Question 1

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

Accepted Answer

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

Question 2

Lance Inc.'s free cash flow was just $1.00 million.If the expected long-run growth rate for this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in short-term investments and $3 million in debt, and 1 million shares outstanding, what is the intrinsic stock price?

Accepted Answer

A)  $17.28 
B)  $17.70 
C)  $18.13 
D)  $18.57 
E)  $19.01 
A)  $17.28 
B)  $17.70 
C)  $18.13 
D)  $18.57 
E)  $19.01 D

Question 3

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? $$\begin{array} { l c c } 
& \mathrm { A } & \mathrm { B } \
\text { Price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \% \
\text { Expected return } & 10 \% & 12 \%
\end{array}$$

Accepted Answer

A)  The two stocks could not be in equilibrium with the numbers given in the question. 
B)  A's expected dividend is $0.50. 
C)  B's expected dividend is $0.75. 
D)  A's expected dividend is $0.75 and B's expected dividend is $1.20. 
E)  The two stocks should have the same expected dividend. 
A)  The two stocks could not be in equilibrium with the numbers given in the question. 
B)  A's expected dividend is $0.50. 
C)  B's expected dividend is $0.75. 
D)  A's expected dividend is $0.75 and B's expected dividend is $1.20. 
E)  The two stocks should have the same expected dividend. D

Question 4

The 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 5

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Accepted Answer

A) True 
 B)False

Question 6

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? $$\begin{array} { l c c } 
& \mathrm { X } & \mathrm { Y } \
\text { Price } & \$ 25 & \$ 25 \
\text { Expected dividend yield } & 5 \% & 3 \% \
\text { Required return } & 12 \% & 10 \%
\end{array}$$

Accepted Answer

A)  Stock X pays a higher dividend per share than Stock Y. 
B)  One year from now, Stock X should have the higher price. 
C)  Stock Y has a lower expected growth rate than Stock X. 
D)  Stock Y has the higher expected capital gains yield. 
E)  Stock Y pays a higher dividend per share than Stock X. 
A)  Stock X pays a higher dividend per share than Stock Y. 
B)  One year from now, Stock X should have the higher price. 
C)  Stock Y has a lower expected growth rate than Stock X. 
D)  Stock Y has the higher expected capital gains yield. 
E)  Stock Y pays a higher dividend per share than Stock X.

Question 7

Dyer 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 8

If 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 9

If a company's free cash flows are 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 company's stock's dividend yield is 5%. 
B)  The value of operations is expected to decline in the future. 
C)  The company's WACC must be equal to or less than 5%. 
D)  The company's value of operations one year from now is expected to be 5% above the current price. 
E)  The expected return on the company's stock is 5% a year. 
A)  The company's stock's dividend yield is 5%. 
B)  The value of operations is expected to decline in the future. 
C)  The company's WACC must be equal to or less than 5%. 
D)  The company's value of operations one year from now is expected to be 5% above the current price. 
E)  The expected return on the company's stock is 5% a year.

Question 10

Huxley Building Supplies' last free cash flow was $1.75 million.Its free cash flow growth rate is expected to be constant at 25% for 2 years, after which free cash flows are expected to grow at a rate of 6% forever.Its weighted average cost of capital WACC is 12%.Huxley has $5 million in short-term investments and $7 million in debt and has 1 million shares outstanding.What is the best estimate of the current intrinsic stock price?

Accepted Answer

A)  $39.58 
B)  $40.64 
C)  $41.71 
D)  $42.80 
E)  $44.92 
A)  $39.58 
B)  $40.64 
C)  $41.71 
D)  $42.80 
E)  $44.92

Question 11

The last dividend paid by Coppard Inc.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 12

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

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  Two firms with the same expected free cash flows and growth rates must also have the same value of operations. 
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 company has a weighted average cost of capital WACC = 12%, and if its free cash flows are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
D)  The value of operations is the present value of all expected future free cash flows, discounted at the free cash flow 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 free cash flows and growth rates must also have the same value of operations. 
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 company has a weighted average cost of capital WACC = 12%, and if its free cash flows are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
D)  The value of operations is the present value of all expected future free cash flows, discounted at the free cash flow growth rate. 
E)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

The required returns of Stocks X and Y are rX = 10% and rY = 12%.Which of the following statements is CORRECT?

Accepted Answer

A)  If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. 
B)  If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. 
C)  The stocks must sell for the same price. 
D)  Stock Y must have a higher dividend yield than Stock X. 
E)  If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate. 
A)  If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. 
B)  If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. 
C)  The stocks must sell for the same price. 
D)  Stock Y must have a higher dividend yield than Stock X. 
E)  If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.

Question 17

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

Question 18

Judd Corporation has a weighted average cost of capital of 10.25%, and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow, FCF1 in millions?

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 19

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 20

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

Exam 7: Corporate Valuation and Stock Valuation

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

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Price \ 25 \ 40 Expected growth 7\% 9\% Expected return 10\% 12\%

The 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?

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Price \ 25 \ 25 Expected dividend yield 5\% 3\% Required return 12\% 10\%

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

If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

The last dividend paid by Coppard Inc.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?

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?

Which of the following statements is CORRECT?

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

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.

The required returns of Stocks X and Y are rX = 10% and rY = 12%.Which of the following statements is CORRECT?

Merrell Enterprises' stock has an expected return of 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?

Judd Corporation has a weighted average cost of capital of 10.25%, and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow, FCF1 in millions?

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.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

Filters

The 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 (r_s) is 12.0%.What is the best estimate of the current stock price?

The last dividend paid by Coppard Inc.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 (r_s) is 11%, what is its current stock price?

The required returns of Stocks X and Y are r_X = 10% and r_Y = 12%.Which of the following statements is CORRECT?

Judd Corporation has a weighted average cost of capital of 10.25%, and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow, FCF₁ in millions?