Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  Two firms with the same expected dividend and growth rates must also have the same stock price. 
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 stock has a required rate of return rs = 12%,and if its dividend is expected to grow at a constant rate of 5%,this implies that the stock's dividend yield is also 5%. 
D)  The price of a stock is the present value of all expected future dividends,discounted at the dividend 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 dividend and growth rates must also have the same stock price. 
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 stock has a required rate of return rs = 12%,and if its dividend is expected to grow at a constant rate of 5%,this implies that the stock's dividend yield is also 5%. 
D)  The price of a stock is the present value of all expected future dividends,discounted at the dividend growth rate. 
E)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

Question 2

You,in analyzing a stock,find that its expected return exceeds its required return.This suggests that you think

Accepted Answer

A)  the stock should be sold. 
B)  the stock is a good buy. 
C)  management is probably not trying to maximize the price per share. 
D)  dividends are not likely to be declared. 
E)  the stock is experiencing supernormal growth. 
A)  the stock should be sold. 
B)  the stock is a good buy. 
C)  management is probably not trying to maximize the price per share. 
D)  dividends are not likely to be declared. 
E)  the stock is experiencing supernormal growth.

Question 3

Kinkead Inc.forecasts that its free cash flow in the coming year,i.e. ,at t = 1,will be −$10 million,but its FCF at t = 2 will be $20 million.After Year 2,FCF is expected to grow at a constant rate of 4% forever.If the weighted average cost of capital is 14%,what is the firm's value of operations,in millions?

Accepted Answer

A)  $158 
B)  $167 
C)  $175 
D)  $184 
E)  $193 
A)  $158 
B)  $167 
C)  $175 
D)  $184 
E)  $193

Question 4

The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?

Accepted Answer

A)  $1,714,750 
B)  $1,805,000 
C)  $1,900,000 
D)  $2,000,000 
E)  $2,100,000 
A)  $1,714,750 
B)  $1,805,000 
C)  $1,900,000 
D)  $2,000,000 
E)  $2,100,000

Question 5

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 6

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

Question 7

Kelly Enterprises' 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 8

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 9

If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.

Accepted Answer

A) True 
 B)False

Question 10

Justus Motor Co.has a WACC of 11.50%,and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow,FCF0 in millions?

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 11

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 12

The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Accepted Answer

A) True 
 B)False

Question 13

The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

A) True 
 B)False

Question 14

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

Accepted Answer

A)  $16.28 
B)  $16.70 
C)  $17.13 
D)  $17.57 
E)  $18.01 
A)  $16.28 
B)  $16.70 
C)  $17.13 
D)  $17.57 
E)  $18.01

Question 15

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

Accepted Answer

A)  Assume that the required return on a given stock is 13%.If the stock's dividend is growing at a constant rate of 5%,its expected dividend yield is 5% as well. 
B)  A stock's dividend yield can never exceed its expected growth rate. 
C)  A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return. 
D)  Other things held constant,the higher a company's beta coefficient,the lower its required rate of return. 
E)  The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield. 
A)  Assume that the required return on a given stock is 13%.If the stock's dividend is growing at a constant rate of 5%,its expected dividend yield is 5% as well. 
B)  A stock's dividend yield can never exceed its expected growth rate. 
C)  A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return. 
D)  Other things held constant,the higher a company's beta coefficient,the lower its required rate of return. 
E)  The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.

Question 16

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

Question 17

Huxley Building Supplies' last free cash flow was $1.75 million.Its free cash flow growth rate is expected to be constant at 25% for 2 years,after which free cash flows are expected to grow at a rate of 6% forever.Its weighted average cost of capital WACC is 12%.Huxley has $5 million in short-term investments and $7 million in debt and has 1 million shares outstanding.What is the best estimate of the current intrinsic stock price?

Accepted Answer

A)  $39.58 
B)  $40.64 
C)  $41.71 
D)  $42.80 
E)  $44.92 
A)  $39.58 
B)  $40.64 
C)  $41.71 
D)  $42.80 
E)  $44.92

Question 18

Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year,and that dividend is expected to grow at a constant rate of 6.00% per year in the future.The company's beta is 1.15,the market risk premium is 5.50%,and the risk-free rate is 4.00%.What is Dyer's current stock price?

Accepted Answer

A)  $28.90 
B)  $29.62 
C)  $30.36 
D)  $31.12 
E)  $31.90 
A)  $28.90 
B)  $29.62 
C)  $30.36 
D)  $31.12 
E)  $31.90

Question 19

Young & Liu Inc.'s free cash flow during the just-ended year (t = 0)was $100 million,and FCF is expected to grow at a constant rate of 5% in the future.If the weighted average cost of capital is 15%,what is the firm's value of operations,in millions?

Accepted Answer

A)  $948 
B)  $998 
C)  $1,050 
D)  $1,103 
E)  $1,158 
A)  $948 
B)  $998 
C)  $1,050 
D)  $1,103 
E)  $1,158

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
B)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis)new issues of the firm's common stock. 
C)  The free cash flow valuation model,Vops =FCF1/(WACC − g),cannot be used for firms that have negative growth rates. 
D)  The free cash flow valuation model,Vops = FCF1/(WACC − g),can be used only for firms whose growth rates exceed their WACC. 
E)  If a company has two classes of common stock,Class A and Class B,the stocks may pay different dividends,but under all state charters the two classes must have the same voting rights. 
A)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
B)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis)new issues of the firm's common stock. 
C)  The free cash flow valuation model,Vops =FCF1/(WACC − g),cannot be used for firms that have negative growth rates. 
D)  The free cash flow valuation model,Vops = FCF1/(WACC − g),can be used only for firms whose growth rates exceed their WACC. 
E)  If a company has two classes of common stock,Class A and Class B,the stocks may pay different dividends,but under all state charters the two classes must have the same voting rights.

Exam 7: Corporate Valuation and Stock Valuation

Which of the following statements is CORRECT?

You,in analyzing a stock,find that its expected return exceeds its required return.This suggests that you think

The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?

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?

Merrell Enterprises' stock has an expected return of 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?

Kelly Enterprises' 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?

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?

If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.

Justus Motor Co.has a WACC of 11.50%,and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow,FCF0 in millions?

Which of the following statements is CORRECT?

The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

Young & Liu Inc.'s free cash flow during the just-ended year (t = 0)was $100 million,and FCF is expected to grow at a constant rate of 5% in the future.If the weighted average cost of capital is 15%,what is the firm's value of operations,in millions?

Which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Applications to Corporate Valuation

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

Filters

Kelly Enterprises' 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 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?

Justus Motor Co.has a WACC of 11.50%,and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow,FCF₀ in millions?