Question 1

The required returns of Stocks X and Y are rX = 10% and rY = 12%.Which of the following statements is CORRECT?

Accepted Answer

A) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. 
B) If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. 
C) The stocks must sell for the same price. 
D) Stock Y must have a higher dividend yield than Stock X. 
E) If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate. 
A) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. 
B) If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. 
C) The stocks must sell for the same price. 
D) Stock Y must have a higher dividend yield than Stock X. 
E) If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.

Question 2

If D1 = $1.25,g (which is constant)= 5.5%,and P0 = $44,what is the stock's expected total return for the coming year?

Accepted Answer

A) 7.54% 
B) 7.73% 
C) 7.93% 
D) 8.13% 
E) 8.34% 
A) 7.54% 
B) 7.73% 
C) 7.93% 
D) 8.13% 
E) 8.34%

Question 3

Decker Tires' free cash flow was just FCF0 = $1.32.Analysts expect the company's free cash flow to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The WACC for this company 9.00%.Decker has $4 million in short-term investments and $14 million in debt and 1 million shares outstanding.What is the best estimate of the stock's current intrinsic price?

Accepted Answer

A) $31.59 
B) $32.65 
C) $33.75 
D) $34.87 
E) $35.99 
A) $31.59 
B) $32.65 
C) $33.75 
D) $34.87 
E) $35.99

Question 4

The preemptive right gives current stockholders the right to purchase,on a pro rata basis,any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.

Accepted Answer

A) True 
 B)False

Question 5

The required return for Williamson Heating's stock is 12%,and the stock sells for $40 per share.The firm just paid a dividend of $1.00,and the dividend is expected to grow by 30% per year for the next 4 years,so D4 = $1.00(1.30)4 = $2.8561.After t = 4,the dividend is expected to grow at a constant rate of X% per year forever.What is the stock's expected constant growth rate after t = 4,i.e.,what is X?

Accepted Answer

A) 5.17% 
B) 5.44% 
C) 5.72% 
D) 6.02% 
E) 6.34% 
A) 5.17% 
B) 5.44% 
C) 5.72% 
D) 6.02% 
E) 6.34%

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A) Two firms with the same expected free cash flows and growth rates must also have the same value of operations. 
B) It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
C) If a company has a weighted average cost of capital WACC = 12%, and if its free cash flows are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
D) The value of operations is the present value of all expected future free cash flows, discounted at the free cash flow growth rate. 
E) The constant growth model takes into consideration the capital gains investors expect to earn on a stock. 
A) Two firms with the same expected free cash flows and growth rates must also have the same value of operations. 
B) It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
C) If a company has a weighted average cost of capital WACC = 12%, and if its free cash flows are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
D) The value of operations is the present value of all expected future free cash flows, discounted at the free cash flow growth rate. 
E) The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

Question 7

Barnette Inc.'s free cash flows are expected to be unstable during the next few years while the company undergoes restructuring.However,FCF is expected to be $50 million in Year 5,i.e.,FCF at t = 5 equals $50 million,and the FCF growth rate is expected to be constant at 6% beyond that point.If the weighted average cost of capital is 12%,what is the horizon value (in millions)at t = 5?

Accepted Answer

A) $719 
B) $757 
C) $797 
D) $839 
E) $883 
A) $719 
B) $757 
C) $797 
D) $839 
E) $883

Question 8

Judd Corporation has a weighted average cost of capital of 10.25%,and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow,FCF1 in millions?

Accepted Answer

A) $2.20 
B) $2.44 
C) $2.69 
D) $2.96 
E) $3.25 
A) $2.20 
B) $2.44 
C) $2.69 
D) $2.96 
E) $3.25

Question 9

If D1 = $1.50,g (which is constant)= 6.5%,and P0 = $56,what is the stock's expected capital gains yield for the coming year?

