Question 1

The expected return on a common stock is equal to:

Accepted Answer

A)  [(1 + dividend yield) × (1 + capital appreciation rate)] - 1. 
B)  the capital appreciation rate + dividend yield. 
C)  (1 + capital appreciation rate)/(1 + dividend yield). 
D) the capital appreciation rate - dividend yield. 
A)  [(1 + dividend yield) × (1 + capital appreciation rate)] - 1. 
B)  the capital appreciation rate + dividend yield. 
C)  (1 + capital appreciation rate)/(1 + dividend yield). 
D) the capital appreciation rate - dividend yield.

Question 2

What rate of return is expected from a stock that sells for $30 per share, pays $1.54 annually in dividends, and is expected to sell for $32.80 per share in one year?

Accepted Answer

A)  15.03% 
B)  14.28% 
C)  14.09% 
D) 14.47% 
A)  15.03% 
B)  14.28% 
C)  14.09% 
D) 14.47%

Question 3

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 4

How can an analyst feel comfortable 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

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 6

What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth, and has a required return of 12.5%?

Accepted Answer

A)  $0 
B)  $4.86 
C)  $34.56 
D) $30.24 
A)  $0 
B)  $4.86 
C)  $34.56 
D) $30.24

Question 7

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

Accepted Answer

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

Question 8

Strong-form market efficiency implies that one could earn above-average returns by examining the history of a firm's stock price.

Accepted Answer

A) True 
 B)False

Question 9

In a valuation of a nonconstant 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 10

If security prices follow a random walk, then on any particular day the odds are that an increase or decrease in price is equally likely.

Accepted Answer

A) True 
 B)False

Question 11

If a firm unexpectedly raises its dividend permanently and by a substantial amount, the firm's stock price:

Accepted Answer

A)  should rise, given dividend discount models. 
B)  should decline, given discounted cash flow analysis. 
C)  will remain constant, due to market efficiency. 
D) remain constant, due to random-walk behavior. 
A)  should rise, given dividend discount models. 
B)  should decline, given discounted cash flow analysis. 
C)  will remain constant, due to market efficiency. 
D) remain constant, due to random-walk behavior.

Question 12

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 13

Which one of the following situations is most likely to occur today for a stock that went down in price yesterday?

Accepted Answer

A)  The stock will increase in price. 
B)  The stock will decrease in price. 
C)  The stock has a 30% chance of decreasing in price. 
D) The stock has no predictable price-change pattern. 
A)  The stock will increase in price. 
B)  The stock will decrease in price. 
C)  The stock has a 30% chance of decreasing in price. 
D) The stock has no predictable price-change pattern.

Question 14

The sustainable rate of growth:

Accepted Answer

A)  increases as the dividend payout ratio increases. 
B)  must be moderate over the long-term even if it is high in the short-term. 
C)  assumes the debt-equity ratio will increase at the same rate as the growth rate. 
D) must exceed the required rate of return to be used in the dividend discount model. 
A)  increases as the dividend payout ratio increases. 
B)  must be moderate over the long-term even if it is high in the short-term. 
C)  assumes the debt-equity ratio will increase at the same rate as the growth rate. 
D) must exceed the required rate of return to be used in the dividend discount model.

Question 15

A stock is expected to pay dividends of $1.20 per share in Year 1 and $1.35 per share in Year 2. After that, the dividend is expected to increase by 2.5% annually. What is the current value of the stock at a discount rate of 14.5%?

Accepted Answer

A)  $11.29 
B)  $10.87 
C)  $12.07 
D) $13.39 
A)  $11.29 
B)  $10.87 
C)  $12.07 
D) $13.39

Question 16

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 17

According to random-walk theory, what are the odds that a stock will increase in price after having increased on two consecutive days of trading?

Accepted Answer

A)  0% 
B)  25% 
C)  50% 
D) 100% 
A)  0% 
B)  25% 
C)  50% 
D) 100%

Question 18

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 19

Under which of the following forms of market efficiency would stock prices always reflect fair value?

Accepted Answer

A)  Weak-form efficiency 
B)  Semistrong-form efficiency 
C)  Strong-form efficiency 
D) Semiweak-form efficiency 
A)  Weak-form efficiency 
B)  Semistrong-form efficiency 
C)  Strong-form efficiency 
D) Semiweak-form efficiency

Question 20

A stock offers an expected dividend of $3.50, has a required return of 14%, and has historically exhibited a growth rate of 6%. 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

Exam 7: Valuing Stocks

The expected return on a common stock is equal to:

What rate of return is expected from a stock that sells for $30 per share, pays $1.54 annually in dividends, and is expected to sell for $32.80 per share in one year?

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

How can an analyst feel comfortable 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?

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 $4.32 annual dividend with no prospects of growth, and has a required return of 12.5%?

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

Strong-form market efficiency implies that one could earn above-average returns by examining the history of a firm's stock price.

In a valuation of a nonconstant dividend growth stock, the terminal value represents the:

If security prices follow a random walk, then on any particular day the odds are that an increase or decrease in price is equally likely.

If a firm unexpectedly raises its dividend permanently and by a substantial amount, the firm's stock price:

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.

Which one of the following situations is most likely to occur today for a stock that went down in price yesterday?

The sustainable rate of growth:

A stock is expected to pay dividends of $1.20 per share in Year 1 and $1.35 per share in Year 2. After that, the dividend is expected to increase by 2.5% annually. What is the current value of the stock at a discount rate of 14.5%?

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

According to random-walk theory, what are the odds that a stock will increase in price after having increased on two consecutive days of trading?

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

Under which of the following forms of market efficiency would stock prices always reflect fair value?

A stock offers an expected dividend of $3.50, has a required return of 14%, and has historically exhibited a growth rate of 6%. 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?

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

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

Filters