Question 1

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Accepted Answer

A)  6.50% 
B)  6.83% 
C)  7.17% 
D)  7.52% 
E)  7.90% 
A)  6.50% 
B)  6.83% 
C)  7.17% 
D)  7.52% 
E)  7.90%

Question 2

Based on the corporate valuation model, Gay Entertainment's total corporate value is $1,200 million. The company's balance sheet shows $120 million of notes payable, $300 million of long-term debt, $50 million of preferred stock, $180 million of retained earnings, and $800 million of total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of its price per share?

Accepted Answer

A)  $21.90 
B)  $24.33 
C)  $26.77 
D)  $29.44 
E)  $32.39 
A)  $21.90 
B)  $24.33 
C)  $26.77 
D)  $29.44 
E)  $32.39

Question 3

The corporate valuation model can be used only when a company doesn't pay dividends.

Accepted Answer

A) True 
 B)False

Question 4

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Accepted Answer

A)  6.62% 
B)  6.82% 
C)  7.03% 
D)  7.25% 
E)  7.47% 
A)  6.62% 
B)  6.82% 
C)  7.03% 
D)  7.25% 
E)  7.47%

Question 5

Based on the corporate valuation model, the total corporate value of Chen Lin Inc. is $900 million. Its balance sheet shows $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of its stock price per share?

Accepted Answer

A)  $22.03 
B)  $24.48 
C)  $27.20 
D)  $29.92 
E)  $32.91 
A)  $22.03 
B)  $24.48 
C)  $27.20 
D)  $29.92 
E)  $32.91

Question 6

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

Accepted Answer

A)  $18.62 
B)  $19.08 
C)  $19.56 
D)  $20.05 
E)  $20.55 
A)  $18.62 
B)  $19.08 
C)  $19.56 
D)  $20.05 
E)  $20.55

Question 7

The corporate valuation model cannot be used unless a company pays dividends.

Accepted Answer

A) True 
 B)False

Question 8

From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.

Accepted Answer

A) True 
 B)False

Question 9

You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

A)  $40.35 
B)  $41.82 
C)  $43.33 
D)  $44.85 
E)  $46.42 
A)  $40.35 
B)  $41.82 
C)  $43.33 
D)  $44.85 
E)  $46.42

Question 10

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

Accepted Answer

A)  $104.27 
B)  $106.95 
C)  $109.69 
D)  $112.50 
E)  $115.38 
A)  $104.27 
B)  $106.95 
C)  $109.69 
D)  $112.50 
E)  $115.38

Question 11

Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $65.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value (in millions) at t = 5?

Accepted Answer

A)  $1,025 
B)  $1,079 
C)  $1,136 
D)  $1,196 
E)  $1,259 
A)  $1,025 
B)  $1,079 
C)  $1,136 
D)  $1,196 
E)  $1,259

Question 12

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Accepted Answer

A)  $2.20 
B)  $2.44 
C)  $2.69 
D)  $2.96 
E)  $3.25 
A)  $2.20 
B)  $2.44 
C)  $2.69 
D)  $2.96 
E)  $3.25

Question 13

The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

Accepted Answer

A)  $41.58 
B)  $42.64 
C)  $43.71 
D)  $44.80 
E)  $45.92 
A)  $41.58 
B)  $42.64 
C)  $43.71 
D)  $44.80 
E)  $45.92

Question 14

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

Accepted Answer

A)  All common stocks fall into one of three classes: A, B, and C. 
B)  All common stocks, regardless of class, must have the same voting rights. 
C)  All firms have several classes of common stock. 
D)  All common stock, regardless of class, must pay the same dividend. 
E)  Some class or classes of common stock are entitled to more votes per share than other classes. 
A)  All common stocks fall into one of three classes: A, B, and C. 
B)  All common stocks, regardless of class, must have the same voting rights. 
C)  All firms have several classes of common stock. 
D)  All common stock, regardless of class, must pay the same dividend. 
E)  Some class or classes of common stock are entitled to more votes per share than other classes.

Question 15

Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?

Accepted Answer

A)  $41.59 
B)  $42.65 
C)  $43.75 
D)  $44.87 
E)  $45.99 
A)  $41.59 
B)  $42.65 
C)  $43.75 
D)  $44.87 
E)  $45.99

Question 16

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. 
B)  The corporate valuation model discounts free cash flows by the required return on equity. 
C)  The corporate valuation model can be used to find the value of a division. 
D)  An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. 
E)  Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or continuing, value. 
A)  The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. 
B)  The corporate valuation model discounts free cash flows by the required return on equity. 
C)  The corporate valuation model can be used to find the value of a division. 
D)  An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. 
E)  Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or continuing, value.

Question 17

Based on the corporate valuation model, Morgan Inc.'s total corporate value is $300 million. The balance sheet shows $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share?

Accepted Answer

A)  $12.00 
B)  $12.64 
C)  $13.30 
D)  $14.00 
E)  $14.70 
A)  $12.00 
B)  $12.64 
C)  $13.30 
D)  $14.00 
E)  $14.70

Question 18

Huang Company's last dividend was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

Accepted Answer

A)  $30.57 
B)  $31.52 
C)  $32.49 
D)  $33.50 
E)  $34.50 
A)  $30.57 
B)  $31.52 
C)  $32.49 
D)  $33.50 
E)  $34.50

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights. 
B)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
C)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
D)  The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates. 
E)  The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required return. 
A)  If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights. 
B)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
C)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
D)  The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates. 
E)  The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required return.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock. 
B)  Two firms with the same expected dividend and growth rate must also have the same stock price. 
C)  It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
D)  If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
E)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
A)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock. 
B)  Two firms with the same expected dividend and growth rate must also have the same stock price. 
C)  It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
D)  If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
E)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

The corporate valuation model can be used only when a company doesn't pay dividends.

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

The corporate valuation model cannot be used unless a company pays dividends.

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

Which of the following statements is NOT CORRECT?

Huang Company's last dividend was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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Exam 9: Stocks

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

The corporate valuation model can be used only when a company doesn't pay dividends.

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

The corporate valuation model cannot be used unless a company pays dividends.

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

Which of the following statements is NOT CORRECT?

Huang Company's last dividend was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters