Question 1

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. B

Question 2

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

Question 3

If D0 = $2.25,g (which is constant)= 3.5%,and P0 = $54,then what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)  4.23% 
B)  3.45% 
C)  3.75% 
D)  4.31% 
E)  5.05% 
A)  4.23% 
B)  3.45% 
C)  3.75% 
D)  4.31% 
E)  5.05% D

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)  6.95% 
B)  5.61% 
C)  7.17% 
D)  7.70% 
E)  7.47% 
A)  6.95% 
B)  5.61% 
C)  7.17% 
D)  7.70% 
E)  7.47%

Question 5

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? $$\begin{array} { l r r } 
& \text { A } & \text { B } \
\text { Required return } & 10 \% & 12 \% \
\text { Market price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \%
\end{array}$$
?

Accepted Answer

A)  These two stocks should have the same price. 
B)  These two stocks must have the same dividend yield. 
C)  These two stocks should have the same expected return. 
D)  These two stocks must have the same expected capital gains yield. 
E)  These two stocks must have the same expected year-end dividend. 
A)  These two stocks should have the same price. 
B)  These two stocks must have the same dividend yield. 
C)  These two stocks should have the same expected return. 
D)  These two stocks must have the same expected capital gains yield. 
E)  These two stocks must have the same expected year-end dividend.

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  To implement the corporate valuation model,we discount projected free cash flows at the weighted average cost of capital. 
B)  To implement the corporate valuation model,we discount net operating profit after taxes (NOPAT)at the weighted average cost of capital. 
C)  To implement the corporate valuation model,we discount projected net income at the weighted average cost of capital. 
D)  To implement the corporate valuation model,we discount projected free cash flows at the cost of equity capital. 
E)  The corporate valuation model requires the assumption of a constant growth rate in all years. 
A)  To implement the corporate valuation model,we discount projected free cash flows at the weighted average cost of capital. 
B)  To implement the corporate valuation model,we discount net operating profit after taxes (NOPAT)at the weighted average cost of capital. 
C)  To implement the corporate valuation model,we discount projected net income at the weighted average cost of capital. 
D)  To implement the corporate valuation model,we discount projected free cash flows at the cost of equity capital. 
E)  The corporate valuation model requires the assumption of a constant growth rate in all years.

Question 7

Misra Inc.forecasts a free cash flow of $55 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%,then what is the horizon,or continuing,value in millions at t = 3?

Accepted Answer

A)  $1,289 
B)  $1,148 
C)  $1,212 
D)  $1,186 
E)  $1,083 
A)  $1,289 
B)  $1,148 
C)  $1,212 
D)  $1,186 
E)  $1,083

Question 8

Church Inc.is presently enjoying relatively high growth because of a surge in the demand for its new product.Management expects earnings and dividends to grow at a rate of 22% for the next 4 years,after which competition will probably reduce the growth rate in earnings and dividends to zero,i.e. ,g = 0.The company's last dividend,D0,was $1.25,its beta is 1.20,the market risk premium is 5.50%,and the risk-free rate is 3.00%.What is the current price of the common stock? Do not round intermediate calculations.

Accepted Answer

A)  $26.57 
B)  $32.69 
C)  $28.97 
D)  $23.39 
E)  $27.37 
A)  $26.57 
B)  $32.69 
C)  $28.97 
D)  $23.39 
E)  $27.37

Question 9

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 10

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

Question 11

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 12

Agarwal Technologies was founded 10 years ago.It has been profitable for the last 5 years,but it has needed all of its earnings to support growth and thus has never paid a dividend.Management has indicated that it plans to pay a $0.25 dividend 3 years from today,then to increase it at a relatively rapid rate for 2 years,and then to increase it at a constant rate of 8.00% thereafter.Management's forecast of the future dividend stream,along with the forecasted growth rates,is shown below.Assuming a required return of 11.00%,what is your estimate of the stock's current value? Use the dividend values provided in the table below for your calculations.Do not round your intermediate calculations. $$\begin{array} { l r r r r r r r } 
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Growth rate } & \mathrm { NA } & \mathrm { NA } & \mathrm { NA } & \mathrm { NA } & 90.00 \% & 45.00 \% & 8.00 \% \
\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.475 & \$ 0.689 & \$ 0.744
\end{array}$$
?

