Question 1

How will the price of a stock be affected if the dividend growth rate is decreased?

Accepted Answer

A)  increase 
B)  either increase or no change 
C)  no change 
D)  either decrease or no change 
E)  decrease 
A)  increase 
B)  either increase or no change 
C)  no change 
D)  either decrease or no change 
E)  decrease

Question 2

The constant perpetual growth model is applicable primarily to those firms which:

Accepted Answer

A)  adhere to a residual dividend policy. 
B)  pay dividends that increase at a steady rate. 
C)  have irregular dividend growth rates. 
D)  maintain a constant dividend payout ratio. 
E)  have multiple rates of dividend growth. 
A)  adhere to a residual dividend policy. 
B)  pay dividends that increase at a steady rate. 
C)  have irregular dividend growth rates. 
D)  maintain a constant dividend payout ratio. 
E)  have multiple rates of dividend growth.

Question 3

Upwind Tours just announced that it will pay an annual dividend of $3.60 a share one year from now.Two years from now,the company expects to pay a $28 a share liquidating dividend.After that,the company will cease operations.What is the current value per share at a discount rate of 12.5 percent?

Accepted Answer

A)  $23.88 
B)  $24.97 
C)  $25.32 
D)  $28.09 
E)  $29.16 
A)  $23.88 
B)  $24.97 
C)  $25.32 
D)  $28.09 
E)  $29.16

Question 4

Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio?

Accepted Answer

A)  two-stage growth 
B)  residual income 
C)  perpetual dividend growth 
D)  supernormal growth 
E)  perpetual cash flow 
A)  two-stage growth 
B)  residual income 
C)  perpetual dividend growth 
D)  supernormal growth 
E)  perpetual cash flow

Question 5

Which one of the following statements concerning beta is correct?

Accepted Answer

A)  The beta assigned to the overall market is zero. 
B)  A stock with a beta of 1.2 earns a higher risk premium than a stock with a beta of 1.3. 
C)  A stock with a beta of 0.5 has 50 percent more risk than the overall market. 
D)  Beta is applied to the T-bill rate when computing the discount rate used for the dividend discount models. 
E)  The higher the beta, the higher the discount rate used for the dividend discount models. 
A)  The beta assigned to the overall market is zero. 
B)  A stock with a beta of 1.2 earns a higher risk premium than a stock with a beta of 1.3. 
C)  A stock with a beta of 0.5 has 50 percent more risk than the overall market. 
D)  Beta is applied to the T-bill rate when computing the discount rate used for the dividend discount models. 
E)  The higher the beta, the higher the discount rate used for the dividend discount models.

Question 6

Based on the dividend discount model,an increase in which of the following will lower the current value of a stock?
I.amount of the next dividend
II.dividend growth rate
III.discount rate

Accepted Answer

A)  I only 
B)  III only 
C)  I and II only 
D)  II and III only 
E)  I, II, and III 
A)  I only 
B)  III only 
C)  I and II only 
D)  II and III only 
E)  I, II, and III

Question 7

The Grand Isle has 12,000 shares of stock outstanding at a market price of $31.60 per share.The book value per share is $12.08.The firm has earnings per share of $1.86 and a dividend payout ratio of 0.40.What is the firm's sustainable rate of growth?

Accepted Answer

A)  8.88 percent 
B)  9.24 percent 
C)  9.71 percent 
D)  10.57 percent 
E)  10.86 percent 
A)  8.88 percent 
B)  9.24 percent 
C)  9.71 percent 
D)  10.57 percent 
E)  10.86 percent

Question 8

Which one of the following is used as an indicator that a firm has good-quality earnings?

Accepted Answer

A)  declining price-earnings ratios 
B)  constant price-earnings ratios 
C)  cash flow per share that exceeds earnings per share 
D)  earnings per share that exceed cash flow per share 
E)  positive earnings per share 
A)  declining price-earnings ratios 
B)  constant price-earnings ratios 
C)  cash flow per share that exceeds earnings per share 
D)  earnings per share that exceed cash flow per share 
E)  positive earnings per share

Question 9

Western Adventures has earnings per share of $2.30 and dividends per share of $1.25.The total equity of the firm is $850,000.There are 40,000 shares of stock outstanding.What is the sustainable rate of growth?

Accepted Answer

A)  2.14 percent 
B)  3.31 percent 
C)  4.94 percent 
D)  5.32 percent 
E)  6.59 percent 
A)  2.14 percent 
B)  3.31 percent 
C)  4.94 percent 
D)  5.32 percent 
E)  6.59 percent

Question 10

What is the percentage of a firm's net income which is reinvested in the firm to support future growth called?

Accepted Answer

A)  payout ratio 
B)  distribution percentage 
C)  retention ratio 
D)  equity ratio 
E)  equity reinvestment 
A)  payout ratio 
B)  distribution percentage 
C)  retention ratio 
D)  equity ratio 
E)  equity reinvestment

Question 11

Long Life Floors just paid an annual dividend of $0.82 a share and plans on increasing future dividends by 2 percent annually.The discount rate is 15 percent.What will the value of this stock be 5 years from today?

