Question 1

Which of the following statements is FALSE?

Accepted Answer

A) As firms mature,their earnings exceed their investment needs and they begin to pay dividends. 
B) Total return equals earnings multiplied by the dividend payout rate. 
C) Cutting the firm's dividend to increase investment will raise the stock price if,and only if,the new investments have a positive NPV. 
D) We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth. 
A) As firms mature,their earnings exceed their investment needs and they begin to pay dividends. 
B) Total return equals earnings multiplied by the dividend payout rate. 
C) Cutting the firm's dividend to increase investment will raise the stock price if,and only if,the new investments have a positive NPV. 
D) We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth. B

Question 2

Use the following information to answer the question(s)below.  
-You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.If the average P/E ratio for the appliance industry sector is 17.0,the value of a share of Whirlpool stock based upon the comparables approach is closest to:

Accepted Answer

A) $103.70 
B) $27.90 
C) $35.90 
D) $23.10 
A) $103.70 
B) $27.90 
C) $35.90 
D) $23.10 A

Question 3

Growing Real Fast Company (GRF)is expected to have a 25 percent growth rate for the next four years (effecting D1,D2,D3,and D4).Beginning in year five,the growth rate is expected to drop to 7 percent per year and last indefinitely.If GRF just paid a $2.00 dividend and the appropriate discount rate is 15 percent,then what is the value of a share of GRE?

Accepted Answer

Current Value of Share = 2.174+ 2.363 + 2.568 + 2.792 + 37.34 = $47.24

Question 4

Use the following information to answer the question(s)below.  
-You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.If Whirlpool stock is currently trading at $87.00 per share,then Whirlpool's P/E ratio is closest to:

Accepted Answer

A) 17.00 
B) 13.50 
C) 14.25 
D) 7.00 
A) 17.00 
B) 13.50 
C) 14.25 
D) 7.00

Question 5

Wyatt Oil presently pays no dividend.You anticipate Wyatt Oil will pay an annual dividend of $0.56 per share two years from today and you expect dividends to grow by 4% per year thereafter.IF Wyatt Oil's equity cost of capital is 12%,then the value of a share of Wyatt Oil today is:

Accepted Answer

A) $4.67 
B) $5.00 
C) $6.25 
D) $7.00 
A) $4.67 
B) $5.00 
C) $6.25 
D) $7.00

Question 6

Nielson Motors has a share price of $25 today.If Nielson Motors is expected to pay a dividend of $0.75 this year,and its stock price is expected to grow to $26.75 at the end of the year,then Nielson's dividend yield and equity cost of capital are:

Accepted Answer

A) 3.0% and 7.0% respectively. 
B) 3.0% and 10.0% respectively. 
C) 4.0% and 6.0% respectively. 
D) 4.0% and 10.0% respectively. 
A) 3.0% and 7.0% respectively. 
B) 3.0% and 10.0% respectively. 
C) 4.0% and 6.0% respectively. 
D) 4.0% and 10.0% respectively.

Question 7

Use the information for the question(s)below.
Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future.Defenestration's equity cost of capital is 13%.
-Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the remaining $2 per share to repurchase stock.If Defenestration's payout rate remains constant,then Defenestration's stock price is closest to:

Accepted Answer

A) $50.00 
B) $22.25 
C) $32.30 
D) $30.75 
A) $50.00 
B) $22.25 
C) $32.30 
D) $30.75

Question 8

Use the information for the question(s)below.
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year.You expect Von Bora's stock price to be $25.00 at the end of two years.Von Bora's equity cost of capital is 10%.
-Suppose you plan to hold Von Bora stock for only one year.Your capital gain from holding Von Bora stock for the first year is closest to:

Accepted Answer

A) $0.95 
B) $1.40 
C) $1.85 
D) $1.25 
A) $0.95 
B) $1.40 
C) $1.85 
D) $1.25

Question 9

JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations.Prior to this announcement,JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share.With the new expansion,JRN's dividends are expected to grow at 8% per year indefinitely.Assuming that JRN's risk is unchanged by the expansion,the value of a share of JRN after the announcement is closest to:

Accepted Answer

A) $25.00 
B) $15.00 
C) $31.25 
D) $27.50 
A) $25.00 
B) $15.00 
C) $31.25 
D) $27.50

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) Future dividend payments and stock prices are not known with certainty;rather these values are based on the investor's expectations at the time the stock is purchased. 
B) The capital gain is the difference between the expected sale price and the purchase price of the stock. 
C) The sum of the dividend yield and the capital gain rate is called the total return of the stock. 
D) We divide the capital gain by the expected future stock price to calculate the capital gain rate. 
A) Future dividend payments and stock prices are not known with certainty;rather these values are based on the investor's expectations at the time the stock is purchased. 
B) The capital gain is the difference between the expected sale price and the purchase price of the stock. 
C) The sum of the dividend yield and the capital gain rate is called the total return of the stock. 
D) We divide the capital gain by the expected future stock price to calculate the capital gain rate.

