Question 1

Other things being equal,a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends.

Accepted Answer

A) dividend payout ratio 
B) degree of financial leverage 
C) variability of earnings 
D) inflation rate 
E) none of the above 
A) dividend payout ratio 
B) degree of financial leverage 
C) variability of earnings 
D) inflation rate 
E) none of the above A

Question 2

A preferred stock will pay a dividend of $3.50 in the upcoming year,and every year thereafter,i.e.,dividends are not expected to grow.You require a return of 11% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Accepted Answer

A) $0.39 
B) $0.56 
C) $31.82 
D) $56.25 
E) none of the above 
A) $0.39 
B) $0.56 
C) $31.82 
D) $56.25 
E) none of the above C

Question 3

Mature Products Corporation produces goods that are very mature in their product life cycles.Mature Products Corporation is expected to pay a dividend in year 1 of $2.00,a dividend of $1.50 in year 2,and a dividend of $1.00 in year 3.After year 3,dividends are expected to decline at a rate of 1% per year.An appropriate required rate of return for the stock is 10%.The stock should be worth ______.

Accepted Answer

A) $9.00 
B) $10.57 
C) $20.00 
D) $22.22 
E) none of the above 
A) $9.00 
B) $10.57 
C) $20.00 
D) $22.22 
E) none of the above B

Question 4

The growth in dividends of XYZ,Inc.is expected to be 10%/year for the next two years,followed by a growth rate of 5%/year for three years; after this five year period,the growth in dividends is expected to be 2%/year,indefinitely.The required rate of return on XYZ,Inc.is 12%.Last year's dividends per share were $2.00.What should the stock sell for today?

Accepted Answer

A) $8.99 
B) $25.21 
C) $40.00 
D) $110.00 
E) none of the above 
A) $8.99 
B) $25.21 
C) $40.00 
D) $110.00 
E) none of the above

Question 5

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding.Siri's required return on equity is 12% and WACC is 9.8%.If FCFE is expected to grow at 9% forever,the intrinsic value of Siri's shares are ____________.

Accepted Answer

A) $68.13 
B) $18.17 
C) $26.35 
D) $14.76 
E) none of the above 
A) $68.13 
B) $18.17 
C) $26.35 
D) $14.76 
E) none of the above

Question 6

Since 1955,Treasury bond yields and earnings yields on stocks were_______.

Accepted Answer

A) identical 
B) negatively correlated 
C) positively correlated 
D) uncorrelated 
A) identical 
B) negatively correlated 
C) positively correlated 
D) uncorrelated

Question 7

The present value of growth opportunities (PVGO)is equal to I)the difference between a stock's price and its no-growth value per share.
II)the stock's price.
III)zero if its return on equity equals the discount rate.
IV)the net present value of favorable investment opportunities.

Accepted Answer

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

Question 8

Consider the free cash flow approach to stock valuation.Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year.The firm's corporate tax rate is 30%.It is expected that $200,000 of operating cash flow will be invested in new fixed assets.Depreciation for the year will be $100,000.After the coming year,cash flows are expected to grow at 6% per year.The appropriate market capitalization rate for unleveraged cash flow is 15% per year.The firm has no outstanding debt.The total value of the equity of Utica Manufacturing Company should be

Accepted Answer

A) $1,000,000 
B) $2,000,000 
C) $3,000,000 
D) $4,000,000 
E) none of the above 
A) $1,000,000 
B) $2,000,000 
C) $3,000,000 
D) $4,000,000 
E) none of the above

Question 9

A preferred stock will pay a dividend of $1.25 in the upcoming year,and every year thereafter,i.e.,dividends are not expected to grow.You require a return of 12% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Accepted Answer

A) $11.56 
B) $9.65 
C) $11.82 
D) $10.42 
E) none of the above 
A) $11.56 
B) $9.65 
C) $11.82 
D) $10.42 
E) none of the above

Question 10

High Speed Company has an expected ROE of 15%.The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

Accepted Answer

A) 3.0% 
B) 4.8% 
C) 7.5% 
D) 6.0% 
E) none of the above 
A) 3.0% 
B) 4.8% 
C) 7.5% 
D) 6.0% 
E) none of the above

Question 11

The most popular approach to forecasting the overall stock market is to use

Accepted Answer

A) the dividend multiplier. 
B) the aggregate return on assets. 
C) the historical ratio of book value to market value. 
D) the aggregate earnings multiplier. 
E) Tobin's Q. 
A) the dividend multiplier. 
B) the aggregate return on assets. 
C) the historical ratio of book value to market value. 
D) the aggregate earnings multiplier. 
E) Tobin's Q.

Question 12

Sales Company paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of earnings as dividends for the foreseeable future.If the firm is expected to generate a 10% return on equity in the future,and if you require a 12% return on the stock,the value of the stock is ________.

Accepted Answer

A) $17.67 
B) $13.00 
C) $16.67 
D) $18.67 
E) none of the above 
A) $17.67 
B) $13.00 
C) $16.67 
D) $18.67 
E) none of the above

Question 13

Each of two stocks,C and D,are expected to pay a dividend of $3 in the upcoming year.The expected growth rate of dividends is 9% for both stocks.You require a rate of return of 10% on stock C and a return of 13% on stock D.The intrinsic value of stock C _____.

Accepted Answer

A) will be greater than the intrinsic value of stock D 
B) will be the same as the intrinsic value of stock D 
C) will be less than the intrinsic value of stock D 
D) cannot be calculated without knowing the market rate of return 
E) none of the above is true. 
A) will be greater than the intrinsic value of stock D 
B) will be the same as the intrinsic value of stock D 
C) will be less than the intrinsic value of stock D 
D) cannot be calculated without knowing the market rate of return 
E) none of the above is true.

