Question 1

One of the problems with attempting to forecast stock market values is that

Accepted Answer

A)  there are no variables that seem to predict market return. 
B)  the earnings multiplier approach can only be used at the firm level. 
C)  the level of uncertainty surrounding the forecast will always be quite high. 
D)  dividend-payout ratios are highly variable. 
E)  None of the options are correct. 
A)  there are no variables that seem to predict market return. 
B)  the earnings multiplier approach can only be used at the firm level. 
C)  the level of uncertainty surrounding the forecast will always be quite high. 
D)  dividend-payout ratios are highly variable. 
E)  None of the options are correct.

Question 2

The growth in dividends of ABC, Inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. After this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on ABC, Inc. is 13%. Last year's dividends per share were $1.85. What should the stock sell for today?

Accepted Answer

A)  $8.99 
B)  $25.21 
C)  $40.00 
D)  $27.74 
E)  None of the options are correct. 
A)  $8.99 
B)  $25.21 
C)  $40.00 
D)  $27.74 
E)  None of the options are correct.

Question 3

A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Accepted Answer

A)  $33.33 
B)  $0.27 
C)  $31.82 
D)  $56.25 
A)  $33.33 
B)  $0.27 
C)  $31.82 
D)  $56.25

Question 4

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

Accepted Answer

A)  $30.23 
B)  $24.11 
C)  $26.52 
D)  $27.50 
E)  None of the options are correct. 
A)  $30.23 
B)  $24.11 
C)  $26.52 
D)  $27.50 
E)  None of the options are correct.

Question 5

Assume that Malnava Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, the value of the stock is

Accepted Answer

A)  $28.57. 
B)  $28.79. 
C)  $30.00. 
D)  $31.78. 
E)  None of the options are correct. 
A)  $28.57. 
B)  $28.79. 
C)  $30.00. 
D)  $31.78. 
E)  None of the options are correct.

Question 6

Shark Tank Corp has an expected ROE of 26%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings.

Accepted Answer

A)  2.6% 
B)  10% 
C)  23.4% 
D)  90% 
A)  2.6% 
B)  10% 
C)  23.4% 
D)  90%

Question 7

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See's required return on equity is 10.6%, and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever, the intrinsic value of See's shares is

Accepted Answer

A)  $108.00. 
B)  $68.30. 
C)  $26.35. 
D)  $14.76. 
A)  $108.00. 
B)  $68.30. 
C)  $26.35. 
D)  $14.76.

Question 8

The most appropriate discount rate to use when applying a FCFF valuation model is the

Accepted Answer

A)  required rate of return on equity. 
B)  WACC. 
C)  risk-free rate. 
D)  required rate of return on equity or risk-free rate, depending on the debt level of the firm. 
E)  None of the options are correct. 
A)  required rate of return on equity. 
B)  WACC. 
C)  risk-free rate. 
D)  required rate of return on equity or risk-free rate, depending on the debt level of the firm. 
E)  None of the options are correct.

Question 9

Turtle Corp has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

Accepted Answer

A)  6.0% 
B)  4.8% 
C)  7.2% 
D)  3.0% 
A)  6.0% 
B)  4.8% 
C)  7.2% 
D)  3.0%

Question 10

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

Accepted Answer

A)  $22.73. 
B)  $27.50. 
C)  $28.57. 
D)  $38.46. 
A)  $22.73. 
B)  $27.50. 
C)  $28.57. 
D)  $38.46.

Question 11

According to Peter Lynch, a rough rule of thumb for security analysis is that

Accepted Answer

A)  the growth rate should be equal to the plowback rate. 
B)  the growth rate should be equal to the dividend-payout rate. 
C)  the growth rate should be low for emerging industries. 
D)  the growth rate should be equal to the P/E ratio. 
E)  None of the options are correct. 
A)  the growth rate should be equal to the plowback rate. 
B)  the growth rate should be equal to the dividend-payout rate. 
C)  the growth rate should be low for emerging industries. 
D)  the growth rate should be equal to the P/E ratio. 
E)  None of the options are correct.

Question 12

The growth in dividends of XYZ, Inc. is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years. After this five-year period, the growth in dividends is expected to be 2% per year, indefinitely. The required rate of return on XYZ, Inc. is 12%. Last year's dividends per share were $2.00. What should the stock sell for today?

Accepted Answer

A)  $8.99 
B)  $25.21 
C)  $40.00 
D)  $110.00 
E)  None of the options are correct. 
A)  $8.99 
B)  $25.21 
C)  $40.00 
D)  $110.00 
E)  None of the options are correct.

