Question 1

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8 percent?

Accepted Answer

A)  $22.86 
B)  $28.00 
C)  $42.00 
D)  $43.75 
A)  $22.86 
B)  $28.00 
C)  $42.00 
D)  $43.75 D

Question 2

What might be included in building a case for "appropriate" P/E ratios in the currently high stock markets?

Accepted Answer

Many firms have invested heavily in intangibles such as R&D.These investments are immediately expensed rather than being added to the balance sheet and amortized over time.This puts a drag on current earnings,thus raising P/E ratios.The distorting effects of inflation on inventories and depreciation could also be mentioned.

Question 3

Which of the following best characterizes the difference between growth stocks and income stocks?

Accepted Answer

A)  growth stocks do not pay dividends 
B)  income stocks offer higher rates of return 
C)  income stocks are seasoned issues 
D)  growth stocks have greater PVGO 
A)  growth stocks do not pay dividends 
B)  income stocks offer higher rates of return 
C)  income stocks are seasoned issues 
D)  growth stocks have greater PVGO D

Question 4

What should be the price of a stock that offers a $4 annual dividend with no prospects of growth,and has a required return of 12.5 percent?

Accepted Answer

A)  $8.50 
B)  $25.00 
C)  $32.00 
D)  $50.00 
A)  $8.50 
B)  $25.00 
C)  $32.00 
D)  $50.00

Question 5

ABC common stock is expected to have extraordinary growth of 20 percent per year for two years,at which time the growth rate will settle into a constant 6 percent.If the discount rate is 15 percent and the most recent dividend was $2.50,what should be the current share price?

Accepted Answer

A)  $31.16 
B)  $33.23 
C)  $37.39 
D)  $47.77 
A)  $31.16 
B)  $33.23 
C)  $37.39 
D)  $47.77

Question 6

Which group of investors is capable of earning consistent,superior profits if financial markets are strong-form efficient?

Accepted Answer

A)  only technical analysts will be able to profit 
B)  only fundamental analysts will be able to profit 
C)  only inside traders will be able to profit 
D)  no one will be capable of sustained, superior profits 
A)  only technical analysts will be able to profit 
B)  only fundamental analysts will be able to profit 
C)  only inside traders will be able to profit 
D)  no one will be capable of sustained, superior profits

Question 7

Other things equal,a firm's sustainable growth rate could increase as a result of:

Accepted Answer

A)  increasing the plowback ratio. 
B)  increasing the payout ratio. 
C)  decreasing the return on equity. 
D)  increasing total assets. 
A)  increasing the plowback ratio. 
B)  increasing the payout ratio. 
C)  decreasing the return on equity. 
D)  increasing total assets.

Question 8

How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:

Accepted Answer

A)  will be paid to a different investor. 
B)  will not be paid by the firm. 
C)  have an insignificant present value. 
D)  ignore the tax consequences of future dividends. 
A)  will be paid to a different investor. 
B)  will not be paid by the firm. 
C)  have an insignificant present value. 
D)  ignore the tax consequences of future dividends.

Question 9

What is the current price of a share of stock for a firm with $5 million in balance-sheet equity,500,000 shares of stock outstanding,and a price/book value ratio of 4? (Use values in dollars)

Accepted Answer

A)  $2.50 
B)  $10.00 
C)  $20.00 
D)  $40.00 
A)  $2.50 
B)  $10.00 
C)  $20.00 
D)  $40.00

Question 10

If a stock's price decreased during the past week,what is the most likely prediction about this week's price change?

Accepted Answer

A)  price will reverse last week's loss and go up 
B)  price will continue last week's decline 
C)  price will stand still until new information is released 
D)  either direction of price change is equally likely 
A)  price will reverse last week's loss and go up 
B)  price will continue last week's decline 
C)  price will stand still until new information is released 
D)  either direction of price change is equally likely

Question 11

If The Globe and Mail lists a stock's dividend as $1,then it is most likely the case that the stock:

Accepted Answer

A)  pays $1 quarterly, or an estimated $4 annually. 
B)  pays $0.25 quarterly, or an estimated $1 annually. 
C)  paid $1 during the past quarter, with no future dividends forecast. 
D)  paid $1 during the past year, with no future dividends forecast. 
A)  pays $1 quarterly, or an estimated $4 annually. 
B)  pays $0.25 quarterly, or an estimated $1 annually. 
C)  paid $1 during the past quarter, with no future dividends forecast. 
D)  paid $1 during the past year, with no future dividends forecast.