Question 14

Consider the free cash flow approach to stock valuation.F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year.The firm's corporate tax rate is 40%.It is expected that $250,000 of operating cash flow will be invested in new fixed assets.Depreciation for the year will be $125,000.After the coming year,cash flows are expected to grow at 7% per year.The appropriate market capitalization rate for unleveraged cash flow is 13% per year.The firm has no outstanding debt.The projected free cash flow of F&G Manufacturing Company for the coming year is _______.

Accepted Answer

A) $250,000 
B) $180,000 
C) $300,000 
D) $380,000 
E) none of the above 
A) $250,000 
B) $180,000 
C) $300,000 
D) $380,000 
E) none of the above

Question 15

The dividend discount model

Accepted Answer

A) ignores capital gains. 
B) incorporates the after-tax value of capital gains. 
C) includes capital gains implicitly. 
D) restricts capital gains to a minimum. 
E) none of the above. 
A) ignores capital gains. 
B) incorporates the after-tax value of capital gains. 
C) includes capital gains implicitly. 
D) restricts capital gains to a minimum. 
E) none of the above.

Question 16

Boaters World is expected to have per share FCFE in year 1 of $1.65,per share FCFE in year 2 of $1.97,and per share FCFE in year 3 of $2.54.After year 3,per share FCFE is expected to grow at the rate of 8% per year.An appropriate required return for the stock is 11%.The stock should be worth _______ today.

Accepted Answer

A) $77.53 
B) $40.67 
C) $82.16 
D) $66.00 
E) none of the above 
A) $77.53 
B) $40.67 
C) $82.16 
D) $66.00 
E) none of the above

Question 17

Zero had a FCFE of $4.5M last year and has 2.25M shares outstanding.Zero's required return on equity is 10% and WACC is 8.2%.If FCFE is expected to grow at 8% forever,the intrinsic value of Zero's shares are ____________.

Accepted Answer

A) $108.00 
B) $1080.00 
C) $26.35 
D) $14.76 
E) none of the above 
A) $108.00 
B) $1080.00 
C) $26.35 
D) $14.76 
E) none of the above

Question 18

Who popularized the dividend discount model,which is sometimes referred to by his name?

Accepted Answer

A) Burton Malkiel 
B) Frederick Macaulay 
C) Harry Markowitz 
D) Marshall Blume 
E) Myron Gordon 
A) Burton Malkiel 
B) Frederick Macaulay 
C) Harry Markowitz 
D) Marshall Blume 
E) Myron Gordon

Question 19

A preferred stock will pay a dividend of $2.75 in the upcoming year,and every year thereafter,i.e.,dividends are not expected to grow.You require a return of 10% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Accepted Answer

A) $0.275 
B) $27.50 
C) $31.82 
D) $56.25 
E) none of the above 
A) $0.275 
B) $27.50 
C) $31.82 
D) $56.25 
E) none of the above

Question 20

Stingy Corporation is expected have EBIT of $1.2M this year.Stingy Corporation is in the 30% tax bracket,will report $133,000 in depreciation,will make $76,000 in capital expenditures,and have a $24,000 increase in net working capital this year.What is Stingy's FCFF?

Accepted Answer

A) 1,139,000 
B) 1,200,000 
C) 1,025,000 
D) 921,000 
E) 873,000 
A) 1,139,000 
B) 1,200,000 
C) 1,025,000 
D) 921,000 
E) 873,000

Exam 18: Option Valuation

Other things being equal,a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends.

A preferred stock will pay a dividend of $3.50 in the upcoming year,and every year thereafter,i.e.,dividends are not expected to grow.You require a return of 11% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding.Siri's required return on equity is 12% and WACC is 9.8%.If FCFE is expected to grow at 9% forever,the intrinsic value of Siri's shares are ____________.

Since 1955,Treasury bond yields and earnings yields on stocks were_______.

The present value of growth opportunities (PVGO)is equal to I)the difference between a stock's price and its no-growth value per share. II)the stock's price. III)zero if its return on equity equals the discount rate. IV)the net present value of favorable investment opportunities.

A preferred stock will pay a dividend of $1.25 in the upcoming year,and every year thereafter,i.e.,dividends are not expected to grow.You require a return of 12% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

High Speed Company has an expected ROE of 15%.The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

The most popular approach to forecasting the overall stock market is to use

Each of two stocks,C and D,are expected to pay a dividend of $3 in the upcoming year.The expected growth rate of dividends is 9% for both stocks.You require a rate of return of 10% on stock C and a return of 13% on stock D.The intrinsic value of stock C _____.

The dividend discount model

Zero had a FCFE of $4.5M last year and has 2.25M shares outstanding.Zero's required return on equity is 10% and WACC is 8.2%.If FCFE is expected to grow at 8% forever,the intrinsic value of Zero's shares are ____________.

Who popularized the dividend discount model,which is sometimes referred to by his name?

A preferred stock will pay a dividend of $2.75 in the upcoming year,and every year thereafter,i.e.,dividends are not expected to grow.You require a return of 10% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Stingy Corporation is expected have EBIT of $1.2M this year.Stingy Corporation is in the 30% tax bracket,will report $133,000 in depreciation,will make $76,000 in capital expenditures,and have a $24,000 increase in net working capital this year.What is Stingy's FCFF?

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Options Markets: Introduction

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

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