Question 1

You wish to earn a return of 11% on each of two stocks,C and

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) A or B 
E) none of the above is a correct 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) A or B 
E) none of the above is a correct answer.

Question 2

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model.

Accepted Answer

A) FCFE 
B) FCEF 
C) DDM 
D) B or C 
E) P/E 
A) FCFE 
B) FCEF 
C) DDM 
D) B or C 
E) P/E

Question 3

If a firm has a required rate of return equal to the ROE

Accepted Answer

A) the firm can increase market price and P/E by retaining more earnings. 
B) the firm can increase market price and P/E by increasing the growth rate. 
C) the amount of earnings retained by the firm does not affect market price or the P/E. 
D) A and B. 
E) none of the above. 
A) the firm can increase market price and P/E by retaining more earnings. 
B) the firm can increase market price and P/E by increasing the growth rate. 
C) the amount of earnings retained by the firm does not affect market price or the P/E. 
D) A and B. 
E) none of the above.

Question 4

You wish to earn a return of 12% on each of two stocks,A and B.Each of the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock A and 10% for stock B.The intrinsic value of stock A _____.

Accepted Answer

A) will be greater than the intrinsic value of stock B 
B) will be the same as the intrinsic value of stock B 
C) will be less than the intrinsic value of stock B 
D) A or B 
E) none of the above is a correct statement. 
A) will be greater than the intrinsic value of stock B 
B) will be the same as the intrinsic value of stock B 
C) will be less than the intrinsic value of stock B 
D) A or B 
E) none of the above is a correct statement.

Question 5

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding.See's required return on equity is 10.6% and WACC is 9.3%.If FCFE is expected to grow at 6.5% forever,the intrinsic value of See's shares are ____________.

Accepted Answer

A) $108.00 
B) $68.29 
C) $26.35 
D) $14.76 
E) none of the above 
A) $108.00 
B) $68.29 
C) $26.35 
D) $14.76 
E) none of the above

Question 6

Think Tank Company has an expected ROE of 26%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings.

Accepted Answer

A) 2.6% 
B) 10% 
C) 23.4% 
D) 90% 
E) none of the above 
A) 2.6% 
B) 10% 
C) 23.4% 
D) 90% 
E) none of the above

Question 7

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

Accepted Answer

A) Credit analysts 
B) Fundamental analysts 
C) Systems analysts 
D) Technical analysts 
E) Specialists 
A) Credit analysts 
B) Fundamental analysts 
C) Systems analysts 
D) Technical analysts 
E) Specialists

Question 8

Earnings management is

Accepted Answer

A) when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly. 
B) when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly. 
C) when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly. 
D) the practice of using flexible accounting rules to improve the apparent profitability of the firm. 
E) none of the above. 
A) when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly. 
B) when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly. 
C) when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly. 
D) the practice of using flexible accounting rules to improve the apparent profitability of the firm. 
E) none of the above.

Question 9

The price/earnings ratio,or multiplier approach,may be used for stock valuation.Explain this process and describe how the "multiplier" varies from the one available in the stock market quotation pages.

Accepted Answer

The price earnings ratio used for stock

Question 10

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 total value of the equity of F&G Manufacturing Company should be

Accepted Answer

A) $1,615,156.50 
B) $2,479,168.95 
C) $3,333,333.33 
D) $4,166,666.67 
E) none of the above 
A) $1,615,156.50 
B) $2,479,168.95 
C) $3,333,333.33 
D) $4,166,666.67 
E) none of the above

Question 11

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

Accepted Answer

A) $30.23 
B) $24.11 
C) $26.52 
D) $27.50 
E) none of the above 
A) $30.23 
B) $24.11 
C) $26.52 
D) $27.50 
E) none of the above

Question 12

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 projected free cash flow of Utica Manufacturing Company for the coming year is _______.

Accepted Answer

A) $150,000 
B) $180,000 
C) $300,000 
D) $380,000 
E) none of the above 
A) $150,000 
B) $180,000 
C) $300,000 
D) $380,000 
E) none of the above

Question 13

Music Doctors Company has an expected ROE of 14%.The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.

Accepted Answer

A) 4.8% 
B) 5.6% 
C) 7.2% 
D) 6.0% 
E) none of the above 
A) 4.8% 
B) 5.6% 
C) 7.2% 
D) 6.0% 
E) none of the above

Question 14

FCF and DDM valuations should be ____________ if the assumptions used are consistent.

