Question 1

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 2

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 $1 dividend per quarter = $4 annually 
A) 2.5 percent 
B) 4.0 percent 
C) 10.0 percent 
D) 15.0 percent $1 dividend per quarter = $4 annually

Question 3

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

Accepted Answer

A) $31.16 
B) $33.23 
C) $37.42 
D) $47.77 Po = 
A) $31.16 
B) $33.23 
C) $37.42 
D) $47.77 Po =

Question 4

If the liquidation value of a firm is negative, then:

Accepted Answer

A) The firm's debt exceeds the market value of assets 
B) The firm's debt exceeds the book value of equity 
C) The book value of assets exceeds the firm's debt 
D) The market value of assets exceeds the firm's debt 
A) The firm's debt exceeds the market value of assets 
B) The firm's debt exceeds the book value of equity 
C) The book value of assets exceeds the firm's debt 
D) The market value of assets exceeds the firm's debt

Question 5

When valuing stock with the dividend discount model, the present value of future dividends will:

Accepted Answer

A) Change depending upon the time horizon selected 
B) Remain constant regardless of the time horizon selected 
C) Remain constant regardless of growth rate 
D) Always equal the present value of the terminal price 
A) Change depending upon the time horizon selected 
B) Remain constant regardless of the time horizon selected 
C) Remain constant regardless of growth rate 
D) Always equal the present value of the terminal price

Question 6

According to the constant dividend growth model, a stock price should equal the:

Accepted Answer

A) Sum of all future dividends 
B) Sum of dividends to be received within the investor's holding period 
C) Dividend yield plus the constant growth rate 
D) Sum of all discounted future dividends 
A) Sum of all future dividends 
B) Sum of dividends to be received within the investor's holding period 
C) Dividend yield plus the constant growth rate 
D) Sum of all discounted future dividends

Question 7

What is the expected dividend to Be paid in three years if yesterday's dividend was $6.00, dividends are expected to grow at a constant 6 percent annual rate, and the firm has a 10 percent expected return?

Accepted Answer

A) $6.75 
B) $7.15 
C) $7.80 
D) $9.37 D3 = Do x (1 + g)3
= $6.00 (1.06)3 
A) $6.75 
B) $7.15 
C) $7.80 
D) $9.37 D3 = Do x (1 + g)3
= $6.00 (1.06)3

Question 8

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 9

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 10

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 11

What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend growth rate of 7%?

Accepted Answer

A) $37.45 
B) $37.80 
C) $40.25 
D) $43.05 
A) $37.45 
B) $37.80 
C) $40.25 
D) $43.05

Question 12

What is the return on equity for a firm that has a constant dividend growth rate of 7 percent and a dividend payout ratio of 60 percent?

Accepted Answer

A) 2.80 percent 
B) 4.20 percent 
C) 11.67 percent 
D) 17.50 percent 7% = ROE x plowback ratio
= ROE x (1 - .6)
= ROE x .4 
A) 2.80 percent 
B) 4.20 percent 
C) 11.67 percent 
D) 17.50 percent 7% = ROE x plowback ratio
= ROE x (1 - .6)
= ROE x .4

Question 13

How can we claim that the Dividend Discount Model works when many actual investors may be seeking capital gains and planning to hold their shares for just a few years?

Accepted Answer

The value of a share of common stock equ

Question 14

A stock offers an expected dividend of $3.50, has a required return of 14 percent, and has historically exhibited a growth rate of 6 percent.Its current price is $35.00 and shows no tendency to change.How can you explain this price based on the constant growth dividend discount model?

Accepted Answer

The constant growth dividend discount mo

Question 15

A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14 percent.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 16

The dividend discount model states that today's stock price equals the present value of all expected future dividends.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following describes a seasoned offering?

Accepted Answer

A) An IPO of common stock for a well-known firm 
B) An IPO that is offered during the best buying season 
C) An additional equity issue from a publicly traded firm 
D) Any shares traded in the secondary market are seasoned offerings 
A) An IPO of common stock for a well-known firm 
B) An IPO that is offered during the best buying season 
C) An additional equity issue from a publicly traded firm 
D) Any shares traded in the secondary market are seasoned offerings

Question 18

According to the dividend discount model, the current value of a stock is equal to the:

Accepted Answer

A) Present value of all expected future dividends 
B) Sum of all future expected dividends 
C) Next expected dividend, discounted to the present 
D) Discounted value of all dividends growing at a constant rate 
A) Present value of all expected future dividends 
B) Sum of all future expected dividends 
C) Next expected dividend, discounted to the present 
D) Discounted value of all dividends growing at a constant rate

Question 19

What is meant by the term true depreciation?

Accepted Answer

A) Depreciation expense as reported on the balance sheet 
B) Depreciation expense according to generally accepted accounting principles 
C) The amount necessary to overcome deterioration of corporate assets 
D) Depreciation expense using only straight-line depreciation methods 
A) Depreciation expense as reported on the balance sheet 
B) Depreciation expense according to generally accepted accounting principles 
C) The amount necessary to overcome deterioration of corporate assets 
D) Depreciation expense using only straight-line depreciation methods

Question 20

Which of the following is least likely to account for an excess of market value over book value of equity?

Accepted Answer

A) Inaccurate depreciation methods 
B) High rate of return on assets 
C) The presence of growth opportunities 
D) Valuable off-balance sheet assets 
A) Inaccurate depreciation methods 
B) High rate of return on assets 
C) The presence of growth opportunities 
D) Valuable off-balance sheet assets

Exam 7: Valuing Stocks

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

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?

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

If the liquidation value of a firm is negative, then:

When valuing stock with the dividend discount model, the present value of future dividends will:

According to the constant dividend growth model, a stock price should equal the:

What is the expected dividend to Be paid in three years if yesterday's dividend was $6.00, dividends are expected to grow at a constant 6 percent annual rate, and the firm has a 10 percent expected return?

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

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?

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

What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend growth rate of 7%?

What is the return on equity for a firm that has a constant dividend growth rate of 7 percent and a dividend payout ratio of 60 percent?

How can we claim that the Dividend Discount Model works when many actual investors may be seeking capital gains and planning to hold their shares for just a few years?

A stock offers an expected dividend of $3.50, has a required return of 14 percent, and has historically exhibited a growth rate of 6 percent.Its current price is $35.00 and shows no tendency to change.How can you explain this price based on the constant growth dividend discount model?

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

The dividend discount model states that today's stock price equals the present value of all expected future dividends.

Which of the following describes a seasoned offering?

According to the dividend discount model, the current value of a stock is equal to the:

What is meant by the term true depreciation?

Which of the following is least likely to account for an excess of market value over book value of equity?

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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