Question 11

Use the following information to answer the question(s)below.  
-Assuming that Novartis AG (NVS)has an EPS of $3.35,based upon the average P/E ratio for its competitors,Novartis' stock price is closest to:

Accepted Answer

A) $13.00 
B) $31.86 
C) $43.47 
D) $44.35 
A) $13.00 
B) $31.86 
C) $43.47 
D) $44.35

Question 12

Use the information for the question(s)below.
Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future.Defenestration's equity cost of capital is 13%.
-A firm's net investment is:

Accepted Answer

A) its capital expenditures in excess of depreciation. 
B) its free cash flow net of increases in working capital. 
C) its enterprise value in excess of debt owed. 
D) the market value of equity plus debt. 
A) its capital expenditures in excess of depreciation. 
B) its free cash flow net of increases in working capital. 
C) its enterprise value in excess of debt owed. 
D) the market value of equity plus debt.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) The most common valuation multiple is the price-earnings (P/
E) ratio. 
B) You should be willing to pay proportionally more for a stock with lower current earnings. 
C) A firm's P/E ratio is equal to the share price divided by its earnings per share. 
D) The intuition behind the use of the P/E ratio is that when you buy a stock,you are in sense buying the rights to the firm's future earnings and differences in the scale of the firms' earnings are likely to persist. 
A) The most common valuation multiple is the price-earnings (P/
E) ratio. 
B) You should be willing to pay proportionally more for a stock with lower current earnings. 
C) A firm's P/E ratio is equal to the share price divided by its earnings per share. 
D) The intuition behind the use of the P/E ratio is that when you buy a stock,you are in sense buying the rights to the firm's future earnings and differences in the scale of the firms' earnings are likely to persist.

Question 14

Given Nielson's current share price,if Nielson's equity cost of capital is 13%,then Nielson's expected growth rate is closest to:

Accepted Answer

A) 5% 
B) 6% 
C) 7% 
D) 8% 
A) 5% 
B) 6% 
C) 7% 
D) 8%

Question 15

Use the information for the question(s)below.
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year.You expect Von Bora's stock price to be $25.00 at the end of two years.Von Bora's equity cost of capital is 10%.
-Suppose you plan to hold Von Bora stock for only one year.Your dividend yield from holding Von Bora stock for the first year is closest to:

Accepted Answer

A) 6.0% 
B) 4.0% 
C) 6.5% 
D) 5.5% 
A) 6.0% 
B) 4.0% 
C) 6.5% 
D) 5.5%

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) The total payout model allows us to ignore the firm's choice between dividends and share repurchases. 
B) By repurchasing shares,the firm increases its share count,which decreases its earning and dividends on a per-share basis. 
C) The total payout model discounts the total payouts that the firm makes to shareholders,which is the total amount spent on both dividends and share repurchases. 
D) In the dividend discount model,we implicitly assume that any cash paid out to the shareholders takes the form of a dividend. 
A) The total payout model allows us to ignore the firm's choice between dividends and share repurchases. 
B) By repurchasing shares,the firm increases its share count,which decreases its earning and dividends on a per-share basis. 
C) The total payout model discounts the total payouts that the firm makes to shareholders,which is the total amount spent on both dividends and share repurchases. 
D) In the dividend discount model,we implicitly assume that any cash paid out to the shareholders takes the form of a dividend.

Question 17

You expect that Bean Enterprises will have earnings per share of $2 for the coming year.Bean plans to retain all of its earnings for the next three years.For the subsequent two years,the firm plans on retaining 50% of its earnings.It will then retain only 25% of its earnings from that point forward.Retained earnings will be invested in projects with an expected return of 20% per year.If Bean's equity cost of capital is 12%,then the price of a share of Bean's stock is closest to:

Accepted Answer

A) $17.00 
B) $10.75 
C) $27.75 
D) $43.50 
A) $17.00 
B) $10.75 
C) $27.75 
D) $43.50

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) There are two potential sources of cash flows from owning a stock. 
B) An investor will be willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV. 
C) An investor might generate cash by choosing to sell the shares at some future date. 
D) Because the cash flows from stock are known with certainty,we can discount them using the risk-free interest rate. 
A) There are two potential sources of cash flows from owning a stock. 
B) An investor will be willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV. 
C) An investor might generate cash by choosing to sell the shares at some future date. 
D) Because the cash flows from stock are known with certainty,we can discount them using the risk-free interest rate.

Question 19

Use the information for the question(s)below.
You expect DM Corporation to generate the following free cash flows over the next five years:   Beginning with year six,you estimate that DM's free cash flows will grow at 6% per year and that DM's weighted average cost of capital is 15%.
-Calculate the enterprise value for DM Corporation.

Accepted Answer

V₀ = @#IMG-DLM& + @#IMG-DLM& + ...+ @#IMG-DLM& +@#IMG-DLM& V₀

Question 20

Which of the following formulas is INCORRECT?

Accepted Answer

A) Divt =  
× Dividend Payout Rate 
B) PN =   
C) earnings growth rate = retention rate × return on new investment 
D) P0 =  
+
  
+ ...+
  
+
  
×
   
A) Divt =  
× Dividend Payout Rate 
B) PN =   
C) earnings growth rate = retention rate × return on new investment 
D) P0 =  
+
  
+ ...+
  
+
  
×

Exam 9: Valuing Stocks

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. -You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.If Whirlpool stock is currently trading at $87.00 per share,then Whirlpool's P/E ratio is closest to:

Wyatt Oil presently pays no dividend.You anticipate Wyatt Oil will pay an annual dividend of $0.56 per share two years from today and you expect dividends to grow by 4% per year thereafter.IF Wyatt Oil's equity cost of capital is 12%,then the value of a share of Wyatt Oil today is:

Nielson Motors has a share price of $25 today.If Nielson Motors is expected to pay a dividend of $0.75 this year,and its stock price is expected to grow to $26.75 at the end of the year,then Nielson's dividend yield and equity cost of capital are:

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. -Assuming that Novartis AG (NVS)has an EPS of $3.35,based upon the average P/E ratio for its competitors,Novartis' stock price is closest to:

Use the information for the question(s)below. Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future.Defenestration's equity cost of capital is 13%. -A firm's net investment is:

Which of the following statements is FALSE?

Given Nielson's current share price,if Nielson's equity cost of capital is 13%,then Nielson's expected growth rate is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following formulas is INCORRECT?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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