Question 1

Rebello's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal)rate of return?

Accepted Answer

A) 6.62% 
B) 6.82% 
C) 7.03% 
D) 7.25% 
E) 7.47% 
A) 6.62% 
B) 6.82% 
C) 7.03% 
D) 7.25% 
E) 7.47% E

Question 2

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,​

Accepted Answer

A) Stock A's expected dividend at t = 1 is only half that of Stock B. 
B) Stock A has a higher dividend yield than Stock B. 
C) Currently the two stocks have the same price, but over time Stock B's price will pass that of A. 
D) Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. 
E) The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. 
A) Stock A's expected dividend at t = 1 is only half that of Stock B. 
B) Stock A has a higher dividend yield than Stock B. 
C) Currently the two stocks have the same price, but over time Stock B's price will pass that of A. 
D) Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. 
E) The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. A

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A) To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital. 
B) To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital. 
C) To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital. 
D) To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital. 
E) The corporate valuation model requires the assumption of a constant growth rate in all years. 
A) To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital. 
B) To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital. 
C) To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital. 
D) To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital. 
E) The corporate valuation model requires the assumption of a constant growth rate in all years. A

Question 4

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D0?

Accepted Answer

A) $0.95 
B) $1.05 
C) $1.16 
D) $1.27 
E) $1.40 
A) $0.95 
B) $1.05 
C) $1.16 
D) $1.27 
E) $1.40

Question 5

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? ​

Accepted Answer

A) These two stocks should have the same price. 
B) These two stocks must have the same dividend yield. 
C) These two stocks should have the same expected return. 
D) These two stocks must have the same expected capital gains yield. 
E) These two stocks must have the same expected year-end dividend. 
A) These two stocks should have the same price. 
B) These two stocks must have the same dividend yield. 
C) These two stocks should have the same expected return. 
D) These two stocks must have the same expected capital gains yield. 
E) These two stocks must have the same expected year-end dividend.

Question 6

Founders' shares are a type of classified stock where the shares are owned by the firm's founders,and they generally have more votes per share than the other classes of common stock.

Accepted Answer

A) True 
 B)False

Question 7

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? ​

Accepted Answer

A) The two stocks should have the same expected dividend. 
B) The two stocks could not be in equilibrium with the numbers given in the question. 
C) A's expected dividend is $0.50. 
D) B's expected dividend is $0.75. 
E) A's expected dividend is $0.75 and B's expected dividend is $1.20. 
A) The two stocks should have the same expected dividend. 
B) The two stocks could not be in equilibrium with the numbers given in the question. 
C) A's expected dividend is $0.50. 
D) B's expected dividend is $0.75. 
E) A's expected dividend is $0.75 and B's expected dividend is $1.20.

Question 8

When a new issue of stock is brought to market,it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

A) True 
 B)False

Question 9

According to the basic DCF stock valuation model,the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Accepted Answer

A) True 
 B)False

Question 10

The preemptive right is important to shareholders because it

Accepted Answer

A) allows managers to buy additional shares below the current market price. 
B) will result in higher dividends per share. 
C) is included in every corporate charter. 
D) protects the current shareholders against a dilution of their ownership interests. 
E) protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate. 
A) allows managers to buy additional shares below the current market price. 
B) will result in higher dividends per share. 
C) is included in every corporate charter. 
D) protects the current shareholders against a dilution of their ownership interests. 
E) protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.

Question 11

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

Accepted Answer

A) $23.11 
B) $23.70 
C) $24.31 
D) $24.93 
E) $25.57 
A) $23.11 
B) $23.70 
C) $24.31 
D) $24.93 
E) $25.57

Question 12

If a stock's expected return as seen by the marginal investor exceeds this investor's required return,then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Accepted Answer

A) True 
 B)False

Question 13

A proxy is a document giving one party the authority to act for another party,including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Accepted Answer

A) True 
 B)False

Question 14

The expected return on Natter Corporation's stock is 14%.The stock's dividend is expected to grow at a constant rate of 8%,and it currently sells for $50 a share.Which of the following statements is CORRECT?