Accepted Answer

A)  $15.62 
B)  $17.18 
C)  $11.87 
D)  $12.97 
E)  $14.22 
A)  $15.62 
B)  $17.18 
C)  $11.87 
D)  $12.97 
E)  $14.22

Question 13

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 $85.00 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)  $1,432 
B)  $1,662 
C)  $2,041 
D)  $1,646 
E)  $1,234 
A)  $1,432 
B)  $1,662 
C)  $2,041 
D)  $1,646 
E)  $1,234

Question 14

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 27.5% 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? Do not round intermediate calculations.

Accepted Answer

A)  $41.08 
B)  $40.63 
C)  $36.11 
D)  $45.14 
E)  $52.36 
A)  $41.08 
B)  $40.63 
C)  $36.11 
D)  $45.14 
E)  $52.36

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

According to the basic DCF stock valuation model,the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Accepted Answer

A) True 
 B)False

Question 17

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 14.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

Accepted Answer

A)  $19.15 
B)  $12.97 
C)  $12.82 
D)  $18.84 
E)  $15.45 
A)  $19.15 
B)  $12.97 
C)  $12.82 
D)  $18.84 
E)  $15.45

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. 
B)  If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%,then the stock's dividend yield is also 5%. 
C)  The stock valuation model,P0 = D1/(rs - g),can be used to value firms whose dividends are expected to decline at a constant rate,i.e. ,to grow at a negative rate. 
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 cannot be used for a zero growth stock,wherein the dividend is expected to remain constant over time. 
A)  The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. 
B)  If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%,then the stock's dividend yield is also 5%. 
C)  The stock valuation model,P0 = D1/(rs - g),can be used to value firms whose dividends are expected to decline at a constant rate,i.e. ,to grow at a negative rate. 
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 cannot be used for a zero growth stock,wherein the dividend is expected to remain constant over time.

Question 19

Ackert Company's last dividend was $4.00.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? Do not round intermediate calculations.

Accepted Answer

A)  $87.00 
B)  $95.61 
C)  $89.87 
D)  $80.31 
E)  $104.21 
A)  $87.00 
B)  $95.61 
C)  $89.87 
D)  $80.31 
E)  $104.21

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  If a company has two classes of common stock,Class A and Class B,then 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 returns. 
A)  If a company has two classes of common stock,Class A and Class B,then 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 returns.

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

Two 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?

If D₀ = $2.25,g (which is constant)= 3.5%,and P₀ = $54,then what is the stock's expected dividend yield for the coming year?

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?

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? A B Required return 10\% 12\% Market price \ 25 \ 40 Expected growth 7\% 9\% ?

Which of the following statements is CORRECT?

Misra Inc.forecasts a free cash flow of $55 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%,then what is the horizon,or continuing,value in millions at t = 3?

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.

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

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 27.5% 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? Do not round intermediate calculations.

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

According to the basic DCF stock valuation model,the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 14.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters

Exam 9: Stocks and Their Valuation

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

Two 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?

If D0 = $2.25,g (which is constant)= 3.5%,and P0 = $54,then what is the stock's expected dividend yield for the coming year?

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?

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? A B Required return 10\% 12\% Market price \ 25 \ 40 Expected growth 7\% 9\% ?

Which of the following statements is CORRECT?

Misra Inc.forecasts a free cash flow of $55 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%,then what is the horizon,or continuing,value in millions at t = 3?

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.

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

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 27.5% 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? Do not round intermediate calculations.

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

According to the basic DCF stock valuation model,the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 14.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters

If D₀ = $2.25,g (which is constant)= 3.5%,and P₀ = $54,then what is the stock's expected dividend yield for the coming year?

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

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 27.5% 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? Do not round intermediate calculations.

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 14.1%,and the constant growth rate is g = 4.0%.What is the current stock price?