.
The correct answer wasB
Companies may issueclasses of stock (e.g., Class A and Class B shares) that differ in aspects suchas voting rights, dividends, or priority of claims in liquidation.
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