Accepted Answer

A) The stock's dividend yield is 7%. 
B) The stock's dividend yield is 8%. 
C) The current dividend per share is $4.00. 
D) The stock price is expected to be $54 a share one year from now. 
E) The stock price is expected to be $57 a share one year from now. 
A) The stock's dividend yield is 7%. 
B) The stock's dividend yield is 8%. 
C) The current dividend per share is $4.00. 
D) The stock price is expected to be $54 a share one year from now. 
E) The stock price is expected to be $57 a share one year from now.

Question 15

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? ​

Accepted Answer

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

Question 16

Whited Inc.'s stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,rs,is 11.50%.What is the stock's expected price 5 years from now?

Accepted Answer

A) $40.17 
B) $41.20 
C) $42.26 
D) $43.34 
E) $44.46 
A) $40.17 
B) $41.20 
C) $42.26 
D) $43.34 
E) $44.46

Question 17

Misra Inc.forecasts a free cash flow of $35 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC)is 10.0% and the cost of equity is 15.0%,what is the horizon,or continuing,value in millions at t = 3?

Accepted Answer

A) $821 
B) $862 
C) $905 
D) $950 
E) $997 
A) $821 
B) $862 
C) $905 
D) $950 
E) $997

Question 18

If D0 = $2.25,g (which is constant)= 3.5%,and P0 = $50,what is the stock's expected dividend yield for the coming year?

Accepted Answer

A) 4.42% 
B) 4.66% 
C) 4.89% 
D) 5.13% 
E) 5.39% 
A) 4.42% 
B) 4.66% 
C) 4.89% 
D) 5.13% 
E) 5.39%

Question 19

You must estimate the intrinsic value of Noe Technologies' stock.The end-of-year free cash flow (FCF1)is expected to be $27.50 million,and it is expected to grow at a constant rate of 7.0% a year thereafter.The company's WACC is 10.0%,it has $125.0 million of long-term debt plus preferred stock outstanding,and there are 15.0 million shares of common stock outstanding.What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

A) $48.64 
B) $50.67 
C) $52.78 
D) $54.89 
E) $57.08 
A) $48.64 
B) $50.67 
C) $52.78 
D) $54.89 
E) $57.08

Question 20

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

Accepted Answer

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

Exam 9: Stocks and Their Valuation

Rebello's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal)rate of return?

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,​

Which of the following statements is CORRECT?

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D0?

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? ​

Founders' shares are a type of classified stock where the shares are owned by the firm's founders,and they generally have more votes per share than the other classes of common stock.

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? ​

When a new issue of stock is brought to market,it is the marginal investor who determines the price at which the stock will trade.

According to the basic DCF stock valuation model,the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

The preemptive right is important to shareholders because it

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

If a stock's expected return as seen by the marginal investor exceeds this investor's required return,then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

A proxy is a document giving one party the authority to act for another party,including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

The expected return on Natter Corporation's stock is 14%.The stock's dividend is expected to grow at a constant rate of 8%,and it currently sells for $50 a share.Which of the following statements is CORRECT?

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? ​

Whited Inc.'s stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,rs,is 11.50%.What is the stock's expected price 5 years from now?

Misra Inc.forecasts a free cash flow of $35 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC)is 10.0% and the cost of equity is 15.0%,what is the horizon,or continuing,value in millions at t = 3?

If D0 = $2.25,g (which is constant)= 3.5%,and P0 = $50,what is the stock's expected dividend yield for the coming year?

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

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, leasing, warrants, and Convertibles

Mergers and Acquisitions

Continuous Compounding and Discounting

Zero Coupon Bonds

Bankruptcy and Reorganization

Calculating Beta Coefficients

Using the Capm to Estimate the Risk-Adjusted Cost of Capital

Techniques for Measuring Beta Risk

Degree of Leverage

Filters

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D₀?

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT?

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT?

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 10.1%,and the constant growth rate is g = 4.0%.What is 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?

Whited Inc.'s stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,r_s,is 11.50%.What is the stock's expected price 5 years from now?

If D₀ = $2.25,g (which is constant)= 3.5%,and P₀ = $50,what is the stock's expected dividend yield for the coming year?