Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

If the general sentiment of investors is pessimistic, stock prices are more apt to:

Accepted Answer

A)  increase significantly. 
B)  increase slightly. 
C)  remain constant. 
D) decline. 
A)  increase significantly. 
B)  increase slightly. 
C)  remain constant. 
D) decline.

Question 3

Studies indicate that stocks of firms with the best earnings news outperform the stocks of firms with the worst earnings news for at least six months. What type of market anomaly is this?

Accepted Answer

A)  New-issue puzzle 
B)  Attitudes towards risk behavior 
C)  Earnings announcement puzzle 
D) Probabilities belief 
A)  New-issue puzzle 
B)  Attitudes towards risk behavior 
C)  Earnings announcement puzzle 
D) Probabilities belief

Question 4

Numerically illustrate the breakdown of the stock price between a firm's assets that are already in place and its present value of growth opportunities. Assume next year's expected earnings are $5.00 a share, the required rate of return is 13%, the return on equity is 17%, and the plowback ratio is 45%.

Accepted Answer

P₀ = $5/(.13 - 0) = $38.46 g =

Question 5

Jefferson's recently paid an annual dividend of $1.31 per share. The dividend is expected to decrease by 4% each year. How much should you pay for this stock today if your required return is 16%?

Accepted Answer

A)  $6.29 
B)  $5.74 
C)  $10.48 
D) $11.57 
A)  $6.29 
B)  $5.74 
C)  $10.48 
D) $11.57

Question 6

A firm expects earnings next year of $10.00 per share, has a plowback ratio of 35%, a return on equity of 20%, and a required return of 15%. Mathematically illustrate the computation of the current stock value and next year's expected stock value, assuming that growth is constant. Also illustrate how the earnings plowback leads to the price increase.

Accepted Answer

DIV₁ = $10 × (1 - .35) = $6.50 g = .20 ×

Question 7

Which one 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

Question 8

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 stocks offer the lowest rates of return. 
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 stocks offer the lowest rates of return.

Question 9

Dani's just paid an annual dividend of $6 per share. What is the dividend expected to be in five years if the growth rate is 4.2%?

Accepted Answer

A)  $7.07 
B)  $7.37 
C)  $7.14 
D) $7.44 
A)  $7.07 
B)  $7.37 
C)  $7.14 
D) $7.44

Question 10

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%, what is the stock's current price?

Accepted Answer

A)  $24.30 
B)  $18.00 
C)  $22.22 
D) $40.50 
A)  $24.30 
B)  $18.00 
C)  $22.22 
D) $40.50

Question 11

If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividend be if dividends grow annually at a constant rate of 6%?

Accepted Answer

A)  $1.33 
B)  $1.49 
C)  $1.58 
D) $1.67 
A)  $1.33 
B)  $1.49 
C)  $1.58 
D) $1.67

Question 12

The terminal value of a share of stock:

Accepted Answer

A)  is similar to the maturity value of a bond. 
B)  refers to the share value at the end of an investor's holding period. 
C)  is the value received by investors upon liquidation of the firm. 
D) is the price for shares traded through a dealers' market. 
A)  is similar to the maturity value of a bond. 
B)  refers to the share value at the end of an investor's holding period. 
C)  is the value received by investors upon liquidation of the firm. 
D) is the price for shares traded through a dealers' market.

Question 13

According to the semistrong form of market efficiency, when new information becomes available in the market, the related stock prices will:

Accepted Answer

A)  remain unchanged because they already reflect this information. 
B)  accurately and rapidly adjust to include this new information. 
C)  adjust to accurately reflect this new information over the course of the next few days. 
D) most likely increase because all new information has a positive effect on stock prices. 
A)  remain unchanged because they already reflect this information. 
B)  accurately and rapidly adjust to include this new information. 
C)  adjust to accurately reflect this new information over the course of the next few days. 
D) most likely increase because all new information has a positive effect on stock prices.

Question 14

What is the required return for a stock that has a constant-growth rate of 3.3%, a price of $25, an expected dividend of $2.10, and a P/E ratio of 14.4?

Accepted Answer

A)  12.40% 
B)  10.92% 
C)  11.70% 
D) 11.26% 
A)  12.40% 
B)  10.92% 
C)  11.70% 
D) 11.26%

Question 15

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% 
B)  4.0% 
C)  10.0% 
D) 5.0% 
A)  2.5% 
B)  4.0% 
C)  10.0% 
D) 5.0%

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

The required return on an equity security is comprised of a:

Accepted Answer

A)  dividend yield and ROE. 
B)  current yield and a terminal value. 
C)  sustainable growth rate and a plowback yield. 
D) dividend yield and a capital gains yield. 
A)  dividend yield and ROE. 
B)  current yield and a terminal value. 
C)  sustainable growth rate and a plowback yield. 
D) dividend yield and a capital gains yield.

Question 18

Which of the following is true for a firm having a stock price of $42, an expected dividend of $3, and a sustainable growth rate of 8%?

Accepted Answer

A)  It has a required return of 15.14%. 
B)  It has a dividend yield of 7.35%. 
C)  The stock price is expected to be $45 next year. 
D) It has a capital appreciation rate of 7.14%. 
A)  It has a required return of 15.14%. 
B)  It has a dividend yield of 7.35%. 
C)  The stock price is expected to be $45 next year. 
D) It has a capital appreciation rate of 7.14%.

Question 19

What are some common errors investors make in assessing the probability of uncertain outcomes? How did such errors reinforce the dot.com boom?

Accepted Answer

Psychologists have found that when judgi

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 7: Valuing Stocks

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

If the general sentiment of investors is pessimistic, stock prices are more apt to:

Studies indicate that stocks of firms with the best earnings news outperform the stocks of firms with the worst earnings news for at least six months. What type of market anomaly is this?

Jefferson's recently paid an annual dividend of $1.31 per share. The dividend is expected to decrease by 4% each year. How much should you pay for this stock today if your required return is 16%?

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

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

Dani's just paid an annual dividend of $6 per share. What is the dividend expected to be in five years if the growth rate is 4.2%?

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%, what is the stock's current price?

If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividend be if dividends grow annually at a constant rate of 6%?

The terminal value of a share of stock:

According to the semistrong form of market efficiency, when new information becomes available in the market, the related stock prices will:

What is the required return for a stock that has a constant-growth rate of 3.3%, a price of $25, an expected dividend of $2.10, and a P/E ratio of 14.4?

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?

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

The required return on an equity security is comprised of a:

Which of the following is true for a firm having a stock price of $42, an expected dividend of $3, and a sustainable growth rate of 8%?

What are some common errors investors make in assessing the probability of uncertain outcomes? How did such errors reinforce the dot.com boom?

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

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

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