Question 1

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 A

Question 2

Evidence that newly issued stocks tend to underperform the market over the following years:

Accepted Answer

A)  is a natural result of risk aversion. 
B)  is exactly what you would expect in an efficient market. 
C)  is inconsistent with the semi-strong form of the efficient market hypothesis. 
D)  is evidence against the random walk hypothesis. 
A)  is a natural result of risk aversion. 
B)  is exactly what you would expect in an efficient market. 
C)  is inconsistent with the semi-strong form of the efficient market hypothesis. 
D)  is evidence against the random walk hypothesis. C

Question 3

For a firm that repurchases its stock,firm value is most easily estimated by discounting _______________

Accepted Answer

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

Question 4

The semi-strong form of the efficient market hypothesis states that:

Accepted Answer

A)  the efficient market hypothesis is only half true. 
B)  professional investors make superior profits but amateurs can't. 
C)  stock prices do not follow a random walk. 
D)  prices reflect all publicly available information. 
A)  the efficient market hypothesis is only half true. 
B)  professional investors make superior profits but amateurs can't. 
C)  stock prices do not follow a random walk. 
D)  prices reflect all publicly available information.

Question 5

The dividend yield of a stock is much like the current yield of a bond.Both ignore prospective capital gains or losses.

Accepted Answer

A) True 
 B)False

Question 6

Market efficiency implies that security prices impound new information quickly.

Accepted Answer

A) True 
 B)False

Question 7

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%

Question 8

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

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 10

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 11

Wilt's has earnings per share of $2.98 and dividends per share of $0.35.What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%?

Accepted Answer

A)  2.14% 
B)  1.71% 
C)  12.89% 
D)  16.06% 
A)  2.14% 
B)  1.71% 
C)  12.89% 
D)  16.06%

Question 12

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 13

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 14

Securities with the same expected risk should offer the same expected rate of return.

Accepted Answer

A) True 
 B)False

Question 15

If it proves possible to make abnormal profits based on information regarding past stock prices,then the market is:

Accepted Answer

A)  weak-form efficient. 
B)  not weak-form efficient. 
C)  semi strong-form efficient. 
D)  strong-form efficient. 
A)  weak-form efficient. 
B)  not weak-form efficient. 
C)  semi strong-form efficient. 
D)  strong-form efficient.

Question 16

Evidence that stock prices follow a random walk does not imply that there aren't predictable cycles in prices.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 19

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 20

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

Accepted Answer

A) True 
 B)False

Exam 7: Valuing Stocks

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

Evidence that newly issued stocks tend to underperform the market over the following years:

For a firm that repurchases its stock,firm value is most easily estimated by discounting _______________

The semi-strong form of the efficient market hypothesis states that:

The dividend yield of a stock is much like the current yield of a bond.Both ignore prospective capital gains or losses.

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%?

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

The sustainable rate of growth:

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?

Wilt's has earnings per share of $2.98 and dividends per share of $0.35.What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%?

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

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%?

Securities with the same expected risk should offer the same expected rate of return.

If it proves possible to make abnormal profits based on information regarding past stock prices,then the market is:

Evidence that stock prices follow a random walk does not imply that there aren't predictable cycles in prices.

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

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?

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

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

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

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