Question 12

To justify a high P/E ratio,the market must believe one of the following about a firm:

Accepted Answer

A)  it has low growth opportunities. 
B)  it will have constant dividends forever. 
C)  it has high growth opportunities. 
D)  it will use low depreciation to increase earnings. 
A)  it has low growth opportunities. 
B)  it will have constant dividends forever. 
C)  it has high growth opportunities. 
D)  it will use low depreciation to increase earnings.

Question 13

If stock prices follow a random walk,which of the following statement(s)is(are)correct?

Accepted Answer

A)  successive stock price changes are not related 
B)  the history of stock prices cannot be used to predict future returns to investors 
C)  Both successive stock price changes are not related and the history of stock prices cannot be used to predict future returns to investors 
D)  None of the choices are correct. 
A)  successive stock price changes are not related 
B)  the history of stock prices cannot be used to predict future returns to investors 
C)  Both successive stock price changes are not related and the history of stock prices cannot be used to predict future returns to investors 
D)  None of the choices are correct.

Question 14

Technical analysts have no effect upon the efficiency of the stock market.

Accepted Answer

A) True 
 B)False

Question 15

What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

Accepted Answer

A)  25.00 percent 
B)  33.33 percent 
C)  66.67 percent 
D)  75.00 percent 
A)  25.00 percent 
B)  33.33 percent 
C)  66.67 percent 
D)  75.00 percent

Question 16

How can you reconcile the fact that whether an investor favours dividends or capital gains,the investor should accept the dividend discount model as a determination of share value?

Accepted Answer

The first fact to be recognized is that

Question 17

A high P/E ratio indicates high level of risk.

Accepted Answer

A) True 
 B)False

Question 18

How much should you pay for a share of stock that offers a constant growth rate of 10 percent,requires a 16 percent rate of return,and is expected to sell for $50 one year from now?

Accepted Answer

A)  $42.00 
B)  $45.00 
C)  $45.45 
D)  $47.00 
A)  $42.00 
B)  $45.00 
C)  $45.45 
D)  $47.00

Question 19

Investors may obtain the same securities at the same time in either the primary or secondary markets.

Accepted Answer

A) True 
 B)False

Question 20

What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40?

Accepted Answer

A)  2.5 percent 
B)  4.0 percent 
C)  10.0 percent 
D)  15.0 percent 
A)  2.5 percent 
B)  4.0 percent 
C)  10.0 percent 
D)  15.0 percent

Exam 7: Valuing Stocks

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8 percent?

What might be included in building a case for "appropriate" P/E ratios in the currently high stock markets?

Which of the following best characterizes the difference between growth stocks and income stocks?

What should be the price of a stock that offers a $4 annual dividend with no prospects of growth,and has a required return of 12.5 percent?

ABC common stock is expected to have extraordinary growth of 20 percent per year for two years,at which time the growth rate will settle into a constant 6 percent.If the discount rate is 15 percent and the most recent dividend was $2.50,what should be the current share price?

Which group of investors is capable of earning consistent,superior profits if financial markets are strong-form efficient?

Other things equal,a firm's sustainable growth rate could increase as a result of:

How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:

What is the current price of a share of stock for a firm with $5 million in balance-sheet equity,500,000 shares of stock outstanding,and a price/book value ratio of 4? (Use values in dollars)

If a stock's price decreased during the past week,what is the most likely prediction about this week's price change?

If The Globe and Mail lists a stock's dividend as $1,then it is most likely the case that the stock:

To justify a high P/E ratio,the market must believe one of the following about a firm:

If stock prices follow a random walk,which of the following statement(s)is(are)correct?

Technical analysts have no effect upon the efficiency of the stock market.

What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

How can you reconcile the fact that whether an investor favours dividends or capital gains,the investor should accept the dividend discount model as a determination of share value?

A high P/E ratio indicates high level of risk.

How much should you pay for a share of stock that offers a constant growth rate of 10 percent,requires a 16 percent rate of return,and is expected to sell for $50 one year from now?

Investors may obtain the same securities at the same time in either the primary or secondary markets.

What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters