Question 1

Which of the following statements is false?

Accepted Answer

A)  Estimating dividends, especially for the distant future, is difficult. 
B)  A firm can only pay out its earnings to investors or reinvest its earnings. 
C)  Successful young firms often have high initial earnings growth rates. 
D)  According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the growth rate. 
A)  Estimating dividends, especially for the distant future, is difficult. 
B)  A firm can only pay out its earnings to investors or reinvest its earnings. 
C)  Successful young firms often have high initial earnings growth rates. 
D)  According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the growth rate.

Question 2

The firm's weighted average capital cost is the cost of capital that reflects

Accepted Answer

A)  the combined risk of the firm's equity and debt. 
B)  the combined risk of the firm's capital assets and current assets. 
C)  the combined risk of the firm's current assets and current liabilities. 
D)  the combined risk of the firm's fixed cost and variable cost. 
A)  the combined risk of the firm's equity and debt. 
B)  the combined risk of the firm's capital assets and current assets. 
C)  the combined risk of the firm's current assets and current liabilities. 
D)  the combined risk of the firm's fixed cost and variable cost.

Question 3

Which of the following statements is false?

Accepted Answer

A)  Stock markets aggregate the information and view of many different investors. 
B)  Only in the relatively rare case in which we have some superior information that other investors lack regarding the firm's cash flows and cost of capital would it make sense to second-guess the market stock price. 
C)  In most situations, a valuation model is best applied to tell us something about the value of the firm's stock. 
D)  The efficient market hypothesis implies that securities will be fairly priced, based on their future cash flows, given all information that is available to investors. 
A)  Stock markets aggregate the information and view of many different investors. 
B)  Only in the relatively rare case in which we have some superior information that other investors lack regarding the firm's cash flows and cost of capital would it make sense to second-guess the market stock price. 
C)  In most situations, a valuation model is best applied to tell us something about the value of the firm's stock. 
D)  The efficient market hypothesis implies that securities will be fairly priced, based on their future cash flows, given all information that is available to investors.

Question 4

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 on purchasing Von Bora stock in one year,right after the $1.40 dividend is paid.You then plan on selling your stock at the end of year two,right after the $1.50 dividend is paid.The total return that you will receive on your investment is closest to:

Accepted Answer

A)  9.50% 
B)  10.75% 
C)  10.25% 
D)  10.00% 
A)  9.50% 
B)  10.75% 
C)  10.25% 
D)  10.00%

Question 5

If you want to value a firm that consistently pays out its earnings as dividends,the simplest model for you to use is the

Accepted Answer

A)  enterprise value model. 
B)  total payout model. 
C)  dividend discount model. 
D)  discounted free cash flow model. 
A)  enterprise value model. 
B)  total payout model. 
C)  dividend discount model. 
D)  discounted free cash flow model.

Question 6

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 earnings 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 earnings 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 7

Which of the following statements is false?

Accepted Answer

A)  The more cash the firm uses to repurchase shares, the less it has available to pay dividends. 
B)  Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered. 
C)  We estimate a firm's current enterprise value by computing the present value of the firm's free cash flow. 
D)  We can interpret the enterprise value as the net cost of acquiring the firm's equity, taking its cash and paying off all debts. 
A)  The more cash the firm uses to repurchase shares, the less it has available to pay dividends. 
B)  Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered. 
C)  We estimate a firm's current enterprise value by computing the present value of the firm's free cash flow. 
D)  We can interpret the enterprise value as the net cost of acquiring the firm's equity, taking its cash and paying off all debts.

Question 8

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 price earnings multiple,the value of a share of Texas Trucking is closest to:

Accepted Answer

A)  $49.30 
B)  $43.10 
C)  $24.15 
D)  $27.60 
A)  $49.30 
B)  $43.10 
C)  $24.15 
D)  $27.60

Question 9

If you want to value a firm that has consistent earnings growth,but varies how it pays out these earnings to shareholders between dividends and repurchases,the simplest model for you to use is the

Accepted Answer

A)  enterprise value model. 
B)  dividend discount model. 
C)  total payout model. 
D)  discounted free cash flow model. 
A)  enterprise value model. 
B)  dividend discount model. 
C)  total payout model. 
D)  discounted free cash flow model.

Question 10

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 a sense buying the rights to the firm's future earnings and differences in the scale of 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 a sense buying the rights to the firm's future earnings and differences in the scale of firms' earnings are likely to persist.

Question 11

Which of the following statements is false?

Accepted Answer

A)  The equity cost of capital for a stock is the expected return of other investments available in the market with equivalent risk to the firm's shares. 
B)  The price of a share of stock is equal to the present value of the expected future dividends it will pay. 
C)  If the current stock price were less than P0 =   , it would be a negative NPV investment, and we would expect investors to rush in and sell it, driving down the stock's price. 
D)  The law of one price implies that to value any security, we must determine the expected cash flows an investor will receive from owning it. 
A)  The equity cost of capital for a stock is the expected return of other investments available in the market with equivalent risk to the firm's shares. 
B)  The price of a share of stock is equal to the present value of the expected future dividends it will pay. 
C)  If the current stock price were less than P0 =   , it would be a negative NPV investment, and we would expect investors to rush in and sell it, driving down the stock's price. 
D)  The law of one price implies that to value any security, we must determine the expected cash flows an investor will receive from owning it.

