chapter 7

A stockholder's ownership of a company's stock gives her the right to

• vote and be the primary claimant of all cash flows.

• vote and be the residual claimant of all cash flows.

• manage and assume responsibility for all liabilities.

• vote and assume responsibility for all liabilities.

Stockholders are residual claimants, meaning that they

• have the first priority claim on all of a company's assets.

• are liable for all of a company's debts.

• will never share in a company's profits.

• receive the remaining cash flow after all other claims are paid.

Periodic payments of net earnings to shareholders are known as

• capital gains.

• dividends.

• profits.

• interest.

The value of any investment is found by computing the

• present value of all future sales.

• present value of all future liabilities.

• future value of all future expenses.

• present value of all future cash flows.

In the one-period valuation model, the value of a share of stock today depends upon

• the present value of both the dividends and the expected sales price.

• only the present value of the future dividends.

• the actual value of the dividends and expected sales price received in one year.

• the future value of dividends and the actual sales price.

In the one-period valuation model, the current stock price increases if

• the expected sales price increases.

• the expected sales price falls.

• the required return increases.

• dividends are cut.

In the one-period valuation model, an increase in the required return on investments in equity

• increases the expected sales price of a stock.

• increases the current price of a stock.

• reduces the expected sales price of a stock.

• reduces the current price of a stock.

In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) ________ in the ________ price of a stock.

• increase; current

• increase; expected sales

• decrease; current

• decrease; expected sales

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be

• $110.11.

• $121.12.

• $100.10.

• $100.11

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be

• $110.00.

• $101.00.

• $100.00.

• $96.19.