Question 1

What is the required return for a stock that has a 6% constant growth rate,a price of $25,an expected dividend of $2,and a P/E ratio of 10?

Accepted Answer

A)  5% 
B)  10% 
C)  14% 
D)  22% 
A)  5% 
B)  10% 
C)  14% 
D)  22%

Question 2

Stocks that have the same expected risk should:

Accepted Answer

A)  offer the same dividend payment. 
B)  have the same sustainable growth rate. 
C)  have the same price. 
D)  have the same expected rate of return. 
A)  offer the same dividend payment. 
B)  have the same sustainable growth rate. 
C)  have the same price. 
D)  have the same expected rate of return.

Question 3

Which of the following is inconsistent with a firm that sells for very near book value?

Accepted Answer

A)  low current earning power 
B)  no intangible assets 
C)  high future earning power 
D)  low, unstable dividend payment 
A)  low current earning power 
B)  no intangible assets 
C)  high future earning power 
D)  low, unstable dividend payment

Question 4

Stock value is always increased whenever earnings are plowed back into the firm.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is correct about a stock currently selling for $50 per share that has a 16 percent expected return and a 10 percent expected capital appreciation?

Accepted Answer

A)  its expected dividend exceeds the actual dividend 
B)  its expected return will exceed the actual return 
C)  it is expected to pay $3 in annual dividends 
D)  it is expected to pay $8 in annual dividends 
A)  its expected dividend exceeds the actual dividend 
B)  its expected return will exceed the actual return 
C)  it is expected to pay $3 in annual dividends 
D)  it is expected to pay $8 in annual dividends

Question 6

Which of the following situations accurately describes a growth stock,assuming that each firm has a required return of 12 percent?

Accepted Answer

A)  a firm with PVGO = $0 
B)  a firm with investment opportunities yielding 10 percent 
C)  a firm with investment opportunities yielding 15 percent 
D)  All of the choices represent growth stocks 
A)  a firm with PVGO = $0 
B)  a firm with investment opportunities yielding 10 percent 
C)  a firm with investment opportunities yielding 15 percent 
D)  All of the choices represent growth stocks

Question 7

The main purpose of a market-value balance sheet is to:

Accepted Answer

A)  show an inflated value of the firm. 
B)  avoid the recording of certain liabilities. 
C)  value assets and liabilities without GAAP restrictions. 
D)  improve the credit rating of the firm. 
A)  show an inflated value of the firm. 
B)  avoid the recording of certain liabilities. 
C)  value assets and liabilities without GAAP restrictions. 
D)  improve the credit rating of the firm.

Question 8

A company with a return on equity of 15 percent and a plowback ratio of 60 percent would expect a constant growth rate of:

Accepted Answer

A)  4 percent 
B)  9 percent 
C)  21 percent 
D)  25 percent 
A)  4 percent 
B)  9 percent 
C)  21 percent 
D)  25 percent

Question 9

The statement that there are no free lunches on Wall Street suggests that:

Accepted Answer

A)  the market is strong-form efficient. 
B)  there is no return to technical or fundamental analysis. 
C)  security prices reflect all available information. 
D)  food purveyors are capitalists. 
A)  the market is strong-form efficient. 
B)  there is no return to technical or fundamental analysis. 
C)  security prices reflect all available information. 
D)  food purveyors are capitalists.

Question 10

If investors believe a company will have the opportunity to make very profitable investments in the future,they will pay more for the company's stock today.

Accepted Answer

A) True 
 B)False

Question 11

Technical analysts would be more likely than other investors to index their portfolios.

Accepted Answer

A) True 
 B)False

Question 12

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

Accepted Answer

A)  at least one of the stocks becomes temporarily mispriced 
B)  this is a common occurrence indicating that one stock has more PVGO 
C)  this cannot happen if the shares are traded in an auction market 
D)  the expected risk levels will change until the expected returns are equal 
A)  at least one of the stocks becomes temporarily mispriced 
B)  this is a common occurrence indicating that one stock has more PVGO 
C)  this cannot happen if the shares are traded in an auction market 
D)  the expected risk levels will change until the expected returns are equal

Question 13

Securities with the same expected risk should offer the same expected rate of return.

Accepted Answer

A) True 
 B)False

Question 14

What is the most likely value of the PVGO for a stock with current price of $50,expected earnings of $6 per share,and a required return of 20 percent?

