Question 1

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 2

What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth,and has a required return of 12.5%?

Accepted Answer

A)  $0 
B)  $4.86 
C)  $34.56 
D)  $30.24 
A)  $0 
B)  $4.86 
C)  $34.56 
D)  $30.24

Question 3

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 4

A negative free cash flow for a business is always sign that it is not performing well.

Accepted Answer

A) True 
 B)False

Question 5

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 6

Which statement is correct?

Accepted Answer

A)  When stock prices barely change for a while, they are said to be stuck in a "bubble." 
B)  Bubbles can result when prices rise rapidly and investors join the game on the assumption that prices will continue to rise. 
C)  Most bubbles with hindsight can be justified by the improved fundamentals. 
D)  "Bubbles" is another term for stocks in high-tech industries. 
A)  When stock prices barely change for a while, they are said to be stuck in a "bubble." 
B)  Bubbles can result when prices rise rapidly and investors join the game on the assumption that prices will continue to rise. 
C)  Most bubbles with hindsight can be justified by the improved fundamentals. 
D)  "Bubbles" is another term for stocks in high-tech industries.

Question 7

An analyst who relies on past cycles of stock pricing to make investment decisions is:

Accepted Answer

A)  performing fundamental analysis. 
B)  relying on strong-form market efficiency. 
C)  assuming that the market is not even weak-form efficient. 
D)  relying on the random walk of stock prices. 
A)  performing fundamental analysis. 
B)  relying on strong-form market efficiency. 
C)  assuming that the market is not even weak-form efficient. 
D)  relying on the random walk of stock prices.

Question 8

The expected return on a common stock is equal to:

Accepted Answer

A)  [(1 + dividend yield) × (1 + capital appreciation rate)] − 1. 
B)  the capital appreciation rate + dividend yield. 
C)  (1 + capital appreciation rate)/(1 + dividend yield). 
D)  the capital appreciation rate − dividend yield. 
A)  [(1 + dividend yield) × (1 + capital appreciation rate)] − 1. 
B)  the capital appreciation rate + dividend yield. 
C)  (1 + capital appreciation rate)/(1 + dividend yield). 
D)  the capital appreciation rate − dividend yield.

Question 9

The liquidation value of a firm is equal to the book value of the firm.

Accepted Answer

A) True 
 B)False

Question 10

Which statement is correct?

Accepted Answer

A)  The momentum factor refers to the tendency for stock price changes to reverse. 
B)  The momentum factor refers to the tendency for stock price changes to persist for a while and then revert. 
C)  The momentum factor implies that stock prices are rather like a pendulum. 
D)  The momentum factor is inconsistent with the strong form of the efficient market hypothesis. 
A)  The momentum factor refers to the tendency for stock price changes to reverse. 
B)  The momentum factor refers to the tendency for stock price changes to persist for a while and then revert. 
C)  The momentum factor implies that stock prices are rather like a pendulum. 
D)  The momentum factor is inconsistent with the strong form of the efficient market hypothesis.

Question 11

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 12

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 13

Suzi owns 100 shares of AB stock.She expects to receive a $238 in dividends next year.Investors expect 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 14

If a firm unexpectedly raises its dividend permanently and by a substantial amount,the firm's stock price:

Accepted Answer

A)  should rise, given dividend discount models. 
B)  should decline, given discounted cash flow analysis. 
C)  will remain constant, due to market efficiency. 
D)  remain constant, due to random-walk behavior. 
A)  should rise, given dividend discount models. 
B)  should decline, given discounted cash flow analysis. 
C)  will remain constant, due to market efficiency. 
D)  remain constant, due to random-walk behavior.

Question 15

A firm's liquidation value is the amount:

Accepted Answer

A)  necessary to repurchase all outstanding shares of common stock. 
B)  realized from selling all assets and paying off all creditors. 
C)  a purchaser would pay to acquire all of the firm's assets. 
D)  shown on the balance sheet as total owners' equity. 
A)  necessary to repurchase all outstanding shares of common stock. 
B)  realized from selling all assets and paying off all creditors. 
C)  a purchaser would pay to acquire all of the firm's assets. 
D)  shown on the balance sheet as total owners' equity.

Question 16

With respect to the notion that stock prices follow a random walk,many researchers have concluded that:

Accepted Answer

A)  stock prices reflect a majority of available information about the firm. 
B)  successive price changes are predictable. 
C)  past stock price changes provide little useful information about future stock price changes. 
D)  stock prices always rise excessively in January. 
A)  stock prices reflect a majority of available information about the firm. 
B)  successive price changes are predictable. 
C)  past stock price changes provide little useful information about future stock price changes. 
D)  stock prices always rise excessively in January.

Question 17

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

Accepted Answer

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

Question 18

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

Accepted Answer

A)  At least one of the stocks becomes temporarily mispriced. 
B)  This is a common occurrence indicating that one stock has more PVGO. 
C)  This cannot happen if the shares are traded in an auction market. 
D)  The expected risk levels will change until the expected returns are equal. 
A)  At least one of the stocks becomes temporarily mispriced. 
B)  This is a common occurrence indicating that one stock has more PVGO. 
C)  This cannot happen if the shares are traded in an auction market. 
D)  The expected risk levels will change until the expected returns are equal.

Question 19

In a valuation of a nonconstant dividend growth stock,the terminal value represents the:

Accepted Answer

A)  point at which the present value of future dividends equals zero. 
B)  maturity date of the stock. 
C)  present value of future dividends from that point on. 
D)  highest value that the stock will attain. 
A)  point at which the present value of future dividends equals zero. 
B)  maturity date of the stock. 
C)  present value of future dividends from that point on. 
D)  highest value that the stock will attain.

Question 20

Which one of the following situations is most likely to occur today for a stock that went down in price yesterday?

Accepted Answer

A)  The stock will increase in price. 
B)  The stock will decrease in price. 
C)  The stock has a 30% chance of decreasing in price. 
D)  The stock has no predictable price-change pattern. 
A)  The stock will increase in price. 
B)  The stock will decrease in price. 
C)  The stock has a 30% chance of decreasing in price. 
D)  The stock has no predictable price-change pattern.

Exam 7: Valuing Stocks

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

What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth,and has a required return of 12.5%?

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

A negative free cash flow for a business is always sign that it is not performing well.

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%?

Which statement is correct?

An analyst who relies on past cycles of stock pricing to make investment decisions is:

The expected return on a common stock is equal to:

The liquidation value of a firm is equal to the book value of the firm.

Which statement is correct?

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

Suzi owns 100 shares of AB stock.She expects to receive a $238 in dividends next year.Investors expect 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 a firm unexpectedly raises its dividend permanently and by a substantial amount,the firm's stock price:

A firm's liquidation value is the amount:

With respect to the notion that stock prices follow a random walk,many researchers have concluded that:

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

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

In a valuation of a nonconstant dividend growth stock,the terminal value represents the:

Which one of the following situations is most likely to occur today for a stock that went down in price yesterday?

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