Accepted Answer

A) 6.50% 
B) 6.83% 
C) 7.17% 
D) 7.52% 
E) 7.90% 
A) 6.50% 
B) 6.83% 
C) 7.17% 
D) 7.52% 
E) 7.90%

Question 10

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25).The stock sells for $32.50 per share,and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate,g,forever.What is the equilibrium expected growth rate?

Accepted Answer

A) 6.01% 
B) 6.17% 
C) 6.33% 
D) 6.49% 
E) 6.65% 
A) 6.01% 
B) 6.17% 
C) 6.33% 
D) 6.49% 
E) 6.65%

Question 11

Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (rs)is 12%.What is the best estimate of the current stock price?

Accepted Answer

A) $41.58 
B) $42.64 
C) $43.71 
D) $44.80 
E) $45.92 
A) $41.58 
B) $42.64 
C) $43.71 
D) $44.80 
E) $45.92

Question 12

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? $$\begin{array} { l c c } 
& \mathrm { X } & \mathrm { Y } \
\text { Price } & \$ 25 & \$ 25 \
\text { Expected dividend yield } & 5 \% & 3 \% \
\text { Required return } & 12 \% & 10 \%
\end{array}$$

Accepted Answer

A) Stock X pays a higher dividend per share than Stock Y. 
B) One year from now, Stock X should have the higher price. 
C) Stock Y has a lower expected growth rate than Stock X. 
D) Stock Y has the higher expected capital gains yield. 
E) Stock Y pays a higher dividend per share than Stock X. 
A) Stock X pays a higher dividend per share than Stock Y. 
B) One year from now, Stock X should have the higher price. 
C) Stock Y has a lower expected growth rate than Stock X. 
D) Stock Y has the higher expected capital gains yield. 
E) Stock Y pays a higher dividend per share than Stock X.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A) If a company has a WACC = 12% and its free cash flow is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
B) The free cash flow valuation model for constant growth, Vop = FCF1/(WACC − g), can be used to value firms whose free cash flows are expected to decline at a constant rate, i.e., to grow at a negative rate. 
C) The value of operations of a stock is the present value of all expected future free cash flows, discounted at the free cash flow growth rate. 
D) The constant growth model cannot be used for a zero growth stock, where free cash flows are expected to remain constant over time. 
E) The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. 
A) If a company has a WACC = 12% and its free cash flow is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
B) The free cash flow valuation model for constant growth, Vop = FCF1/(WACC − g), can be used to value firms whose free cash flows are expected to decline at a constant rate, i.e., to grow at a negative rate. 
C) The value of operations of a stock is the present value of all expected future free cash flows, discounted at the free cash flow growth rate. 
D) The constant growth model cannot be used for a zero growth stock, where free cash flows are expected to remain constant over time. 
E) The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

Question 14

Alcott's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $45.00,what is its nominal (not effective)annual rate of return?

Accepted Answer

A) 8.03% 
B) 8.24% 
C) 8.45% 
D) 8.67% 
E) 8.89% 
A) 8.03% 
B) 8.24% 
C) 8.45% 
D) 8.67% 
E) 8.89%

Question 15

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Accepted Answer

A) True 
 B)False

Question 16

Based on the free cash flow valuation model,Bizzaro Co.'s value of operations is $300 million.The balance sheet shows $20 million of short-term investments that are unrelated to operations,$50 million of accounts payable,$90 million of notes payable,$30 million of long-term debt,$40 million of preferred stock,and $100 million of common equity.Bizzaro has 10 million shares of stock outstanding.What is the best estimate of the stock's price per share?

Accepted Answer

A) $13.72 
B) $14.44 
C) $15.20 
D) $16.00 
E) $16.80 
A) $13.72 
B) $14.44 
C) $15.20 
D) $16.00 
E) $16.80

Question 17

A stock is expected to pay a year-end dividend of $2.00,i.e.,D1 = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = −5%).If the company is in equilibrium and its expected and required rate of return is 15%,which of the following statements is CORRECT?