Question 13

The present value of growth opportunities (PVGO) is equal toI) the difference between a stock's price and its no-growth value per share.II) the stock's price.III) zero if its return on equity equals the discount rate.IV) the net present value of favorable investment opportunities.

Accepted Answer

A)  I and IV 
B)  II and IV 
C)  I, III, and IV 
D)  II, III, and IV 
E)  III and IV 
A)  I and IV 
B)  II and IV 
C)  I, III, and IV 
D)  II, III, and IV 
E)  III and IV

Question 14

Consider the free cash flow approach to stock valuation. F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year. The firm's corporate tax rate is 40%. It is expected that $250,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $125,000. After the coming year, cash flows are expected to grow at 7% per year. The appropriate market capitalization rate for unleveraged cash flow is 13% per year. The firm has no outstanding debt. The projected free cash flow of F&G Manufacturing Company for the coming year is

Accepted Answer

A)  $250,000. 
B)  $180,000. 
C)  $300,000. 
D)  $380,000. 
A)  $250,000. 
B)  $180,000. 
C)  $300,000. 
D)  $380,000.

Question 15

The dividend discount model

Accepted Answer

A)  ignores capital gains. 
B)  incorporates the after-tax value of capital gains. 
C)  includes capital gains implicitly. 
D)  restricts capital gains to a minimum. 
E)  None of the options are correct. 
A)  ignores capital gains. 
B)  incorporates the after-tax value of capital gains. 
C)  includes capital gains implicitly. 
D)  restricts capital gains to a minimum. 
E)  None of the options are correct.

Question 16

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings.

Accepted Answer

A)  dividend-payout ratio 
B)  degree of financial leverage 
C)  variability of earnings 
D)  inflation rate 
A)  dividend-payout ratio 
B)  degree of financial leverage 
C)  variability of earnings 
D)  inflation rate

Question 17

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has

Accepted Answer

A)  an anticipated earnings growth rate which is less than that of the average firm. 
B)  a dividend yield which is less than that of the average firm. 
C)  less predictable earnings growth than that of the average firm. 
D)  greater cyclicality of earnings growth than that of the average firm. 
A)  an anticipated earnings growth rate which is less than that of the average firm. 
B)  a dividend yield which is less than that of the average firm. 
C)  less predictable earnings growth than that of the average firm. 
D)  greater cyclicality of earnings growth than that of the average firm.

Question 18

Suppose that the average P/E multiple in the oil industry is 20. Non-Standard Oil Corp is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Non-Standard Oil Corp stock should be

Accepted Answer

A)  $28.12. 
B)  $35.55. 
C)  $60.00. 
D)  $72.00. 
E)  None of the options are correct. 
A)  $28.12. 
B)  $35.55. 
C)  $60.00. 
D)  $72.00. 
E)  None of the options are correct.

Question 19

Toria Corp has an expected ROE of 15%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 75% of earnings.

Accepted Answer

A)  3.75% 
B)  11.25% 
C)  8.25% 
D)  15.0% 
A)  3.75% 
B)  11.25% 
C)  8.25% 
D)  15.0%

Question 20

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market-capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The projected free cash flow of Utica Manufacturing Company for the coming year is

Accepted Answer

A)  $150,000. 
B)  $180,000. 
C)  $300,000. 
D)  $380,000. 
A)  $150,000. 
B)  $180,000. 
C)  $300,000. 
D)  $380,000.

Exam 18: Equity Valuation Models

One of the problems with attempting to forecast stock market values is that

A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

Assume that Malnava Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, the value of the stock is

Shark Tank Corp has an expected ROE of 26%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings.

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See's required return on equity is 10.6%, and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever, the intrinsic value of See's shares is

The most appropriate discount rate to use when applying a FCFF valuation model is the

Turtle Corp has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

According to Peter Lynch, a rough rule of thumb for security analysis is that

The present value of growth opportunities (PVGO) is equal toI) the difference between a stock's price and its no-growth value per share.II) the stock's price.III) zero if its return on equity equals the discount rate.IV) the net present value of favorable investment opportunities.

The dividend discount model

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings.

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has

Suppose that the average P/E multiple in the oil industry is 20. Non-Standard Oil Corp is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Non-Standard Oil Corp stock should be

Toria Corp has an expected ROE of 15%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 75% of earnings.

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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