Question 1

According to the dividend growth model,if a company were to declare that it would never pay dividends,its value would be

Accepted Answer

A)  Based on earnings. 
B)  Based on expectations regarding. 
C)  Higher than similar firms since it could reinvest a greater amount in new projects. 
D)  Zero. 
E)  Based on the capital asset pricing model. 
A)  Based on earnings. 
B)  Based on expectations regarding. 
C)  Higher than similar firms since it could reinvest a greater amount in new projects. 
D)  Zero. 
E)  Based on the capital asset pricing model. D

Question 2

Exhibit 11.3
Use the Information Below for the Following Problem(S)
A large grocery chain is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 6 years remaining until maturity. The bonds were issued with a 6 percent coupon rate (paid semiannually) and a par value of $1,000. Because of increased risk the required rate has risen to 10 percent.
-Refer to Exhibit 11.3.What will be the value of these securities in one year if the required return declines to 8 percent?

Accepted Answer

A)  $899.43 
B)  $862.50 
C)  $869.88 
D)  $918.93 
E)  $946.98 
A)  $899.43 
B)  $862.50 
C)  $869.88 
D)  $918.93 
E)  $946.98 D

Question 3

Which of the following is correct?

Accepted Answer

A) If estimated value > Market price, you should buy. B) If estimated value > Market price, you should sell. C) If estimated value < Market price, you should sell. D) If estimated value < Market price, you should buy. E) Choices a and c. A) If estimated value > Market price, you should buy. B) If estimated value > Market price, you should sell. C) If estimated value < Market price, you should sell. D) If estimated value < Market price, you should buy. E) Choices a and c. E

Question 4

The growth rate in equity without any external financing is determined by multiplying the payout ratio times the return on equity (ROE).

Accepted Answer

A) True 
 B)False

Question 5

The P/E ratio is determined by

Accepted Answer

A)  The required rate of return. 
B)  The expected dividend payout ratio. 
C)  The expected growth rate of dividends. 
D)  Choices a and b 
E)  All of the above 
A)  The required rate of return. 
B)  The expected dividend payout ratio. 
C)  The expected growth rate of dividends. 
D)  Choices a and b 
E)  All of the above

Question 6

Using the constant growth model,an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

Accepted Answer

A)  Rise more than 1% 
B)  Rise less than 1%. 
C)  Remain constant. 
D)  Fall more than 1%. 
E)  Fall less than 1%. 
A)  Rise more than 1% 
B)  Rise less than 1%. 
C)  Remain constant. 
D)  Fall more than 1%. 
E)  Fall less than 1%.

Question 7

The value of preferred stock can be calculated by dividing its dividend by the required rate of return.

Accepted Answer

A) True 
 B)False

Question 8

The real risk free rate depends on the real growth in the economy and can be affected for short time periods by temporary tightness or ease in the capital markets.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 11.6
Use the Information Below for the Following Problem(S)
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%.
-Refer to Exhibit 11.6.The dividends for years 1,2,and 3 are

Accepted Answer

A)  $2, $2.08, $2.16 
B)  $2, $2.05, $2.10 
C)  $2.16, $2.24, $2.32 
D)  $2.16, $2.33, $2.52 
E)  $2.07, $2.14, $2.21 
A)  $2, $2.08, $2.16 
B)  $2, $2.05, $2.10 
C)  $2.16, $2.24, $2.32 
D)  $2.16, $2.33, $2.52 
E)  $2.07, $2.14, $2.21

Question 10

Empirical studies have shown that the market factor has increased over time and now accounts for the majority of an individual stock's price variance.

Accepted Answer

A) True 
 B)False

Question 11

The value of a corporate bond can be derived by calculating the present value of the interest payments and the present value of the face value at the bond's

Accepted Answer

A)  Current yield. 
B)  Coupon rate. 
C)  Required rate of return. 
D)  Effective rate. 
E)  Prime rate. 
A)  Current yield. 
B)  Coupon rate. 
C)  Required rate of return. 
D)  Effective rate. 
E)  Prime rate.

Question 12

Which securities can be valued by dividing the annual dividend by the required rate of return?

Accepted Answer

A)  Low coupon bonds 
B)  Junk bonds 
C)  Common stocks 
D)  Preferred stocks 
E)  Constant growth common stocks 
A)  Low coupon bonds 
B)  Junk bonds 
C)  Common stocks 
D)  Preferred stocks 
E)  Constant growth common stocks

Question 13

The importance of an industry's performance on an individual stock's performance varies across industries.

Accepted Answer

A) True 
 B)False

Question 14

Tayco Corporation has just paid dividends of $3 per share.The earnings per share for the company was $4.If you believe that the appropriate discount rate is 15% and the long term growth rate in dividends is 6%,and earnings is 6%,the firm's P/E ratio is

Accepted Answer

A)  8.33 
B)  33.33 
C)  44.44 
D)  11.11 
E)  None of the above 
A)  8.33 
B)  33.33 
C)  44.44 
D)  11.11 
E)  None of the above

Question 15

In dividend discount models (DDM)with supernormal growth,supernormal growth may continue indefinitely.

Accepted Answer

A) True 
 B)False

Question 16

The beta for the DAK Corporation is 1.25.If the yield on 30 year T-bonds is 5.65%,and the long term average return on the S&P 500 is 11%.Calculate the required rate of return for DAK Corporation.

Accepted Answer

A)  12.34% 
B)  7.06% 
C)  13.74% 
D)  5.35% 
E)  5.65% 
A)  12.34% 
B)  7.06% 
C)  13.74% 
D)  5.35% 
E)  5.65%

Question 17

Dividend growth is a function of

Accepted Answer

A)  Return on equity. 
B)  The retention rate. 
C)  The payout ratio. 
D)  All of the above. 
E)  None of the above. 
A)  Return on equity. 
B)  The retention rate. 
C)  The payout ratio. 
D)  All of the above. 
E)  None of the above.

Question 18

The three step valuation process consists of (1)analysis of alternative economies and markets,(2)analysis of alternative industries and (3)analysis of industry influences.

Accepted Answer

A) True 
 B)False

Question 19

The price of a bond can be calculated by discounting future coupons over the bonds life by the yield to maturity.

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 11.7
Use the Information Below for the Following Problem(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%.
-Refer to Exhibit 11.7.The future price of the stock in year 3 is

Accepted Answer

A)  $81.75 
B)  $84.81 
C)  $92.56 
D)  $101.85 
E)  $111.16 
A)  $81.75 
B)  $84.81 
C)  $92.56 
D)  $101.85 
E)  $111.16

Exam 11: Security Valuation Principles

According to the dividend growth model,if a company were to declare that it would never pay dividends,its value would be

Which of the following is correct?

The growth rate in equity without any external financing is determined by multiplying the payout ratio times the return on equity (ROE).

The P/E ratio is determined by

Using the constant growth model,an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

The value of preferred stock can be calculated by dividing its dividend by the required rate of return.

The real risk free rate depends on the real growth in the economy and can be affected for short time periods by temporary tightness or ease in the capital markets.

Empirical studies have shown that the market factor has increased over time and now accounts for the majority of an individual stock's price variance.

The value of a corporate bond can be derived by calculating the present value of the interest payments and the present value of the face value at the bond's

Which securities can be valued by dividing the annual dividend by the required rate of return?

The importance of an industry's performance on an individual stock's performance varies across industries.

Tayco Corporation has just paid dividends of $3 per share.The earnings per share for the company was $4.If you believe that the appropriate discount rate is 15% and the long term growth rate in dividends is 6%,and earnings is 6%,the firm's P/E ratio is

In dividend discount models (DDM)with supernormal growth,supernormal growth may continue indefinitely.

The beta for the DAK Corporation is 1.25.If the yield on 30 year T-bonds is 5.65%,and the long term average return on the S&P 500 is 11%.Calculate the required rate of return for DAK Corporation.

Dividend growth is a function of

The three step valuation process consists of (1)analysis of alternative economies and markets,(2)analysis of alternative industries and (3)analysis of industry influences.

The price of a bond can be calculated by discounting future coupons over the bonds life by the yield to maturity.

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

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