Accepted Answer

A) The company's dividend yield 5 years from now is expected to be 10%. 
B) The constant growth model cannot be used because the growth rate is negative. 
C) The company's expected capital gains yield is 5%. 
D) The company's expected stock price at the beginning of next year is $9.50. 
E) The company's current stock price is $20. 
A) The company's dividend yield 5 years from now is expected to be 10%. 
B) The constant growth model cannot be used because the growth rate is negative. 
C) The company's expected capital gains yield is 5%. 
D) The company's expected stock price at the beginning of next year is $9.50. 
E) The company's current stock price is $20.

Question 18

Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

Accepted Answer

A) All common stocks, regardless of class, must have the same voting rights. 
B) All firms have several classes of common stock. 
C) All common stock, regardless of class, must pay the same dividend. 
D) Some class or classes of common stock are entitled to more votes per share than other classes. 
E) All common stocks fall into one of three classes: A, B, and C. 
A) All common stocks, regardless of class, must have the same voting rights. 
B) All firms have several classes of common stock. 
C) All common stock, regardless of class, must pay the same dividend. 
D) Some class or classes of common stock are entitled to more votes per share than other classes. 
E) All common stocks fall into one of three classes: A, B, and C.

Question 19

Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Accepted Answer

A) True 
 B)False

Question 20

McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years,after the growth rate in earnings and dividends will fall to zero,i.e.,g = 0.The company's last dividend,D0,was $1.25,its beta is 1.20,the market risk premium is 5.50%,and the risk-free rate is 3.00%.What is the current price of the common stock?

Accepted Answer

A) $26.77 
B) $27.89 
C) $29.05 
D) $30.21 
E) $31.42 
A) $26.77 
B) $27.89 
C) $29.05 
D) $30.21 
E) $31.42

Exam 8: Basic Stock Valuation

The required returns of Stocks X and Y are rX = 10% and rY = 12%.Which of the following statements is CORRECT?

If D1 = $1.25,g (which is constant)= 5.5%,and P0 = $44,what is the stock's expected total return for the coming year?

The preemptive right gives current stockholders the right to purchase,on a pro rata basis,any new shares issued by the firm.This right helps protect current stockholders against both dilution of control and dilution of value.

Which of the following statements is CORRECT?

Judd Corporation has a weighted average cost of capital of 10.25%,and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow,FCF1 in millions?

If D1 = $1.50,g (which is constant)= 6.5%,and P0 = $56,what is the stock's expected capital gains yield for the coming year?

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25).The stock sells for $32.50 per share,and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate,g,forever.What is the equilibrium expected growth rate?

Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (rs)is 12%.What is the best estimate of the current stock price?

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? Price \ 25 \ 25 Expected dividend yield 5\% 3\% Required return 12\% 10\%

Which of the following statements is CORRECT?

Alcott's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $45.00,what is its nominal (not effective)annual rate of return?

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

A stock is expected to pay a year-end dividend of $2.00,i.e.,D1 = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = −5%).If the company is in equilibrium and its expected and required rate of return is 15%,which of the following statements is CORRECT?

Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters

The required returns of Stocks X and Y are r_X = 10% and r_Y = 12%.Which of the following statements is CORRECT?

If D₁ = $1.25,g (which is constant)= 5.5%,and P₀ = $44,what is the stock's expected total return for the coming year?

Judd Corporation has a weighted average cost of capital of 10.25%,and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow,FCF₁ in millions?

If D₁ = $1.50,g (which is constant)= 6.5%,and P₀ = $56,what is the stock's expected capital gains yield for the coming year?

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D₁ = $1.25).The stock sells for $32.50 per share,and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate,g,forever.What is the equilibrium expected growth rate?

Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (r_s)is 12%.What is the best estimate of the current stock price?

A stock is expected to pay a year-end dividend of $2.00,i.e.,D₁ = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = −5%).If the company is in equilibrium and its expected and required rate of return is 15%,which of the following statements is CORRECT?