Accepted Answer

A) very different for all firms 
B) similar for all firms 
C) similar only for unlevered firms 
D) similar only for levered firms 
E) none of the above 
A) very different for all firms 
B) similar for all firms 
C) similar only for unlevered firms 
D) similar only for levered firms 
E) none of the above

Question 15

According to Peter Lynch,a rough rule of thumb for security analysis is that

Accepted Answer

A) the growth rate should be equal to the plowback rate. 
B) the growth rate should be equal to the dividend payout rate. 
C) the growth rate should be low for emerging industries. 
D) the growth rate should be equal to the P/E ratio. 
E) none of the above. 
A) the growth rate should be equal to the plowback rate. 
B) the growth rate should be equal to the dividend payout rate. 
C) the growth rate should be low for emerging industries. 
D) the growth rate should be equal to the P/E ratio. 
E) none of the above.

Question 16

SGA Consulting had a FCFE of $3.2M last year and has 3.2M shares outstanding.SGA's required return on equity is 13% and WACC is 11.5%.If FCFE is expected to grow at 8.5% forever,the intrinsic value of SGA's shares are ____________.

Accepted Answer

A) $21.60 
B) $26.56 
C) $244.42 
D) $24.11 
E) none of the above 
A) $21.60 
B) $26.56 
C) $244.42 
D) $24.11 
E) none of the above

Question 17

Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20,a dividend in year 2 of $1.50,and a dividend in year 3 of $2.00.After year 3,dividends are expected to grow at the rate of 10% per year.An appropriate required return for the stock is 14%.The stock should be worth _______ today.

Accepted Answer

A) $33.00 
B) $39.86 
C) $55.00 
D) $66.00 
E) $40.68 
A) $33.00 
B) $39.86 
C) $55.00 
D) $66.00 
E) $40.68

Question 18

Discuss the relationships between the required rate of return on a stock,the firm's return on equity,the plowback rate,the growth rate,and the value of the firm.

Accepted Answer

If the firm earns more on retained earni

Question 19

High Tech Chip Company paid a dividend last year of $2.50.The expected ROE for next year is 12.5%.An appropriate required return on the stock is 11%.If the firm has a plowback ratio of 60%,the dividend in the coming year should be

Accepted Answer

A) $1.00 
B) $2.50 
C) $2.69 
D) $2.81 
E) none of the above 
A) $1.00 
B) $2.50 
C) $2.69 
D) $2.81 
E) none of the above

Question 20

A firm has a return on equity of 20% and a dividend payout ratio of 30%.The firm's anticipated growth rate is _________.

Accepted Answer

A) 6% 
B) 10% 
C) 14% 
D) 20% 
E) none of the above 
A) 6% 
B) 10% 
C) 14% 
D) 20% 
E) none of the above

Exam 18: Option Valuation

You wish to earn a return of 11% on each of two stocks,C and

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model.

If a firm has a required rate of return equal to the ROE

You wish to earn a return of 12% on each of two stocks,A and B.Each of the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock A and 10% for stock B.The intrinsic value of stock A _____.

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding.See's required return on equity is 10.6% and WACC is 9.3%.If FCFE is expected to grow at 6.5% forever,the intrinsic value of See's shares are ____________.

Think Tank Company has an expected ROE of 26%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings.

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

Earnings management is

The price/earnings ratio,or multiplier approach,may be used for stock valuation.Explain this process and describe how the "multiplier" varies from the one available in the stock market quotation pages.

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

Music Doctors Company has an expected ROE of 14%.The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.

FCF and DDM valuations should be ____________ if the assumptions used are consistent.

According to Peter Lynch,a rough rule of thumb for security analysis is that

SGA Consulting had a FCFE of $3.2M last year and has 3.2M shares outstanding.SGA's required return on equity is 13% and WACC is 11.5%.If FCFE is expected to grow at 8.5% forever,the intrinsic value of SGA's shares are ____________.

Discuss the relationships between the required rate of return on a stock,the firm's return on equity,the plowback rate,the growth rate,and the value of the firm.

High Tech Chip Company paid a dividend last year of $2.50.The expected ROE for next year is 12.5%.An appropriate required return on the stock is 11%.If the firm has a plowback ratio of 60%,the dividend in the coming year should be

A firm has a return on equity of 20% and a dividend payout ratio of 30%.The firm's anticipated growth rate is _________.

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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