Question 1

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.

Accepted Answer

A) technical analysts 
B) statistical analysts 
C) fundamental analysts 
D) dividend analysts 
E) psychoanalysts 
A) technical analysts 
B) statistical analysts 
C) fundamental analysts 
D) dividend analysts 
E) psychoanalysts

Question 2

The growth in per share FCFE of CBS,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 per share FCFE is expected to be 2%/year,indefinitely.The required rate of return on CBS,Inc.is 12%.Last year's per share FCFE was $2.00.What should the stock sell for today?

Accepted Answer

A) $8.99 
B) $22.51 
C) $40.00 
D) $25.21 
E) $27.12 
A) $8.99 
B) $22.51 
C) $40.00 
D) $25.21 
E) $27.12

Question 3

Low Fly Airline is expected to pay a dividend of $7 in the coming year.Dividends are expected to grow at the rate of 15% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Low Fly Airline has a beta of 3.00.The intrinsic value of the stock is ______.

Accepted Answer

A) $46.67 
B) $50.00 
C) $56.00 
D) $62.50 
E) none of the above 
A) $46.67 
B) $50.00 
C) $56.00 
D) $62.50 
E) none of the above

Question 4

Light Construction Machinery Company has an expected ROE of 11%.The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

Accepted Answer

A) 3.0% 
B) 4.8% 
C) 8.25% 
D) 9.0% 
E) none of the above 
A) 3.0% 
B) 4.8% 
C) 8.25% 
D) 9.0% 
E) none of the above

Question 5

The most appropriate discount rate to use when applying a FCFE valuation model is the ___________.

Accepted Answer

A) required rate of return on equity 
B) WACC 
C) risk-free rate 
D) A or C depending on the debt level of the firm 
E) none of the above 
A) required rate of return on equity 
B) WACC 
C) risk-free rate 
D) A or C depending on the debt level of the firm 
E) none of the above

Question 6

Rome Corporation is expected have EBIT of $2.3M this year.Rome Corporation is in the 30% tax bracket,will report $175,000 in depreciation,will make $175,000 in capital expenditures,and have no change in net working capital this year.What is Rome's FCFF?

Accepted Answer

A) 2,300,000 
B) 1,785,000 
C) 1,960,000 
D) 1,610,000 
E) 1,435,000 
A) 2,300,000 
B) 1,785,000 
C) 1,960,000 
D) 1,610,000 
E) 1,435,000

Question 7

Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year.Dividends are expected to grow at the rate of 6% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Sunshine Corporation has a beta of 0.75.The intrinsic value of the stock is _______.

Accepted Answer

A) $10.71 
B) $15.00 
C) $17.75 
D) $25.00 
E) none of the above 
A) $10.71 
B) $15.00 
C) $17.75 
D) $25.00 
E) none of the above

Question 8

A preferred stock will pay a dividend of $7.50 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) $0.75 
B) $7.50 
C) $64.12 
D) $56.25 
E) none of the above 
A) $0.75 
B) $7.50 
C) $64.12 
D) $56.25 
E) none of the above

Question 9

The growth in dividends of Music Doctors,Inc.is expected to be 8%/year for the next two years,followed by a growth rate of 4%/year for three years; after this five year period,the growth in dividends is expected to be 3%/year,indefinitely.The required rate of return on Music Doctors,Inc.is 11%.Last year's dividends per share were $2.75.What should the stock sell for today?

Accepted Answer

A) $8.99 
B) $25.21 
C) $39.71 
D) $110.00 
E) none of the above 
A) $8.99 
B) $25.21 
C) $39.71 
D) $110.00 
E) none of the above

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.

Light Construction Machinery Company has an expected ROE of 11%.The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

The most appropriate discount rate to use when applying a FCFE valuation model is the ___________.

Rome Corporation is expected have EBIT of $2.3M this year.Rome Corporation is in the 30% tax bracket,will report $175,000 in depreciation,will make $175,000 in capital expenditures,and have no change in net working capital this year.What is Rome's FCFF?

A preferred stock will pay a dividend of $7.50 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.

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

Filters

Exam 18: Option Valuation

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.

Light Construction Machinery Company has an expected ROE of 11%.The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

The most appropriate discount rate to use when applying a FCFE valuation model is the ___________.

Rome Corporation is expected have EBIT of $2.3M this year.Rome Corporation is in the 30% tax bracket,will report $175,000 in depreciation,will make $175,000 in capital expenditures,and have no change in net working capital this year.What is Rome's FCFF?

A preferred stock will pay a dividend of $7.50 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.

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

Filters