Question 1

Firms having a higher expected return have a higher:

Accepted Answer

A)  level of expected risk. 
B)  dividend yield. 
C)  market value of equity. 
D)  degree of certainty concerning their returns. 
A)  level of expected risk. 
B)  dividend yield. 
C)  market value of equity. 
D)  degree of certainty concerning their returns.

Question 2

Market efficiency implies that security prices impound new information quickly.

Accepted Answer

A) True 
 B)False

Question 3

Lincoln and Donovan's will pay a dividend of $5 per share in year 1.It sells at $60 a share,and firms in the same industry provide an expected rate of return of 14 percent.What must be the expected growth rate of the company's dividend?

Accepted Answer

60 = 5/.14

Question 4

Explain why the market value of common stock often differs from its liquidation value or its book value.

Accepted Answer

A firm's liquidation value represents th

Question 5

Investors are willing to purchase stocks having high P/E ratios because:

Accepted Answer

A)  they expect these shares to sell for a lower price. 
B)  they expect these shares to offer higher dividend payments. 
C)  these shares are accompanied by guaranteed earnings. 
D)  they expect these shares to have greater growth opportunities. 
A)  they expect these shares to sell for a lower price. 
B)  they expect these shares to offer higher dividend payments. 
C)  these shares are accompanied by guaranteed earnings. 
D)  they expect these shares to have greater growth opportunities.

Question 6

When investors are not capable of making superior investment decisions on a continual basis based on past prices,public or private information,the market is said to be:

Accepted Answer

A)  weak-form efficient. 
B)  semi-strong-form efficient. 
C)  strong-form efficient. 
D)  fundamentally efficient. 
A)  weak-form efficient. 
B)  semi-strong-form efficient. 
C)  strong-form efficient. 
D)  fundamentally efficient.

Question 7

In a valuation of a non-constant dividend growth stock,the terminal value represents the:

Accepted Answer

A)  point at which the present value of future dividends equals zero. 
B)  maturity date of the stock. 
C)  present value of future dividends from that point onwards. 
D)  highest value that the stock will attain. 
A)  point at which the present value of future dividends equals zero. 
B)  maturity date of the stock. 
C)  present value of future dividends from that point onwards. 
D)  highest value that the stock will attain.

Question 8

Which of the following should increase the firm's sustainable growth rate?

Accepted Answer

A)  increase the dividend payout ratio 
B)  decrease the required return 
C)  decrease the ROE 
D)  increase the plowback ratio 
A)  increase the dividend payout ratio 
B)  decrease the required return 
C)  decrease the ROE 
D)  increase the plowback ratio

Question 9

LookGood,Inc.has just announced the bad news that its earnings have dropped by 30 percent.In fact,its investors had anticipated even worse results (a decrease of 40 percent).As a result,LookGood's stock price:

Accepted Answer

A)  Increases. 
B)  Remains the same. 
C)  Decreases. 
D)  Follows a random walk as usual. 
A)  Increases. 
B)  Remains the same. 
C)  Decreases. 
D)  Follows a random walk as usual.

Question 10

The dividend discount model should not be used to value stocks in which the dividend does not grow.

Accepted Answer

A) True 
 B)False

Question 11

A positive value for PVGO suggests that the firm has:

Accepted Answer

A)  a positive return on equity. 
B)  a positive plowback ratio. 
C)  investment opportunities with superior returns. 
D)  a high rate of constant growth. 
A)  a positive return on equity. 
B)  a positive plowback ratio. 
C)  investment opportunities with superior returns. 
D)  a high rate of constant growth.

Question 12

The intent of technical analysis is to discover patterns in past stock prices.

Accepted Answer

A) True 
 B)False

Question 13

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year,what is the stock's current price?

Accepted Answer

A)  $4.50 
B)  $18.00 
C)  $22.22 
D)  $40.50 
A)  $4.50 
B)  $18.00 
C)  $22.22 
D)  $40.50

Question 14

An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return.Which of the following seems most likely?

Accepted Answer

A)  the 20% stock is a better investment. 
B)  the 14% stock is overpriced. 
C)  Both stocks will have approximately the same return. 
D)  Both stocks are priced correctly given their perceived risk. 
A)  the 20% stock is a better investment. 
B)  the 14% stock is overpriced. 
C)  Both stocks will have approximately the same return. 
D)  Both stocks are priced correctly given their perceived risk.

Question 15

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

Accepted Answer

A)  its stock price will remain constant 
B)  its stock price will increase by the sustainable growth rate 
C)  its stock price will decline unless dividend payout ratio is zero 
D)  its stock price will decline unless plowback rate exceeds required return 
A)  its stock price will remain constant 
B)  its stock price will increase by the sustainable growth rate 
C)  its stock price will decline unless dividend payout ratio is zero 
D)  its stock price will decline unless plowback rate exceeds required return

Question 16

In general,if a firm has positive present value of growth opportunities,then its price-earnings ratio:

Accepted Answer

A)  is greater than its required rate of return. 
B)  is less than its required rate of return. 
C)  equals its required rate of return. 
D)  will be lower than the industry average. 
A)  is greater than its required rate of return. 
B)  is less than its required rate of return. 
C)  equals its required rate of return. 
D)  will be lower than the industry average.

Question 17

Which of the following is a characteristic of secondary markets for common stock?

Accepted Answer

A)  only low-priced shares are traded in these markets. 
B)  only high-risk shares are traded in these markets. 
C)  secondary markets are where corporations borrow funds. 
D)  secondary-market trades do not provide funds for corporations whose stock is traded. 
A)  only low-priced shares are traded in these markets. 
B)  only high-risk shares are traded in these markets. 
C)  secondary markets are where corporations borrow funds. 
D)  secondary-market trades do not provide funds for corporations whose stock is traded.

Question 18

Security prices are said to follow a "random walk," which means that:

Accepted Answer

A)  stock selection for portfolio composition is unimportant. 
B)  it is impossible to know whether stocks offer higher returns than bonds. 
C)  investment analysts are unnecessary. 
D)  successive price changes are unpredictable. 
A)  stock selection for portfolio composition is unimportant. 
B)  it is impossible to know whether stocks offer higher returns than bonds. 
C)  investment analysts are unnecessary. 
D)  successive price changes are unpredictable.

Question 19

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share,has an expected dividend of $2.50,and a required return of 20 percent?

Accepted Answer

A)  $0 
B)  $6.00 
C)  $8.00 
D)  $10.00 
A)  $0 
B)  $6.00 
C)  $8.00 
D)  $10.00

Question 20

The book value of a firm's equity is determined by:

Accepted Answer

A)  multiplying share price by shares outstanding. 
B)  multiplying share price at issue by shares outstanding. 
C)  the difference between book values of assets and liabilities. 
D)  the difference between market values of assets and liabilities. 
A)  multiplying share price by shares outstanding. 
B)  multiplying share price at issue by shares outstanding. 
C)  the difference between book values of assets and liabilities. 
D)  the difference between market values of assets and liabilities.

Exam 7: Valuing Stocks

Firms having a higher expected return have a higher:

Market efficiency implies that security prices impound new information quickly.

Lincoln and Donovan's will pay a dividend of $5 per share in year 1.It sells at $60 a share,and firms in the same industry provide an expected rate of return of 14 percent.What must be the expected growth rate of the company's dividend?

Explain why the market value of common stock often differs from its liquidation value or its book value.

Investors are willing to purchase stocks having high P/E ratios because:

When investors are not capable of making superior investment decisions on a continual basis based on past prices,public or private information,the market is said to be:

In a valuation of a non-constant dividend growth stock,the terminal value represents the:

Which of the following should increase the firm's sustainable growth rate?

LookGood,Inc.has just announced the bad news that its earnings have dropped by 30 percent.In fact,its investors had anticipated even worse results (a decrease of 40 percent).As a result,LookGood's stock price:

The dividend discount model should not be used to value stocks in which the dividend does not grow.

A positive value for PVGO suggests that the firm has:

The intent of technical analysis is to discover patterns in past stock prices.

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year,what is the stock's current price?

An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return.Which of the following seems most likely?

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

In general,if a firm has positive present value of growth opportunities,then its price-earnings ratio:

Which of the following is a characteristic of secondary markets for common stock?

Security prices are said to follow a "random walk," which means that:

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share,has an expected dividend of $2.50,and a required return of 20 percent?

The book value of a firm's equity is determined by:

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