Accepted Answer

A)  $6.96 
B)  $7.04 
C)  $7.10 
D)  $7.18 
E)  $7.25 
A)  $6.96 
B)  $7.04 
C)  $7.10 
D)  $7.18 
E)  $7.25

Question 12

Which one of the following is the most common definition of cash flow as used in the price-cash flow ratio?

Accepted Answer

A)  net income minus dividends 
B)  net income plus depreciation 
C)  net income minus depreciation plus taxes 
D)  earnings before interest and taxes plus depreciation 
E)  earnings before interest and taxes 
A)  net income minus dividends 
B)  net income plus depreciation 
C)  net income minus depreciation plus taxes 
D)  earnings before interest and taxes plus depreciation 
E)  earnings before interest and taxes

Question 13

A firm has paid annual dividends of $1.34,$1.43,$1.55,$1.62,$1.64,and $1.75 per share over the past 6 years,respectively.What is the geometric average growth rate for these dividends?

Accepted Answer

A)  5.19 percent 
B)  5.28 percent 
C)  5.48 percent 
D)  5.57 percent 
E)  5.74 percent 
A)  5.19 percent 
B)  5.28 percent 
C)  5.48 percent 
D)  5.57 percent 
E)  5.74 percent

Question 14

Best Value Outlet recently announced that it intends to pay dividends of $0.40,$0.60,$0.75,and $1.00 per share over the next four years,respectively.After that,the plan is to increase the dividend by 3.5 percent annually.What is the current value of this stock if the applicable discount rate is 13.5 percent?

Accepted Answer

A)  $6.44 
B)  $7.83 
C)  $8.17 
D)  $9.55 
E)  $13.10 
A)  $6.44 
B)  $7.83 
C)  $8.17 
D)  $9.55 
E)  $13.10

Question 15

The dividend discount model assumes that:

Accepted Answer

A)  the dividend payout ratio will remain constant. 
B)  the dividend growth rate is equal to the discount rate. 
C)  discount rate increases at a constant rate. 
D)  at least one dividend will be paid in the future. 
E)  the dividend payout ratio increases at a constant rate. 
A)  the dividend payout ratio will remain constant. 
B)  the dividend growth rate is equal to the discount rate. 
C)  discount rate increases at a constant rate. 
D)  at least one dividend will be paid in the future. 
E)  the dividend payout ratio increases at a constant rate.

Question 16

The Rug Barn has paid annual dividends of $1.30,$1.36,$1.40,$1.42,and $1.45 over the last 5 years,respectively.What is the geometric average dividend growth rate?

Accepted Answer

A)  1.98 percent 
B)  2.11 percent 
C)  2.39 percent 
D)  2.55 percent 
E)  2.77 percent 
A)  1.98 percent 
B)  2.11 percent 
C)  2.39 percent 
D)  2.55 percent 
E)  2.77 percent

Question 17

Perry Adventures last annual dividend was $0.70 a share.The firm will increase the dividend by 5 percent for the next 4 years and thereafter increase the dividend by 3 percent annually.What is this stock worth today if the required return is 10 percent?

Accepted Answer

A)  $10.38 
B)  $11.05 
C)  $11.30 
D)  $13.97 
E)  $14.08 
A)  $10.38 
B)  $11.05 
C)  $11.30 
D)  $13.97 
E)  $14.08

Question 18

The net income per share divided by the market price per share is called the:

Accepted Answer

A)  profit margin. 
B)  profit yield. 
C)  market yield. 
D)  earnings yield. 
E)  income ratio. 
A)  profit margin. 
B)  profit yield. 
C)  market yield. 
D)  earnings yield. 
E)  income ratio.

Question 19

Which of the following have the same meaning as the term "economic value added"?
I.abnormal earnings
II.residual income
III.value created by a firm in period t
IV.EPSt - Bt-1× k

Accepted Answer

A)  I and II only 
B)  III and IV only 
C)  I, II, and III only 
D)  II, III, and IV only 
E)  I, II, III, and IV 
A)  I and II only 
B)  III and IV only 
C)  I, II, and III only 
D)  II, III, and IV only 
E)  I, II, III, and IV

Question 20

Cayman Boats plans to pay a $1.75 a share dividend at the end of each of the next 2 years.At the end of year 3,it will pay a final liquidating dividend of $25 a share.After that,the company plans to close its doors permanently.What is the current value of this stock at a discount rate of 10 percent?

Accepted Answer

A)  $19.89 
B)  $20.26 
C)  $21.82 
D)  $23.80 
E)  $24.50 
A)  $19.89 
B)  $20.26 
C)  $21.82 
D)  $23.80 
E)  $24.50

How will the price of a stock be affected if the dividend growth rate is decreased?

