Question 1

Cutting the firm's dividend to increase investment will raise the stock price if,and only if,the new investments have

Accepted Answer

A)  a positive NPV. 
B)  a positive IRR. 
C)  a positive payback period. 
D)  a positive growth rate. 
A)  a positive NPV. 
B)  a positive IRR. 
C)  a positive payback period. 
D)  a positive growth rate.

Question 2

The firm's weighted average capital cost (WACC)is mainly used in

Accepted Answer

A)  the zero dividend growth model. 
B)  the constant dividend growth model. 
C)  the discounted free cash flow model. 
D)  the total payout model. 
A)  the zero dividend growth model. 
B)  the constant dividend growth model. 
C)  the discounted free cash flow model. 
D)  the total payout model.

Question 3

Monsters Inc.is a utility company that recently paid a common stock dividend of $2.35 per share.Determine the current price of a share of Monsters' common stock if its divided growth rate is expected to remain at 7 percent per year indefinitely and its equity cost of capital is 12 percent.

Accepted Answer

Using the constant growth divi

Question 4

In general,one of the reasons that the constant dividend growth model should not be used for young firms is

Accepted Answer

A)  because young firms have no profits. 
B)  because young firms have zero growth. 
C)  because young firms' growth rates are unstable. 
D)  because young firms grow too fast. 
A)  because young firms have no profits. 
B)  because young firms have zero growth. 
C)  because young firms' growth rates are unstable. 
D)  because young firms grow too fast.

Question 5

Because the cash flows from owning a stock are risky,we can only discount them using

Accepted Answer

A)  the risk-free interest rate. 
B)  the real interest rate. 
C)  the effective rate of interest. 
D)  the equity cost of capital. 
A)  the risk-free interest rate. 
B)  the real interest rate. 
C)  the effective rate of interest. 
D)  the equity cost of capital.

Question 6

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%.
-Assuming that Defenestration's dividend payout rate and expected growth rate remain constant,and Defenestration does not issue or repurchase shares,then Defenestration's stock price is closest to:

Accepted Answer

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

Question 7

Use the information for the question(s) below.
In a surprise announcement, NASA released details of a major contract with Lockheed-Martin (LMT) that would increase LMT's market value by $7.5 billion. It was widely expected by the market that this contract would be awarded to LMT's major competitor Boeing (BA). Assume that Boeing has 800 million shares outstanding and Lockheed Martin has 425 million shares outstanding. Prior to this announcement, the market felt that the probability of Boeing winning the contract was 90% and that Lockheed-Martin's chance was only about 10%.
-What are the implications of the efficient market hypothesis for corporate managers?

Accepted Answer

A manager seeking to boost the price of

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 $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 rate from holding Von Bora stock for the first year is closest to:

Accepted Answer

A)  3.5% 
B)  4.0% 
C)  6.0% 
D)  4.5% 
A)  3.5% 
B)  4.0% 
C)  6.0% 
D)  4.5%

Question 9

Which of the following statements is false?

Accepted Answer

A)  We can estimate the value of a firm's shares by multiplying its current earnings per share by the average P/E ratio of comparable firms. 
B)  For valuation purposes, the trailing P/E ratio is generally preferred, since it is based on actual, not expected, earnings. 
C)  Forward earnings are the expected earnings over the coming 12 months. 
D)  Trailing earnings are the earnings over the previous 12 months. 
A)  We can estimate the value of a firm's shares by multiplying its current earnings per share by the average P/E ratio of comparable firms. 
B)  For valuation purposes, the trailing P/E ratio is generally preferred, since it is based on actual, not expected, earnings. 
C)  Forward earnings are the expected earnings over the coming 12 months. 
D)  Trailing earnings are the earnings over the previous 12 months.

Question 10

Which of the following formulas is incorrect?

Accepted Answer

A)  Forward   =
  
B)  Forward   =
  
C)    =
  
D)  Forward   =
  
A)  Forward   =
  
B)  Forward   =
  
C)    =
  
D)  Forward   =

Question 11

Which of the following statements is correct?

Accepted Answer

A)  There is one potential source of cash flows from owning a stock. 
B)  There are two potential sources of cash flows from owning a stock. 
C)  There are three potential sources of cash flows from owning a stock. 
D)  There are more than three potential sources of cash flows from owning a stock. 
A)  There is one potential source of cash flows from owning a stock. 
B)  There are two potential sources of cash flows from owning a stock. 
C)  There are three potential sources of cash flows from owning a stock. 
D)  There are more than three potential sources of cash flows from owning a stock.

