Question 1

What is the most likely value of the PVGO for a stock with a current price of $50,expected earnings of $6 per share,and a required return of 20%?

Accepted Answer

A)  $10 
B)  $20 
C)  $25 
D)  $30 
A)  $10 
B)  $20 
C)  $25 
D)  $30

Question 2

A firm has 120,000 shares of stock outstanding,a sustainable rate of growth of 3.8%,and $648,200 in next year's free cash flow.What value would you place on a share of this firm's stock if you require a 14% rate of return?

Accepted Answer

A)  $48.09 
B)  $52.96 
C)  $54.02 
D)  $61.58 
A)  $48.09 
B)  $52.96 
C)  $54.02 
D)  $61.58

Question 3

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

Accepted Answer

A)  $22.86 
B)  $28.00 
C)  $42.00 
D)  $43.75 
A)  $22.86 
B)  $28.00 
C)  $42.00 
D)  $43.75

Question 4

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 5

Which of these statements is correct? Free cash flow

Accepted Answer

A)  is available to be paid out to investors as interest or dividends, or to repay debt or buy back stock. 
B)  is positive if the company is issuing debt or stock. 
C)  is equal to net income. 
D)  is another term for retained earnings. 
A)  is available to be paid out to investors as interest or dividends, or to repay debt or buy back stock. 
B)  is positive if the company is issuing debt or stock. 
C)  is equal to net income. 
D)  is another term for retained earnings.

Question 6

If stock prices follow a random walk,their prices bear no relation to the company's real activities.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 9

If the price of a stock falls on 4 consecutive days of trading,then stock prices:

Accepted Answer

A)  cannot be following a random walk. 
B)  can still be following a random walk. 
C)  are almost certain to increase the following day. 
D)  are almost certain to decrease the following day. 
A)  cannot be following a random walk. 
B)  can still be following a random walk. 
C)  are almost certain to increase the following day. 
D)  are almost certain to decrease the following day.

Question 10

Psychologists have observed that:

Accepted Answer

A)  once investors have made a loss, they become much more willing to take risks. 
B)  investors tend to place too much faith in their ability to spot mispriced stocks. 
C)  when forecasting the future, people tend to place too little weight on recent events. 
D)  investors like stocks of companies whose names begin with letters that occur early in the alphabet. 
A)  once investors have made a loss, they become much more willing to take risks. 
B)  investors tend to place too much faith in their ability to spot mispriced stocks. 
C)  when forecasting the future, people tend to place too little weight on recent events. 
D)  investors like stocks of companies whose names begin with letters that occur early in the alphabet.

Question 11

Which of the following is least likely to contribute to going concern value?

Accepted Answer

A)  High liquidation value 
B)  Extra earning power 
C)  Future investment opportunities 
D)  Intangible assets 
A)  High liquidation value 
B)  Extra earning power 
C)  Future investment opportunities 
D)  Intangible assets

Question 12

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 13

Market value,unlike book value and liquidation value,treats the firm as a going concern.

Accepted Answer

A) True 
 B)False

Question 14

If investors believe a company will have the opportunity to make very profitable investments in the future,they will pay more for the company's stock today.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following situations accurately describes a growth stock,assuming that each firm has a required return of 12%?

Accepted Answer

A)  A firm with PVGO = $0. 
B)  A firm with investment opportunities yielding 10%. 
C)  A firm with investment opportunities yielding 15%. 
D)  A firm with PVGO < $0. 
A)  A firm with PVGO = $0. 
B)  A firm with investment opportunities yielding 10%. 
C)  A firm with investment opportunities yielding 15%. 
D)  A firm with PVGO < $0.

Question 16

The sustainable growth rate represents the ____ rate at which a firm can grow:

Accepted Answer

A)  maximum; while maintaining a constant debt-equity ratio. 
B)  maximum; based solely on internal financing. 
C)  minimum; while maintaining a constant debt-equity ratio. 
D)  minimum; based solely on internal financing. 
A)  maximum; while maintaining a constant debt-equity ratio. 
B)  maximum; based solely on internal financing. 
C)  minimum; while maintaining a constant debt-equity ratio. 
D)  minimum; based solely on internal financing.

Question 17

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

Accepted Answer

A) True 
 B)False

Question 18

A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%.What might investors expect to pay for the stock one year from now after the next dividend has been paid?

Accepted Answer

A)  $82.20 
B)  $86.20 
C)  $87.20 
D)  $91.20 
A)  $82.20 
B)  $86.20 
C)  $87.20 
D)  $91.20

Question 19

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 20

What is the plowback ratio for a firm that has earnings per share of $2.68 and pays out $1.75 per share in dividends?

Accepted Answer

A)  28.20% 
B)  34.70% 
C)  66.67% 
D)  71.80% 
A)  28.20% 
B)  34.70% 
C)  66.67% 
D)  71.80%

Exam 7: Valuing Stocks

What is the most likely value of the PVGO for a stock with a current price of $50,expected earnings of $6 per share,and a required return of 20%?

A firm has 120,000 shares of stock outstanding,a sustainable rate of growth of 3.8%,and $648,200 in next year's free cash flow.What value would you place on a share of this firm's stock if you require a 14% rate of return?

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

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

Which of these statements is correct? Free cash flow

If stock prices follow a random walk,their prices bear no relation to the company's real activities.

The terminal value of a share of stock:

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%?

If the price of a stock falls on 4 consecutive days of trading,then stock prices:

Psychologists have observed that:

Which of the following is least likely to contribute to going concern value?

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?

Market value,unlike book value and liquidation value,treats the firm as a going concern.

If investors believe a company will have the opportunity to make very profitable investments in the future,they will pay more for the company's stock today.

Which of the following situations accurately describes a growth stock,assuming that each firm has a required return of 12%?

The sustainable growth rate represents the ____ rate at which a firm can grow:

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%.What might investors expect to pay for the stock one year from now after the next dividend has been paid?

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 plowback ratio for a firm that has earnings per share of $2.68 and pays out $1.75 per share in dividends?

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