Question 1

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

Accepted Answer

A)  8.37% 
B)  8.59% 
C)  8.81% 
D)  9.03% 
E)  9.27% 
A)  8.37% 
B)  8.59% 
C)  8.81% 
D)  9.03% 
E)  9.27%

Question 2

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

Accepted Answer

A)  the stock is experiencing supernormal growth. 
B)  the stock should be sold. 
C)  the stock is a good buy. 
D)  management is probably not trying to maximize the price per share. 
E)  dividends are not likely to be declared. 
A)  the stock is experiencing supernormal growth. 
B)  the stock should be sold. 
C)  the stock is a good buy. 
D)  management is probably not trying to maximize the price per share. 
E)  dividends are not likely to be declared.

Question 3

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?

Accepted Answer

A)  $37.52 
B)  $39.40 
C)  $41.37 
D)  $43.44 
E)  $45.61 
A)  $37.52 
B)  $39.40 
C)  $41.37 
D)  $43.44 
E)  $45.61

Question 4

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

A) True 
 B)False

Question 5

Misra Inc. forecasts a free cash flow of $35 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5.5% thereafter. If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%, what is the horizon, or continuing, value in millions at t = 3?

Accepted Answer

A)  $821 
B)  $862 
C)  $905 
D)  $950 
E)  $997 
A)  $821 
B)  $862 
C)  $905 
D)  $950 
E)  $997

Question 6

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Accepted Answer

A)  $0.95 
B)  $1.05 
C)  $1.16 
D)  $1.27 
E)  $1.40 
A)  $0.95 
B)  $1.05 
C)  $1.16 
D)  $1.27 
E)  $1.40

Question 7

The expected return on Natter Corporation's stock is 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

Accepted Answer

A)  The stock's dividend yield is 7%. 
B)  The stock's dividend yield is 8%. 
C)  The current dividend per share is $4.00. 
D)  The stock price is expected to be $54 a share one year from now. 
E)  The stock price is expected to be $57 a share one year from now. 
A)  The stock's dividend yield is 7%. 
B)  The stock's dividend yield is 8%. 
C)  The current dividend per share is $4.00. 
D)  The stock price is expected to be $54 a share one year from now. 
E)  The stock price is expected to be $57 a share one year from now.

Question 8

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Accepted Answer

A) True 
 B)False

Question 9

You must estimate the intrinsic value of Noe Technologies' stock. The end-of-year free cash flow (FCF1) is expected to be $27.50 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The company's WACC is 10.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 15.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

A)  $48.64 
B)  $50.67 
C)  $52.78 
D)  $54.89 
E)  $57.08 
A)  $48.64 
B)  $50.67 
C)  $52.78 
D)  $54.89 
E)  $57.08

Question 10

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)  4.42% 
B)  4.66% 
C)  4.89% 
D)  5.13% 
E)  5.39% 
A)  4.42% 
B)  4.66% 
C)  4.89% 
D)  5.13% 
E)  5.39%

Question 11

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Accepted Answer

A)  If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's. 
B)  Stock B must have a higher dividend yield than Stock A. 
C)  Stock A must have a higher dividend yield than Stock B. 
D)  If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's. 
E)  Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B. 
A)  If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's. 
B)  Stock B must have a higher dividend yield than Stock A. 
C)  Stock A must have a higher dividend yield than Stock B. 
D)  If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's. 
E)  Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.

Question 12

(9A). If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Accepted Answer

A) True 
 B)False

Question 13

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firm's total corporate value.

Accepted Answer

A) True 
 B)False

Question 14

(9A). If markets are in equilibrium, which of the following conditions will exist?

Accepted Answer

A)  Each stock's expected return should equal its realized return as seen by the marginal investor. 
B)  Each stock's expected return should equal its required return as seen by the marginal investor. 
C)  All stocks should have the same expected return as seen by the marginal investor. 
D)  The expected and required returns on stocks and bonds should be equal. 
E)  All stocks should have the same realized return during the coming year. 
A)  Each stock's expected return should equal its realized return as seen by the marginal investor. 
B)  Each stock's expected return should equal its required return as seen by the marginal investor. 
C)  All stocks should have the same expected return as seen by the marginal investor. 
D)  The expected and required returns on stocks and bonds should be equal. 
E)  All stocks should have the same realized return during the coming year.

Question 15

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the firm's total corporate value?

Accepted Answer

A)  $2,572,125 
B)  $2,707,500 
C)  $2,850,000 
D)  $3,000,000 
E)  $3,150,000 
A)  $2,572,125 
B)  $2,707,500 
C)  $2,850,000 
D)  $3,000,000 
E)  $3,150,000

Question 16

The preemptive right is important to shareholders because it

Accepted Answer

A)  allows managers to buy additional shares below the current market price. 
B)  will result in higher dividends per share. 
C)  is included in every corporate charter. 
D)  protects the current shareholders against a dilution of their ownership interests. 
E)  protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate. 
A)  allows managers to buy additional shares below the current market price. 
B)  will result in higher dividends per share. 
C)  is included in every corporate charter. 
D)  protects the current shareholders against a dilution of their ownership interests. 
E)  protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.

Question 17

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

Accepted Answer

A)  $17.39 
B)  $17.84 
C)  $18.29 
D)  $18.75 
E)  $19.22 
A)  $17.39 
B)  $17.84 
C)  $18.29 
D)  $18.75 
E)  $19.22

Question 18

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.

Accepted Answer

A) True 
 B)False

Question 19

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Accepted Answer

A)  The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield. 
B)  Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well. 
C)  A stock's dividend yield can never exceed its expected growth rate. 
D)  A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return. 
E)  Other things held constant, the higher a company's beta coefficient, the lower its required rate of return. 
A)  The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield. 
B)  Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well. 
C)  A stock's dividend yield can never exceed its expected growth rate. 
D)  A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return. 
E)  Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Misra Inc. forecasts a free cash flow of $35 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5.5% thereafter. If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%, what is the horizon, or continuing, value in millions at t = 3?

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

The expected return on Natter Corporation's stock is 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

(9A). If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firm's total corporate value.

(9A). If markets are in equilibrium, which of the following conditions will exist?

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the firm's total corporate value?

The preemptive right is important to shareholders because it

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

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Exam 9: Stocks

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Misra Inc. forecasts a free cash flow of $35 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5.5% thereafter. If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%, what is the horizon, or continuing, value in millions at t = 3?

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

The expected return on Natter Corporation's stock is 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

(9A). If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firm's total corporate value.

(9A). If markets are in equilibrium, which of the following conditions will exist?

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the firm's total corporate value?

The preemptive right is important to shareholders because it

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

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