Question 12

Which of the following statements is false?

Accepted Answer

A)  In a share repurchase, the firm uses excess cash to buy back its own stock. 
B)  The discounted free cash flow model begins by determining the value of the firm's equity. 
C)  The discounted free cash flow model focuses on the cash flows to all of the firm's investors, both debt and equity holders, and allows us to avoid estimating the impact of the firm's borrowing decisions on earnings. 
D)  In recent years an increasing number of firms have replaced dividend payouts with share repurchases. 
A)  In a share repurchase, the firm uses excess cash to buy back its own stock. 
B)  The discounted free cash flow model begins by determining the value of the firm's equity. 
C)  The discounted free cash flow model focuses on the cash flows to all of the firm's investors, both debt and equity holders, and allows us to avoid estimating the impact of the firm's borrowing decisions on earnings. 
D)  In recent years an increasing number of firms have replaced dividend payouts with share repurchases.

Question 13

Which of the following is NOT a way that a firm can increase its dividend?

Accepted Answer

A)  by increasing its retention rate 
B)  by decreasing its shares outstanding 
C)  by increasing its earnings (net income) 
D)  by increasing its dividend payout rate 
A)  by increasing its retention rate 
B)  by decreasing its shares outstanding 
C)  by increasing its earnings (net income) 
D)  by increasing its dividend payout rate

Question 14

Which of the following formulas is incorrect?

Accepted Answer

A)  Capital Gain Rate =   
B)  Dividend Yield =   
C)  P0 =   +
  
D)  rE = Capital Gain Rate + Dividend Yield 
A)  Capital Gain Rate =   
B)  Dividend Yield =   
C)  P0 =   +
  
D)  rE = Capital Gain Rate + Dividend Yield

Question 15

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 $150 million of debt and 12 million shares of stock outstanding,then the share price for CCM is closest to:

Accepted Answer

A)  $49.50 
B)  $11.25 
C)  $20.50 
D)  $22.75 
A)  $49.50 
B)  $11.25 
C)  $20.50 
D)  $22.75

Question 16

Which of the following statements is correct?

Accepted Answer

A)  The expected total return of the stock should equal the expected return of other investments available in the market with higher risk. 
B)  The expected total return of the stock should equal the expected return of other investments available in the market with lower risk. 
C)  The expected total return of the stock should equal the expected return of other investments available in the market with equivalent risk. 
D)  The expected total return of the stock should equal the expected return of other investments available in the market with different risk. 
A)  The expected total return of the stock should equal the expected return of other investments available in the market with higher risk. 
B)  The expected total return of the stock should equal the expected return of other investments available in the market with lower risk. 
C)  The expected total return of the stock should equal the expected return of other investments available in the market with equivalent risk. 
D)  The expected total return of the stock should equal the expected return of other investments available in the market with different risk.

Question 17

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 do you anticipate will happen to Lockheed-Martin and Boeing's stock prices are a result of this surprise announcement?

Accepted Answer

Lockheed-Martin
Price increase = $7,500

Question 18

Which of the following formulas is incorrect?

Accepted Answer

A)  g = retention rate × return on new investment 
B)  Divt = EPSt × Dividend Payout Rate 
C)  P0 =   
D)  rE =   - g 
A)  g = retention rate × return on new investment 
B)  Divt = EPSt × Dividend Payout Rate 
C)  P0 =   
D)  rE =   - g

Question 19

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 20

In the discounted free cash flow model,we assume that

Accepted Answer

A)  we are focusing on the present value of all operating cash flows. 
B)  we are focusing on the present value of all investing cash flows. 
C)  we are focusing on the present value of all financing cash flows. 
D)  we are focusing on the present value of all cash flows before any payments to debt or equity holders. 
A)  we are focusing on the present value of all operating cash flows. 
B)  we are focusing on the present value of all investing cash flows. 
C)  we are focusing on the present value of all financing cash flows. 
D)  we are focusing on the present value of all cash flows before any payments to debt or equity holders.

Exam 7: Valuing Stocks

Which of the following statements is false?

The firm's weighted average capital cost is the cost of capital that reflects

Which of the following statements is false?

If you want to value a firm that consistently pays out its earnings as dividends,the simplest model for you to use is the

Which of the following statements is false?

Which of the following statements is false?

If you want to value a firm that has consistent earnings growth,but varies how it pays out these earnings to shareholders between dividends and repurchases,the simplest model for you to use is the

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

Which of the following is NOT a way that a firm can increase its dividend?

Which of the following formulas is incorrect?

Which of the following statements is correct?

Which of the following formulas is incorrect?

In the discounted free cash flow model,we assume that

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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