Question 12

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& V

Question 13

Suppose you plan to hold Von Bora stock for only one year.Calculate your total return from holding Von Bora stock for the first year.

Accepted Answer

P₁ = @#IMG-DLM& = @#IMG-DLM& = $24.10 P₀ = @#IMG-DLM& + @#IMG-DLM& = @#IMG-DLM& + @#IMG-DLM& = $23.17

Question 14

The valuation Triad links the firm's

Accepted Answer

A)  expected future cash flows, share price and cost of capital. 
B)  expected present cash flows, share price and cost of capital. 
C)  expected future earnings, share price and cost of capital. 
D)  expected present earnings, share price and cost of capital. 
A)  expected future cash flows, share price and cost of capital. 
B)  expected present cash flows, share price and cost of capital. 
C)  expected future earnings, share price and cost of capital. 
D)  expected present earnings, share price and cost of capital.

Question 15

Which of the following statements is false?

Accepted Answer

A)  The fact that a firm has an exceptional management team, has developed an efficient manufacturing process, or has just secured a patent on a new technology is ignored when we apply a valuation multiple. 
B)  Valuation multiples have the advantage that they allow us to incorporate specific information about the firm's cost of capital or future growth. 
C)  For firms with substantial tangible assets, the ratio of price to book value of equity per share is sometimes used. 
D)  Using multiples will not help us determine if an entire industry is overvalued. 
A)  The fact that a firm has an exceptional management team, has developed an efficient manufacturing process, or has just secured a patent on a new technology is ignored when we apply a valuation multiple. 
B)  Valuation multiples have the advantage that they allow us to incorporate specific information about the firm's cost of capital or future growth. 
C)  For firms with substantial tangible assets, the ratio of price to book value of equity per share is sometimes used. 
D)  Using multiples will not help us determine if an entire industry is overvalued.

Question 16

Use the information for the question(s) below.
You expect CCM Corporation to generate the following free cash flows over the next five years:
   Following year five, you estimate that CCM's free cash flows will grow at 5% per year and that CCM's weighted average cost of capital is 13%.
-If CCM has $200 million of debt and 8 million shares of stock outstanding,then the share price for CCM is closest to:

Accepted Answer

A)  $49.50 
B)  $12.50 
C)  $19.35 
D)  $24.50 
A)  $49.50 
B)  $12.50 
C)  $19.35 
D)  $24.50

Question 17

Which of the following statements is false?

Accepted Answer

A)  We must discount the cash flows from stock based on the equity cost of capital for the stock. 
B)  The divided yield is the percentage return the investor expects to earn from the dividend paid by the stock. 
C)  The firm might pay out cash to its shareholders in the form of a dividend. 
D)  The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price. 
A)  We must discount the cash flows from stock based on the equity cost of capital for the stock. 
B)  The divided yield is the percentage return the investor expects to earn from the dividend paid by the stock. 
C)  The firm might pay out cash to its shareholders in the form of a dividend. 
D)  The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price.

Question 18

Use the information for the question(s) below.
Suppose that Texas Trucking (TT) has earnings per share of $3.45 and EBITDA of $45 million. TT also has 5 million shares outstanding and debt of $150 million (net of cash). You believe that Oklahoma Logistics and Transport (OLT) is comparable to TT in terms of its underlying business, but OLT has no debt. OLT has a P/E of 12.5 and an enterprise value to EBITDA multiple of 7.
-Based upon the enterprise value to EBITDA ratio,the value of a share of Texas Trucking is closest to:

Accepted Answer

A)  $33.00 
B)  $82.50 
C)  $43.10 
D)  $21.25 
A)  $33.00 
B)  $82.50 
C)  $43.10 
D)  $21.25

Question 19

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 $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 20

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

Exam 7: Valuing Stocks

Cutting the firm's dividend to increase investment will raise the stock price if,and only if,the new investments have

The firm's weighted average capital cost (WACC)is mainly used in

Monsters Inc.is a utility company that recently paid a common stock dividend of $2.35 per share.Determine the current price of a share of Monsters' common stock if its divided growth rate is expected to remain at 7 percent per year indefinitely and its equity cost of capital is 12 percent.

In general,one of the reasons that the constant dividend growth model should not be used for young firms is

Because the cash flows from owning a stock are risky,we can only discount them using

Which of the following statements is false?

Which of the following formulas is incorrect?

Which of the following statements is correct?

Suppose you plan to hold Von Bora stock for only one year.Calculate your total return from holding Von Bora stock for the first year.

The valuation Triad links the firm's

Which of the following statements is false?

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

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 Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of 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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