Question 1

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 2

ABC common stock is expected to have extraordinary growth of 20% per year for 2 years, after which 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 approximate current share price?

Accepted Answer

A)  $31.16 
B)  $33.23 
C)  $37.39 
D) $47.77 
A)  $31.16 
B)  $33.23 
C)  $37.39 
D) $47.77

Question 3

The growth of mature companies is primarily funded by:

Accepted Answer

A)  issuing new shares of stock. 
B)  issuing new debt securities. 
C)  reinvesting company earnings. 
D) increasing accounts payable. 
A)  issuing new shares of stock. 
B)  issuing new debt securities. 
C)  reinvesting company earnings. 
D) increasing accounts payable.

Question 4

How do you estimate expected rates of return in the constant-growth dividend discount model?

Accepted Answer

In constant-growth business situations,

Question 5

Janice has spent hours upon hours analyzing the last five years of financial statements of a firm and has concluded that the firm's stock is currently underpriced. What type of analyst is Janice?

Accepted Answer

A)  Fundamental analyst 
B)  Random-walker analyst 
C)  Technical analyst 
D) Behavioral finance analyst 
A)  Fundamental analyst 
B)  Random-walker analyst 
C)  Technical analyst 
D) Behavioral finance analyst

Question 6

Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20th of the month and selling them on the last day of the month. If this is true, then:

Accepted Answer

A)  the market is only semistrong-form efficient. 
B)  the market violates even weak-form efficiency. 
C)  insiders will be the only investors to profit. 
D) prices follow a random walk. 
A)  the market is only semistrong-form efficient. 
B)  the market violates even weak-form efficiency. 
C)  insiders will be the only investors to profit. 
D) prices follow a random walk.

Question 7

What is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation?

Accepted Answer

A)  Market value of equity 
B)  Book value of equity 
C)  Zero 
D) Shareholders may be required to pay to be liquidated. 
A)  Market value of equity 
B)  Book value of equity 
C)  Zero 
D) Shareholders may be required to pay to be liquidated.

Question 8

The dividend discount model should not be used to value stocks in which the dividend does not grow.

Accepted Answer

A) True 
 B)False

Question 9

Based on the random walk theory, if a stock's price decreased last week, then this week the price:

Accepted Answer

A)  will reverse last week's loss and go up. 
B)  will continue last week's decline. 
C)  will stand still until new information is released. 
D) has an equal chance of going either up or down. 
A)  will reverse last week's loss and go up. 
B)  will continue last week's decline. 
C)  will stand still until new information is released. 
D) has an equal chance of going either up or down.

Question 10

What should be the current price of a stock if the expected dividend is $5, the stock has a required return of 20%, and a constant dividend growth rate of 6%?

Accepted Answer

A)  $19.23 
B)  $25.00 
C)  $35.71 
D) $37.86 
A)  $19.23 
B)  $25.00 
C)  $35.71 
D) $37.86

Question 11

If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock:

Accepted Answer

A)  pays $1 per share per quarter. 
B)  paid $.25 per share per quarter for the past year. 
C)  paid $1 during the past quarter, with no future dividends forecast. 
D) is expected to pay an annual dividend of $1 per share next year. 
A)  pays $1 per share per quarter. 
B)  paid $.25 per share per quarter for the past year. 
C)  paid $1 during the past quarter, with no future dividends forecast. 
D) is expected to pay an annual dividend of $1 per share next year.

Question 12

Suzi owns 100 shares of AB stock. She expects to receive a $238 in dividends next year. She also expects the stock to sell for $46 a share one year from now. What is the intrinsic value of this stock if the dividend payout ratio is 40% and the discount rate is 13.5%?

Accepted Answer

A)  $38.19 
B)  $42.63 
C)  $40.53 
D) $45.77 
A)  $38.19 
B)  $42.63 
C)  $40.53 
D) $45.77

Question 13

If no price change occurs in a stock on the day that it announces its next dividend, it can be assumed that:

Accepted Answer

A)  the stock market is inefficient. 
B)  the dividend was reduced. 
C)  the market was expecting this information. 
D) technical analysts are not following this stock. 
A)  the stock market is inefficient. 
B)  the dividend was reduced. 
C)  the market was expecting this information. 
D) technical analysts are not following this stock.

Question 14

What is the expected constant-growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18%?

Accepted Answer

A)  3.41% 
B)  5.50% 
C)  9.26% 
D) 12.5% 
A)  3.41% 
B)  5.50% 
C)  9.26% 
D) 12.5%

Question 15

Which group of investors is capable of earning consistent, superior profits if financial markets are semistrong-form efficient? Ignore any legal considerations.

Accepted Answer

A)  Technical analysts 
B)  Fundamental analysts 
C)  Company insiders 
D) Mutual fund managers 
A)  Technical analysts 
B)  Fundamental analysts 
C)  Company insiders 
D) Mutual fund managers

Question 16

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 17

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

Accepted Answer

A)  Its stock price will remain constant. 
B)  Its stock price will increase by the sustainable growth rate. 
C)  Its stock price will decline unless the dividend payout ratio is zero. 
D) Its stock price will decline unless the plowback rate exceeds the required return. 
A)  Its stock price will remain constant. 
B)  Its stock price will increase by the sustainable growth rate. 
C)  Its stock price will decline unless the dividend payout ratio is zero. 
D) Its stock price will decline unless the plowback rate exceeds the required return.

Question 18

For a firm that repurchases its stock, the dividend discount model might best be applied to the firm's:

Accepted Answer

A)  dividends plus its repurchases. 
B)  repurchases rather than its dividends. 
C)  free cash flows. 
D) pre-repurchase earnings per share. 
A)  dividends plus its repurchases. 
B)  repurchases rather than its dividends. 
C)  free cash flows. 
D) pre-repurchase earnings per share.

Question 19

If the market is efficient, stock prices should be expected to react only to new information that is released.

Accepted Answer

A) True 
 B)False

Question 20

What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate for 3 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)  $67.60 
B)  $62.08 
C)  $68.64 
D) $73.44 
A)  $67.60 
B)  $62.08 
C)  $68.64 
D) $73.44

Exam 7: Valuing Stocks

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

ABC common stock is expected to have extraordinary growth of 20% per year for 2 years, after which 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 approximate current share price?

The growth of mature companies is primarily funded by:

How do you estimate expected rates of return in the constant-growth dividend discount model?

Janice has spent hours upon hours analyzing the last five years of financial statements of a firm and has concluded that the firm's stock is currently underpriced. What type of analyst is Janice?

Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20th of the month and selling them on the last day of the month. If this is true, then:

What is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation?

The dividend discount model should not be used to value stocks in which the dividend does not grow.

Based on the random walk theory, if a stock's price decreased last week, then this week the price:

What should be the current price of a stock if the expected dividend is $5, the stock has a required return of 20%, and a constant dividend growth rate of 6%?

If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock:

Suzi owns 100 shares of AB stock. She expects to receive a $238 in dividends next year. She also expects the stock to sell for $46 a share one year from now. What is the intrinsic value of this stock if the dividend payout ratio is 40% and the discount rate is 13.5%?

If no price change occurs in a stock on the day that it announces its next dividend, it can be assumed that:

What is the expected constant-growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18%?

Which group of investors is capable of earning consistent, superior profits if financial markets are semistrong-form efficient? Ignore any legal considerations.

The value of common stock will likely decrease if:

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

For a firm that repurchases its stock, the dividend discount model might best be applied to the firm's:

If the market is efficient, stock prices should be expected to react only to new information that is released.

What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate for 3 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?

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

Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20^th of the month and selling them on the last day of the month. If this is true, then: