Question 1

If the dividend yield for year 1 is expected to be 5% based on a stock price of $25,what will the year 4 dividend be if dividends grow annually at a constant rate of 6%?

Accepted Answer

A)  $1.33 
B)  $1.49 
C)  $1.58 
D)  $1.67 
A)  $1.33 
B)  $1.49 
C)  $1.58 
D)  $1.67

Question 2

Which one of the following is more likely to be responsible for a firm having a low PVGO?

Accepted Answer

A)  ROE exceeds required return. 
B)  Plowback is very high. 
C)  Market value of equity is close to book value. 
D)  Book value of equity is low. 
A)  ROE exceeds required return. 
B)  Plowback is very high. 
C)  Market value of equity is close to book value. 
D)  Book value of equity is low.

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

What is the expected constant-growth rate of dividends for a stock currently priced at $50,that just paid a dividend of $4,and has a required return of 18%?

Accepted Answer

A)  3.41% 
B)  5.50% 
C)  9.26% 
D)  12.5% 
A)  3.41% 
B)  5.50% 
C)  9.26% 
D)  12.5%

Question 5

If the market is efficient,stock prices should be expected to react only to new information.

Accepted Answer

A) True 
 B)False

Question 6

Which statement is correct?

Accepted Answer

A)  Stock repurchases invalidate the dividend discount model 
B)  Stock repurchases do not add value to a business and can be ignored. 
C)  When there are repurchases, it is simpler to value a business by discounting the free cash flow. 
D)  Stock repurchases increase the number of shares and make it difficult to forecast dividends per share 
A)  Stock repurchases invalidate the dividend discount model 
B)  Stock repurchases do not add value to a business and can be ignored. 
C)  When there are repurchases, it is simpler to value a business by discounting the free cash flow. 
D)  Stock repurchases increase the number of shares and make it difficult to forecast dividends per share

Question 7

If the general sentiment of investors is pessimistic,stock prices are more apt to:

Accepted Answer

A)  increase significantly. 
B)  increase slightly. 
C)  remain constant. 
D)  decline. 
A)  increase significantly. 
B)  increase slightly. 
C)  remain constant. 
D)  decline.

Question 8

Dani's just paid an annual dividend of $6 per share.What is the dividend expected to be in five years if the growth rate is 4.2%?

Accepted Answer

A)  $7.07 
B)  $7.37 
C)  $7.14 
D)  $7.44 
A)  $7.07 
B)  $7.37 
C)  $7.14 
D)  $7.44

Question 9

According to random-walk theory,what are the (approximate)odds that a stock will increase in price after having increased on two consecutive days of trading?

Accepted Answer

A)  0% 
B)  25% 
C)  50% 
D)  100% 
A)  0% 
B)  25% 
C)  50% 
D)  100%

Question 10

What rate of return is expected from a stock that sells for $30 per share,pays $1.54 annually in dividends,and is expected to sell for $32.80 per share in one year?

Accepted Answer

A)  15.03% 
B)  14.28% 
C)  14.09% 
D)  14.47% 
A)  15.03% 
B)  14.28% 
C)  14.09% 
D)  14.47%

Question 11

The statement that there are no free lunches on Wall Street suggests that:

Accepted Answer

A)  the market is strong-form efficient. 
B)  there is no return to technical or fundamental analysis. 
C)  security prices reflect all available information. 
D)  food stocks offer the lowest rates of return. 
A)  the market is strong-form efficient. 
B)  there is no return to technical or fundamental analysis. 
C)  security prices reflect all available information. 
D)  food stocks offer the lowest rates of return.

Question 12

Jefferson's recently paid an annual dividend of $1.31 per share.The dividend is expected to decrease by 4% each year.How much should you pay for this stock today if your required return is 16%?

Accepted Answer

A)  $6.29 
B)  $5.74 
C)  $10.48 
D)  $11.57 
A)  $6.29 
B)  $5.74 
C)  $10.48 
D)  $11.57

Question 13

The value of common stock will likely decrease if:

Accepted Answer

A)  the investment horizon decreases. 
B)  the growth rate of dividends increases. 
C)  the discount rate increases. 
D)  dividends are discounted back to the present. 
A)  the investment horizon decreases. 
B)  the growth rate of dividends increases. 
C)  the discount rate increases. 
D)  dividends are discounted back to the present.