Accepted Answer

A)  $10 
B)  $20 
C)  $25 
D)  $30 
A)  $10 
B)  $20 
C)  $25 
D)  $30

Question 15

The liquidation value of a firm is equal to the book value of the firm.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is true for a firm having a stock price of $42,and expected dividend of $3,and a sustainable growth rate of 8 percent?

Accepted Answer

A)  it has a required return of 15.14percent. 
B)  it has a dividend payout ratio of 37.5 percent. 
C)  it has an ROE of 7.14 percent. 
D)  it has a plowback rate of 7.14 percent. 
A)  it has a required return of 15.14percent. 
B)  it has a dividend payout ratio of 37.5 percent. 
C)  it has an ROE of 7.14 percent. 
D)  it has a plowback rate of 7.14 percent.

Question 17

A firm's liquidation value is the amount:

Accepted Answer

A)  necessary to repurchase all shares of common stock. 
B)  realized from selling all assets and repaying debts. 
C)  a purchaser would pay for the firm in bankruptcy. 
D)  equal to the book value of equity. 
A)  necessary to repurchase all shares of common stock. 
B)  realized from selling all assets and repaying debts. 
C)  a purchaser would pay for the firm in bankruptcy. 
D)  equal to the book value of equity.

Question 18

CumChan Corporation reinvests 30 percent of its earnings in the corporation.The stock sells for $25,and the next dividend will be $1.25 per share.The discount rate is 7.5 percent.What is the rate of return on the company's reinvested funds?

Accepted Answer

25 = 1.25/.075-g = .

Question 19

Lincoln Thomas believes that the Harris Group will pay a dividend of $4 on its common stock in year 2.Thereafter,you expect dividends to grow at a rate of 12 percent a year in perpetuity.If Lincoln requires a return of 24 percent on his investment,how much should he be willing to pay for the stock?

Accepted Answer

P₀ = DIV₁/(r

Question 20

A payout ratio of 35 percent for a company indicates that:

Accepted Answer

A)  35 percent of dividends are plowed back for growth. 
B)  65 percent of dividends are plowed back for growth. 
C)  65 percent of earnings are paid out as dividends. 
D)  35 percent of earnings are paid out as dividends. 
A)  35 percent of dividends are plowed back for growth. 
B)  65 percent of dividends are plowed back for growth. 
C)  65 percent of earnings are paid out as dividends. 
D)  35 percent of earnings are paid out as dividends.

Exam 7: Valuing Stocks

What is the required return for a stock that has a 6% constant growth rate,a price of $25,an expected dividend of $2,and a P/E ratio of 10?

Stocks that have the same expected risk should:

Which of the following is inconsistent with a firm that sells for very near book value?

Stock value is always increased whenever earnings are plowed back into the firm.

Which of the following statements is correct about a stock currently selling for $50 per share that has a 16 percent expected return and a 10 percent expected capital appreciation?

Which of the following situations accurately describes a growth stock,assuming that each firm has a required return of 12 percent?

The main purpose of a market-value balance sheet is to:

A company with a return on equity of 15 percent and a plowback ratio of 60 percent would expect a constant growth rate of:

The statement that there are no free lunches on Wall Street suggests that:

If investors believe a company will have the opportunity to make very profitable investments in the future,they will pay more for the company's stock today.

Technical analysts would be more likely than other investors to index their portfolios.

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

Securities with the same expected risk should offer the same expected rate of return.

What is the most likely value of the PVGO for a stock with current price of $50,expected earnings of $6 per share,and a required return of 20 percent?

The liquidation value of a firm is equal to the book value of the firm.

Which of the following is true for a firm having a stock price of $42,and expected dividend of $3,and a sustainable growth rate of 8 percent?

A firm's liquidation value is the amount:

CumChan Corporation reinvests 30 percent of its earnings in the corporation.The stock sells for $25,and the next dividend will be $1.25 per share.The discount rate is 7.5 percent.What is the rate of return on the company's reinvested funds?

Lincoln Thomas believes that the Harris Group will pay a dividend of $4 on its common stock in year 2.Thereafter,you expect dividends to grow at a rate of 12 percent a year in perpetuity.If Lincoln requires a return of 24 percent on his investment,how much should he be willing to pay for the stock?

A payout ratio of 35 percent for a company indicates that:

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