Question 1

Fundamentalists typically use the "Bottom-Up Approach" whereas technicians use the "Top-Down Approach" to the valuation process.

Accepted Answer

A) True 
 B)False

Question 2

A company's dividend last year was $3.00.Dividends are expected to grow indefinitely at 7% and the required rate of return for the stock is 13%.What is the value of the stock today?

Accepted Answer

A)  $2.83 
B)  $23.08 
C)  $24.69 
D)  $50.00 
E)  $53.50 
A)  $2.83 
B)  $23.08 
C)  $24.69 
D)  $50.00 
E)  $53.50

Question 3

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 is the current value of these securities?

Accepted Answer

A)  $656.40 
B)  $899.00 
C)  $822.70 
D)  $569.50 
E)  $962.00 
A)  $656.40 
B)  $899.00 
C)  $822.70 
D)  $569.50 
E)  $962.00

Question 4

The risk premium is impacted by business risk,financial risk,and liquidity risk.

Accepted Answer

A) True 
 B)False

Question 5

Exhibit 11.2
Use the Information Below for the Following Problem(S)
A major manufacturer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 7 years remaining till maturity. The bonds were issued with an 8 percent coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 10 percent.
-Refer to Exhibit 11.2.What will be the value of these securities in one year if the required return is 6 percent?

Accepted Answer

A)  $1151.92 
B)  $972.52 
C)  $1100.15 
D)  $900.18 
E)  $936.72 
A)  $1151.92 
B)  $972.52 
C)  $1100.15 
D)  $900.18 
E)  $936.72

Question 6

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 dividends for years 1,2,and 3 are

Accepted Answer

A)  $1.5, $2.0, $2.05 
B)  $1.64, $1.78, $1.94 
C)  $1.64, $1.94, $2.24 
D)  $1.5, $2.40, $3.30 
E)  $2.07, $2.14, $2.21 
A)  $1.5, $2.0, $2.05 
B)  $1.64, $1.78, $1.94 
C)  $1.64, $1.94, $2.24 
D)  $1.5, $2.40, $3.30 
E)  $2.07, $2.14, $2.21

Question 7

Using the constant growth model,an increase in the required rate of return from 17 to 20 percent combined with an increase in the growth rate from 8 to 11 percent would cause the price to

Accepted Answer

A)  Rise more than 3% 
B)  Rise less than 3%. 
C)  Remain constant. 
D)  Fall more than 3%. 
E)  Fall less than 3%. 
A)  Rise more than 3% 
B)  Rise less than 3%. 
C)  Remain constant. 
D)  Fall more than 3%. 
E)  Fall less than 3%.

Question 8

Given an optimistic economic and stock-market outlook for a country,the investor should underweight the allocation to this country in his/her portfolio.

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 present value today of dividends for years 1 to 5 is

Accepted Answer

A)  $4.06 
B)  $10.28 
C)  $12.40 
D)  $14.52 
E)  $10.0 
A)  $4.06 
B)  $10.28 
C)  $12.40 
D)  $14.52 
E)  $10.0

Question 10

The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the firm's

Accepted Answer

A)  Required rate of return based on the capital asset pricing model (CAPM) 
B)  Required rate of return based on the dividend discount model (DDM) 
C)  Weighted average cost of capital (WAC
C)  
D)  Historical cost of debt and equity 
E)  All of the above are appropriate depending on the situation 
A)  Required rate of return based on the capital asset pricing model (CAPM) 
B)  Required rate of return based on the dividend discount model (DDM) 
C)  Weighted average cost of capital (WAC
C)  
D)  Historical cost of debt and equity 
E)  All of the above are appropriate depending on the situation

Question 11

A relative valuation technique is appropriate to consider when you have a good set of comparable entities.

Accepted Answer

A) True 
 B)False

Question 12

Exhibit 11.5
Use the Information Below for the Following Problem(S)
The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7 percent for the next three years and the stock will then reach $25.00 per share.
-Refer to Exhibit 11.5.How much should you be willing to pay for the stock if you feel that the 7 percent growth rate can be maintained indefinitely and you require a 16 percent return?

Accepted Answer

A)  $11.15 
B)  $14.44 
C)  $14.86 
D)  $18.90 
E)  $19.24 
A)  $11.15 
B)  $14.44 
C)  $14.86 
D)  $18.90 
E)  $19.24

Question 13

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 price of the stock today (P?)is

Accepted Answer

A)  $136.29 
B)  $133.03 
C)  $120.33 
D)  $123.43 
E)  $126.60 
A)  $136.29 
B)  $133.03 
C)  $120.33 
D)  $123.43 
E)  $126.60

Question 14

If the estimated value of an asset is greater than the market price,you would want to buy the investment.

Accepted Answer

A) True 
 B)False

Question 15

The two components that are required in order to carry out asset valuation are (1)the stream of expected cash flows and (2)the required rate of return.

Accepted Answer

A) True 
 B)False

Question 16

If the intrinsic value of an asset is greater than the market price,you would want to buy the investment.

Accepted Answer

A) True 
 B)False

Question 17

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 future price of the stock in year 5 is

Accepted Answer

A)  $113.40 
B)  $122.47 
C)  $132.27 
D)  $142.85 
E)  $154.35 
A)  $113.40 
B)  $122.47 
C)  $132.27 
D)  $142.85 
E)  $154.35

Question 18

Exhibit 11.5
Use the Information Below for the Following Problem(S)
The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7 percent for the next three years and the stock will then reach $25.00 per share.
-Refer to Exhibit 11.5.How much should you be willing to pay for the stock if you require a 16 percent return?

Accepted Answer

A)  $17.34 
B)  $18.90 
C)  $19.09 
D)  $19.21 
E)  None of the above 
A)  $17.34 
B)  $18.90 
C)  $19.09 
D)  $19.21 
E)  None of the above

Question 19

Ross Corporation paid dividends per share of $1.20 at the end of 1990.At the end of 2000 it paid dividends per share of $3.50.Calculate the compound annual growth rate in dividends.

Accepted Answer

A)  52.17% 
B)  34.28% 
C)  23% 
D)  19.17% 
E)  11.29% 
A)  52.17% 
B)  34.28% 
C)  23% 
D)  19.17% 
E)  11.29%

Question 20

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

Accepted Answer

A) True 
 B)False

Exam 11: Security Valuation Principles

Fundamentalists typically use the "Bottom-Up Approach" whereas technicians use the "Top-Down Approach" to the valuation process.

A company's dividend last year was $3.00.Dividends are expected to grow indefinitely at 7% and the required rate of return for the stock is 13%.What is the value of the stock today?

The risk premium is impacted by business risk,financial risk,and liquidity risk.

Using the constant growth model,an increase in the required rate of return from 17 to 20 percent combined with an increase in the growth rate from 8 to 11 percent would cause the price to

Given an optimistic economic and stock-market outlook for a country,the investor should underweight the allocation to this country in his/her portfolio.

The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the firm's

A relative valuation technique is appropriate to consider when you have a good set of comparable entities.

If the estimated value of an asset is greater than the market price,you would want to buy the investment.

The two components that are required in order to carry out asset valuation are (1)the stream of expected cash flows and (2)the required rate of return.

If the intrinsic value of an asset is greater than the market price,you would want to buy the investment.

Ross Corporation paid dividends per share of $1.20 at the end of 1990.At the end of 2000 it paid dividends per share of $3.50.Calculate the compound annual growth rate in dividends.

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

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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