Question 14

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 15

Which of the following is inconsistent with a firm that sells for very near book value?

Accepted Answer

A)  Low current earnings 
B)  Few, if any, intangible assets 
C)  High future earning power 
D)  Low, unstable dividend payment 
A)  Low current earnings 
B)  Few, if any, intangible assets 
C)  High future earning power 
D)  Low, unstable dividend payment

Question 16

The dividend discount model states 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 17

ABC common stock is expected to have extraordinary growth in earnings and dividends of 20% per year for 2 years,after which the growth rate will settle into a constant 6%.If the discount rate is 15% and the most recent dividend was $2.50,what should be the approximate current share price?

Accepted Answer

A)  $31.16 
B)  $33.23 
C)  $37.39 
D)  $47.77 
A)  $31.16 
B)  $33.23 
C)  $37.39 
D)  $47.77

Question 18

When new information becomes available in the market,evidence generally suggests that:

Accepted Answer

A)  insiders will be the only investors to gain. 
B)  it takes at least ten trading days for stock prices to adjust. 
C)  stock prices will adjust to the information rapidly. 
D)  transaction costs will erase any benefit of trading on the information. 
A)  insiders will be the only investors to gain. 
B)  it takes at least ten trading days for stock prices to adjust. 
C)  stock prices will adjust to the information rapidly. 
D)  transaction costs will erase any benefit of trading on the information.

Question 19

Suppose that the total value of dividends to be paid by companies in the Narnian stock market index is $100 billion.Investors expect dividends to grow over the long term by 5% annually,and they require a 10% return.Now a collapse in the economy leads investors to revise their growth estimate down to 4%.By how much should market values change?

Accepted Answer

A)  −16.67%. 
B)  zero. 
C)  −20%. 
D)  +20%. 
A)  −16.67%. 
B)  zero. 
C)  −20%. 
D)  +20%.

Question 20

What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate in each of years 2 and 3,and then grow at a constant rate of 5% if the stock's required return is 13% and next year's dividend will be $4.00?

Accepted Answer

A)  $67.60 
B)  $62.08 
C)  $68.64 
D)  $73.44 
A)  $67.60 
B)  $62.08 
C)  $68.64 
D)  $73.44

Exam 7: Valuing Stocks

If the dividend yield for year 1 is expected to be 5% based on a stock price of $25,what will the year 4 dividend be if dividends grow annually at a constant rate of 6%?

Which one of the following is more likely to be responsible for a firm having a low PVGO?

A positive value for PVGO suggests that the firm has:

What is the expected constant-growth rate of dividends for a stock currently priced at $50,that just paid a dividend of $4,and has a required return of 18%?

If the market is efficient,stock prices should be expected to react only to new information.

Which statement is correct?

If the general sentiment of investors is pessimistic,stock prices are more apt to:

Dani's just paid an annual dividend of $6 per share.What is the dividend expected to be in five years if the growth rate is 4.2%?

According to random-walk theory,what are the (approximate)odds that a stock will increase in price after having increased on two consecutive days of trading?

What rate of return is expected from a stock that sells for $30 per share,pays $1.54 annually in dividends,and is expected to sell for $32.80 per share in one year?

The statement that there are no free lunches on Wall Street suggests that:

Jefferson's recently paid an annual dividend of $1.31 per share.The dividend is expected to decrease by 4% each year.How much should you pay for this stock today if your required return is 16%?

The value of common stock will likely decrease if:

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 is inconsistent with a firm that sells for very near book value?

The dividend discount model states 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.

ABC common stock is expected to have extraordinary growth in earnings and dividends of 20% per year for 2 years,after which the growth rate will settle into a constant 6%.If the discount rate is 15% and the most recent dividend was $2.50,what should be the approximate current share price?

When new information becomes available in the market,evidence generally suggests that:

What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate in each of years 2 and 3,and then grow at a constant rate of 5% if the stock's required return is 13% and next year's dividend will be $4.00?

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

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