Question 1

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.

Question 2

Technical analysts are most likely to be successful in a market that is considered to be:

Accepted Answer

A)  semistrong-form efficient. 
B)  strong-form efficient. 
C)  less than weak-form efficient. 
D) a random walk. 
A)  semistrong-form efficient. 
B)  strong-form efficient. 
C)  less than weak-form efficient. 
D) a random walk.

Question 3

A positive value for PVGO suggests that the firm has:

Accepted Answer

A)  a positive return on equity. 
B)  a positive plowback ratio. 
C)  investment opportunities with superior returns. 
D) a high rate of constant growth. 
A)  a positive return on equity. 
B)  a positive plowback ratio. 
C)  investment opportunities with superior returns. 
D) a high rate of constant growth.

Question 4

A stock currently sells for $50 per share, has an expected return of 15%, and an expected capital appreciation rate of 10%. What is the amount of the expected dividend?

Accepted Answer

A)  $2.50 
B)  $2.75 
C)  $3.00 
D) $3.50 
A)  $2.50 
B)  $2.75 
C)  $3.00 
D) $3.50

Question 5

How can you reconcile the fact that whether an investor favors dividends or capital gains, the investor should accept the dividend discount model as a determination of share value?

Accepted Answer

The first fact to be recognized is that

Question 6

When investors are not capable of making superior investment decisions on a continual basis based on past prices or public or private information, the market is said to be:

Accepted Answer

A)  weak-form efficient. 
B)  semistrong-form efficient. 
C)  strong-form efficient. 
D) fundamentally efficient. 
A)  weak-form efficient. 
B)  semistrong-form efficient. 
C)  strong-form efficient. 
D) fundamentally efficient.

Question 7

It is possible to ignore cash dividends that occur far into the future when using a dividend discount model because those dividends:

Accepted Answer

A)  will most likely be paid to a different investor. 
B)  will most likely not be paid. 
C)  have an insignificant present value. 
D) have a minimal, if any, potential rate of growth. 
A)  will most likely be paid to a different investor. 
B)  will most likely not be paid. 
C)  have an insignificant present value. 
D) have a minimal, if any, potential rate of growth.

Question 8

The dividend discount model indicates that the value of a stock is the present value of the dividends it will pay over the investor's horizon, plus the present value of the expected stock price at the end of that horizon.

Accepted Answer

A) True 
 B)False

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 should be the current price of a share of stock if a $5 dividend was just paid, 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

An example that specifically contradicts strong-form market efficiency in U.S. stock markets is that:

Accepted Answer

A)  excess profits are observed in cases of insider trading. 
B)  stock prices follow predictable patterns within each month. 
C)  random-walk behavior is reliable. 
D) fundamental analysts outperform the S&P 500. 
A)  excess profits are observed in cases of insider trading. 
B)  stock prices follow predictable patterns within each month. 
C)  random-walk behavior is reliable. 
D) fundamental analysts outperform the S&P 500.

Question 12

What should you pay for a stock if next year's annual dividend is forecast to be $5.25, the constant-growth rate is 2.85%, and you require a 15.5% rate of return?

Accepted Answer

A)  $31.25 
B)  $38.87 
C)  $41.50 
D) $42.68 
A)  $31.25 
B)  $38.87 
C)  $41.50 
D) $42.68

Question 13

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 market and book values 
A)  Market value 
B)  Book value 
C)  Liquidation value 
D) Both market and book values

Question 14

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

Accepted Answer

A)  change depending on the time horizon selected. 
B)  remain constant regardless of the time horizon selected. 
C)  remain constant regardless of the rate of growth. 
D) always equal the present value of the terminal price. 
A)  change depending on the time horizon selected. 
B)  remain constant regardless of the time horizon selected. 
C)  remain constant regardless of the rate of growth. 
D) always equal the present value of the terminal price.

Question 15

What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of $45, and a constant-growth rate of 12%?

Accepted Answer

A)  $1.80 
B)  $3.60 
C)  $4.50 
D) $7.20 
A)  $1.80 
B)  $3.60 
C)  $4.50 
D) $7.20

Question 16

What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?

Accepted Answer

A)  $27.55 
B)  $30.28 
C)  $26.60 
D) $31.37 
A)  $27.55 
B)  $30.28 
C)  $26.60 
D) $31.37

Question 17

In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.

Accepted Answer

A)  guaranteed; not guaranteed 
B)  guaranteed; guaranteed 
C)  not guaranteed; not guaranteed 
D) not guaranteed; guaranteed 
A)  guaranteed; not guaranteed 
B)  guaranteed; guaranteed 
C)  not guaranteed; not guaranteed 
D) not guaranteed; guaranteed

Question 18

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 19

Market efficiency implies that security prices impound new information quickly.

Accepted Answer

A) True 
 B)False

Question 20

What is the expected constant-growth rate of dividends for a stock with a current price of $87, an expected dividend payment of $5.40 per share, and a required return of 16%?

Accepted Answer

A)  8.48% 
B)  6.25% 
C)  9.79% 
D) 5.23% 
A)  8.48% 
B)  6.25% 
C)  9.79% 
D) 5.23%

Exam 7: Valuing Stocks

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

Technical analysts are most likely to be successful in a market that is considered to be:

A positive value for PVGO suggests that the firm has:

A stock currently sells for $50 per share, has an expected return of 15%, and an expected capital appreciation rate of 10%. What is the amount of the expected dividend?

How can you reconcile the fact that whether an investor favors dividends or capital gains, the investor should accept the dividend discount model as a determination of share value?

When investors are not capable of making superior investment decisions on a continual basis based on past prices or public or private information, the market is said to be:

It is possible to ignore cash dividends that occur far into the future when using a dividend discount model because those dividends:

The dividend discount model indicates that the value of a stock is the present value of the dividends it will pay over the investor's horizon, plus the present value of the expected stock price at the end of that horizon.

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

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

An example that specifically contradicts strong-form market efficiency in U.S. stock markets is that:

What should you pay for a stock if next year's annual dividend is forecast to be $5.25, the constant-growth rate is 2.85%, and you require a 15.5% rate of return?

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

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

What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of $45, and a constant-growth rate of 12%?

What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?

In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.

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%?

Market efficiency implies that security prices impound new information quickly.

What is the expected constant-growth rate of dividends for a stock with a current price of $87, an expected dividend payment of $5.40 per share, and a required return of 16%?

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

In the calculation of rates of return on common stock, dividends are _ and capital gains are .