Question 1

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

Question 2

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 3

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

Accepted Answer

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

Question 4

What would be the expected price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00?

Accepted Answer

A) $61.60 
B) $62.08 
C) $68.62 
D) $79.44 Po = 
A) $61.60 
B) $62.08 
C) $68.62 
D) $79.44 Po =

Question 5

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 inta

Question 6

What would be the expected price of a stock when dividends are expected to grow at a 25 percent rate for three years, then grow at a constant rate of 5 percent, if the stock's required return is 13 percent and next year's dividend will be $4.00?

Accepted Answer

A) $61.60 
B) $62.08 
C) $68.62 
D) $79.44 Po = 
A) $61.60 
B) $62.08 
C) $68.62 
D) $79.44 Po =

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Which of the following values treats the firm as a going concern?

Accepted Answer

A) Market value 
B) Book value 
C) Liquidation value 
D) Both (b) and (c) 
A) Market value 
B) Book value 
C) Liquidation value 
D) Both (b) and (c)

Question 9

Reinvesting earnings into a firm will not increase the stock price unless:

Accepted Answer

A) The new paradigm of stock pricing is maintained 
B) True depreciation is less than reported depreciation 
C) The firm's dividends are growing also 
D) The ROE of new investments exceeds the firm's required return 
A) The new paradigm of stock pricing is maintained 
B) True depreciation is less than reported depreciation 
C) The firm's dividends are growing also 
D) The ROE of new investments exceeds the firm's required return

Question 10

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% $25 = 2/(r - .06) 
A) 5% 
B) 10% 
C) 14% 
D) 22% $25 = 2/(r - .06)

Question 11

Which of the following is least likely to contribute to going concern value?

Accepted Answer

A) High liquidation value 
B) Extra earning power 
C) Future investment opportunities 
D) Intangible assets 
A) High liquidation value 
B) Extra earning power 
C) Future investment opportunities 
D) Intangible assets

Question 12

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 13

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 14

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8 percent and the firm's ROE is 20 percent?

Accepted Answer

A) 8 percent 
B) 12 percent 
C) 20 percent 
D) 40 percent 8% = 20% x plowback 
A) 8 percent 
B) 12 percent 
C) 20 percent 
D) 40 percent 8% = 20% x plowback

Question 15

An excess of market value over the book value of equity can be attributed to going concern value.

Accepted Answer

A) True 
 B)False

Question 16

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 P = $4/.125 
A) $8.50 
B) $25.00 
C) $32.00 
D) $50.00 P = $4/.125

Question 17

Which of the following is more likely to be responsible for a firm having low PVGO?

Accepted Answer

A) ROE exceeds required return 
B) Plowback is very high 
C) Payout is very high 
D) Book value of equity is low 
A) ROE exceeds required return 
B) Plowback is very high 
C) Payout is very high 
D) Book value of equity is low

Question 18

If next year's dividend is forecast to be $5.00, the constant growth rate is 4%, and the discount rate is 16%, 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 19

What price would you expect to pay for a stock with 13 percent required rate of return, 4 percent rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?

Accepted Answer

A) $27.78 
B) $30.28 
C) $31.10 
D) $31.39 Po = Do + 
A) $27.78 
B) $30.28 
C) $31.10 
D) $31.39 Po = Do +

Question 20

The study of published financial information on a company in order to make investment decisions is known as:

Accepted Answer

A) Technical analysis 
B) Fundamental analysis 
C) Efficiency analysis 
D) Random pricing analysis 
A) Technical analysis 
B) Fundamental analysis 
C) Efficiency analysis 
D) Random pricing analysis

Exam 7: Valuing Stocks

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

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.

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

What would be the expected price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00?

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

What would be the expected price of a stock when dividends are expected to grow at a 25 percent rate for three years, then grow at a constant rate of 5 percent, if the stock's required return is 13 percent and next year's dividend will be $4.00?

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

Which of the following values treats the firm as a going concern?

Reinvesting earnings into a firm will not increase the stock price unless:

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?

Which of the following is least likely to contribute to going concern value?

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

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

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8 percent and the firm's ROE is 20 percent?

An excess of market value over the book value of equity can be attributed to going concern value.

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?

Which of the following is more likely to be responsible for a firm having low PVGO?

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

What price would you expect to pay for a stock with 13 percent required rate of return, 4 percent rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?

The study of published financial information on a company in order to make investment decisions is known as:

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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