Question 1

According to the dividend discount model, a stock's price today depends on the investor's horizon for holding the stock.

Accepted Answer

A) True 
 B)False

Question 2

A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14%.What might investors expect to pay for the stock one year from now?

Accepted Answer

A) $82.20 
B) $86.20 
C) $87.20 
D) $91.20 Expected return = 
A) $82.20 
B) $86.20 
C) $87.20 
D) $91.20 Expected return =

Question 3

Firms with valuable intangible assets are more likely to show a(n):

Accepted Answer

A) Excess of book value over market value of equity 
B) High going-concern value 
C) Low liquidation value 
D) Low P/E ratio 
A) Excess of book value over market value of equity 
B) High going-concern value 
C) Low liquidation value 
D) Low P/E ratio

Question 4

How can an analyst be credible in stating that the value of a stock is equal to the discounted value of all future dividends when a company may pay dividends indefinitely and it is virtually impossible to predict dividends beyond some reasonable horizon?

Accepted Answer

At most reasonable discount rates for co

Question 5

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 on 
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 on 
D) Highest value that the stock will attain

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

If the liquidation value of a corporation exceeds the market value of the equity, then the:

Accepted Answer

A) Firm has no value as a going concern 
B) Firm's stock will sell for book value 
C) Firm is not taking advantage of available growth opportunities 
D) Dividend payout ratio has been too high 
A) Firm has no value as a going concern 
B) Firm's stock will sell for book value 
C) Firm is not taking advantage of available growth opportunities 
D) Dividend payout ratio has been too high

Question 8

The dividend discount model indicate that the value of a stock is the present value of the dividends it will pay over the investor's horizon plus the present value of the expected stock price at the end of that horizon.

Accepted Answer

A) True 
 B)False

Question 9

The value of common stock will likely decrease if:

Accepted Answer

A) The investment horizon decreases 
B) The growth rate of dividends increases 
C) The discount rate increases 
D) Dividends are discounted back to the present 
A) The investment horizon decreases 
B) The growth rate of dividends increases 
C) The discount rate increases 
D) Dividends are discounted back to the present

Question 10

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

Question 11

If next year's dividend is forecast to be $5.00, the constant growth rate is 4 percent, and the discount rate is 16 percent, then the current stock price should be:

Accepted Answer

A) $31.25 
B) $40.00 
C) $41.67 
D) $43.33 Po = 
A) $31.25 
B) $40.00 
C) $41.67 
D) $43.33 Po =

Question 12

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

Accepted Answer

A) True 
 B)False

Question 13

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

Question 14

The dividend discount model does not hold for investors who have a preference for capital gains.

Accepted Answer

A) True 
 B)False

Question 15

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 A and B 
D) Neither A nor B 
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 A and B 
D) Neither A nor B

Question 16

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 17

Show numerically that investment horizon has no bearing on current stock price.For your illustration assume investment horizons of three versus five years and the following facts: the stock is correctly priced at $40.00, has a required return of 17 percent, a growth rate of 7 percent, and has just paid a $3.74 dividend.

Accepted Answer

Note: The variation between $40.01 and $

Question 18

How do you estimate Expected Rates of Return in the Constant-Growth Dividend Discount Model?

Accepted Answer

In constant-growth business situations,

Question 19

What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20 percent, and a constant dividend growth rate of 6 percent?

Accepted Answer

A) $19.23 
B) $25.00 
C) $35.71 
D) $37.86 P = $5(1.06)/(.20 - .06)
P = 5.30/.14 
A) $19.23 
B) $25.00 
C) $35.71 
D) $37.86 P = $5(1.06)/(.20 - .06)
P = 5.30/.14

Question 20

Assuming all of the following firms have a required return of 14 percent, which would you expect to have a positive present value of growth opportunities?

Accepted Answer

A) A firm with a P/E ratio of 9 
B) A firm with a P/E ratio of 6 
C) A firm with an E/P ratio of 20 percent 
D) None of the above firms are expected to have positive PVGO Required return > E/P ratio if PVGO > 0 
A) A firm with a P/E ratio of 9 
B) A firm with a P/E ratio of 6 
C) A firm with an E/P ratio of 20 percent 
D) None of the above firms are expected to have positive PVGO Required return > E/P ratio if PVGO > 0

Exam 7: Valuing Stocks

According to the dividend discount model, a stock's price today depends on the investor's horizon for holding the stock.

A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14%.What might investors expect to pay for the stock one year from now?

Firms with valuable intangible assets are more likely to show a(n):

How can an analyst be credible in stating that the value of a stock is equal to the discounted value of all future dividends when a company may pay dividends indefinitely and it is virtually impossible to predict dividends beyond some reasonable horizon?

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

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

If the liquidation value of a corporation exceeds the market value of the equity, then the:

The dividend discount model indicate that the value of a stock is the present value of the dividends it will pay over the investor's horizon plus the present value of the expected stock price at the end of that horizon.

The value of common stock will likely decrease if:

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

If next year's dividend is forecast to be $5.00, the constant growth rate is 4 percent, and the discount rate is 16 percent, then the current stock price should be:

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

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?

The dividend discount model does not hold for investors who have a preference for capital gains.

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

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:

How do you estimate Expected Rates of Return in the Constant-Growth Dividend Discount Model?

What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20 percent, and a constant dividend growth rate of 6 percent?

Assuming all of the following firms have a required return of 14 percent, which would you expect to have a positive present value of growth opportunities?

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 Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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