Question 1

constant growth stocks are in equilibrium, have the same price, and have the same required rate of return Which of the following statements is CORRECT?

Accepted Answer

A)  If one stock has a higher dividend yield, it must also have a lower dividend growth rate. 
B)  If one stock has a higher dividend yield, it must also have a higher dividend growth rate. 
C)  The two stocks must have the same dividend growth rate. 
D)  The two stocks must have the same dividend yield. 
E)  The two stocks must have the same dividend per share. 
A)  If one stock has a higher dividend yield, it must also have a lower dividend growth rate. 
B)  If one stock has a higher dividend yield, it must also have a higher dividend growth rate. 
C)  The two stocks must have the same dividend growth rate. 
D)  The two stocks must have the same dividend yield. 
E)  The two stocks must have the same dividend per share. A

Question 2

a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

A)  The stock's dividend yield is 5%. 
B)  The price of the stock is expected to decline in the future. 
C)  The stock's required return must be equal to or less than 5%. 
D)  The stock's price one year from now is expected to be 5% above the current price. 
E)  The expected return on the stock is 5% a year. 
A)  The stock's dividend yield is 5%. 
B)  The price of the stock is expected to decline in the future. 
C)  The stock's required return must be equal to or less than 5%. 
D)  The stock's price one year from now is expected to be 5% above the current price. 
E)  The expected return on the stock is 5% a year. D

Question 3

Connolly Co.'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 Connolly'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 A

Question 4

D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)  4.12% 
B)  4.34% 
C)  4.57% 
D)  4.81% 
E)  5.05% 
A)  4.12% 
B)  4.34% 
C)  4.57% 
D)  4.81% 
E)  5.05%

Question 5

markets are in equilibrium, which of the following conditions will exist?

Accepted Answer

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

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  Two firms with the same expected dividend and growth rates must also have the same stock price. 
B)  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. 
C)  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%. 
D)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
E)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock. 
A)  Two firms with the same expected dividend and growth rates must also have the same stock price. 
B)  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. 
C)  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%. 
D)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
E)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

Question 7

a firm's expected growth rate increased then its required rate of return would

Accepted Answer

A)  decrease. 
B)  fluctuate less than before. 
C)  fluctuate more than before. 
D)  possibly increase, possibly decrease, or possibly remain constant. 
E)  increase. 
A)  decrease. 
B)  fluctuate less than before. 
C)  fluctuate more than before. 
D)  possibly increase, possibly decrease, or possibly remain constant. 
E)  increase.

Question 8

Carby Hardware 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 preferred 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 9

preemptive right is important to shareholders because it

Accepted Answer

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

Question 10

Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. 
B)  The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. 
C)  One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. 
D)  One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. 
E)  A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. 
A)  Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. 
B)  The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. 
C)  One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. 
D)  One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. 
E)  A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.

Question 12

Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00% What is Dyer's current stock price?

Accepted Answer

A)  $28.90 
B)  $29.62 
C)  $30.36 
D)  $31.12 
E)  $31.90 
A)  $28.90 
B)  $29.62 
C)  $30.36 
D)  $31.12 
E)  $31.90

Question 13

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 14

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 15

Hirshfeld Corporation'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 16

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share Kellner'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 17

Connor Publishing'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 18

last dividend paid by Wilden Corporation was $1.55 The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever The firm's required return (rs) is 12.0% What is the best estimate of the current stock price?

Accepted Answer

A)  $37.05 
B)  $38.16 
C)  $39.30 
D)  $40.48 
E)  $41.70 
A)  $37.05 
B)  $38.16 
C)  $39.30 
D)  $40.48 
E)  $41.70

Question 19

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Accepted Answer

A) True 
 B)False

Question 20

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Accepted Answer

A) True 
 B)False

Exam 5: Stocks

constant growth stocks are in equilibrium, have the same price, and have the same required rate of return Which of the following statements is CORRECT?

a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Connolly Co.'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 Connolly's expected stock price in 7 years, i.e., what is?

D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

markets are in equilibrium, which of the following conditions will exist?

Which of the following statements is CORRECT?

a firm's expected growth rate increased then its required rate of return would

Carby Hardware 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 preferred stock sell?

preemptive right is important to shareholders because it

Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Which of the following statements is CORRECT?

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?

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.

Hirshfeld Corporation'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?

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

Connor Publishing'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?

last dividend paid by Wilden Corporation was $1.55 The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever The firm's required return (rs) is 12.0% What is the best estimate of the current stock price?

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Overview

Risk and Return: Part I

Risk and Return: Part II

Bonds

Financial Options

Financial Analysis

Forecasting

Cost of Capital

Corporate Valuation

Capital Budgeting

Cash Flows and Risk

Real Options

Cap Structure

Cap Structure II

Dividends

Ipos, Invsmt Banking

Leasing

Hybrids

Working Capital

Derivatives

Bankruptcy, Reorganization, and Liquidation

Mergers

Filters