The constant perpetual growth model is applicable primarily to those firms which:

Upwind Tours just announced that it will pay an annual dividend of $3.60 a share one year from now.Two years from now,the company expects to pay a $28 a share liquidating dividend.After that,the company will cease operations.What is the current value per share at a discount rate of 12.5 percent?

Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio?

Which one of the following statements concerning beta is correct?

Based on the dividend discount model,an increase in which of the following will lower the current value of a stock? I.amount of the next dividend II.dividend growth rate III.discount rate

The Grand Isle has 12,000 shares of stock outstanding at a market price of $31.60 per share.The book value per share is $12.08.The firm has earnings per share of $1.86 and a dividend payout ratio of 0.40.What is the firm's sustainable rate of growth?

Which one of the following is used as an indicator that a firm has good-quality earnings?

Western Adventures has earnings per share of $2.30 and dividends per share of $1.25.The total equity of the firm is $850,000.There are 40,000 shares of stock outstanding.What is the sustainable rate of growth?

What is the percentage of a firm's net income which is reinvested in the firm to support future growth called?

Long Life Floors just paid an annual dividend of $0.82 a share and plans on increasing future dividends by 2 percent annually.The discount rate is 15 percent.What will the value of this stock be 5 years from today?

Which one of the following is the most common definition of cash flow as used in the price-cash flow ratio?

A firm has paid annual dividends of $1.34,$1.43,$1.55,$1.62,$1.64,and $1.75 per share over the past 6 years,respectively.What is the geometric average growth rate for these dividends?

The dividend discount model assumes that:

The Rug Barn has paid annual dividends of $1.30,$1.36,$1.40,$1.42,and $1.45 over the last 5 years,respectively.What is the geometric average dividend growth rate?

Perry Adventures last annual dividend was $0.70 a share.The firm will increase the dividend by 5 percent for the next 4 years and thereafter increase the dividend by 3 percent annually.What is this stock worth today if the required return is 10 percent?

The net income per share divided by the market price per share is called the:

Which of the following have the same meaning as the term "economic value added"? I.abnormal earnings II.residual income III.value created by a firm in period t IV.EPSt - Bt-1× k

Cayman Boats plans to pay a $1.75 a share dividend at the end of each of the next 2 years.At the end of year 3,it will pay a final liquidating dividend of $25 a share.After that,the company plans to close its doors permanently.What is the current value of this stock at a discount rate of 10 percent?

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds and Other Investment Companies

The Stock Market

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return,Risk,and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

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Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

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Exam 6: Common Stock Valuation

How will the price of a stock be affected if the dividend growth rate is decreased?

The constant perpetual growth model is applicable primarily to those firms which:

Upwind Tours just announced that it will pay an annual dividend of $3.60 a share one year from now.Two years from now,the company expects to pay a $28 a share liquidating dividend.After that,the company will cease operations.What is the current value per share at a discount rate of 12.5 percent?

Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio?

Which one of the following statements concerning beta is correct?

Based on the dividend discount model,an increase in which of the following will lower the current value of a stock? I.amount of the next dividend II.dividend growth rate III.discount rate

The Grand Isle has 12,000 shares of stock outstanding at a market price of $31.60 per share.The book value per share is $12.08.The firm has earnings per share of $1.86 and a dividend payout ratio of 0.40.What is the firm's sustainable rate of growth?

Which one of the following is used as an indicator that a firm has good-quality earnings?

Western Adventures has earnings per share of $2.30 and dividends per share of $1.25.The total equity of the firm is $850,000.There are 40,000 shares of stock outstanding.What is the sustainable rate of growth?

What is the percentage of a firm's net income which is reinvested in the firm to support future growth called?

Long Life Floors just paid an annual dividend of $0.82 a share and plans on increasing future dividends by 2 percent annually.The discount rate is 15 percent.What will the value of this stock be 5 years from today?

Which one of the following is the most common definition of cash flow as used in the price-cash flow ratio?

A firm has paid annual dividends of $1.34,$1.43,$1.55,$1.62,$1.64,and $1.75 per share over the past 6 years,respectively.What is the geometric average growth rate for these dividends?

The dividend discount model assumes that:

The Rug Barn has paid annual dividends of $1.30,$1.36,$1.40,$1.42,and $1.45 over the last 5 years,respectively.What is the geometric average dividend growth rate?

Perry Adventures last annual dividend was $0.70 a share.The firm will increase the dividend by 5 percent for the next 4 years and thereafter increase the dividend by 3 percent annually.What is this stock worth today if the required return is 10 percent?

The net income per share divided by the market price per share is called the:

Which of the following have the same meaning as the term "economic value added"? I.abnormal earnings II.residual income III.value created by a firm in period t IV.EPSt - Bt-1× k

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds and Other Investment Companies

The Stock Market

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return,Risk,and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

Corporate and Government Bonds

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters