Question 1

What are the major limitations of the dividend-discount model?

Accepted Answer

There is a tremendous amount of uncertai

Question 2

On a certain date,Hasbro has a stock price of $37.50,pays a dividend of $0.64,and has an equity cost of capital of 8%.An investor expects the dividend rate to increase by 6% per year in perpetuity.He then sells all stocks that he owns in Hasbro.Given Hasbro's share price,was this a reasonable action?

Accepted Answer

A) No,since the constant dividend growth rate gives a stock estimate of $37.50. 
B) No,since the constant dividend growth rate gives a stock estimate greater than $37.50. 
C) Yes,since the constant dividend growth rate gives a stock estimate greater than $37.50. 
D) No,since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect. 
E) Yes,since the constant dividend growth rate gives a stock estimate less than $37.50. 
A) No,since the constant dividend growth rate gives a stock estimate of $37.50. 
B) No,since the constant dividend growth rate gives a stock estimate greater than $37.50. 
C) Yes,since the constant dividend growth rate gives a stock estimate greater than $37.50. 
D) No,since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect. 
E) Yes,since the constant dividend growth rate gives a stock estimate less than $37.50.

Question 3

The Sisyphean Company's common stock is currently trading for $25.00 per share.The stock is expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 14%.If the dividend payout rate is expected to remain constant,then the expected growth rate in the Sisyphean Company's earnings is closest to:

Accepted Answer

A) 8% 
B) 6% 
C) 4% 
D) 2% 
E) 0% 
A) 8% 
B) 6% 
C) 4% 
D) 2% 
E) 0%

Question 4

Use the table for the question(s)below.
  
-General Industries is expected to generate the above free cash flows over the next five years,after which free cash flows are expected to grow at a rate of 3% per year.If the weighted average cost of capital is 8% and General Industries has cash of $10 million,debt of $40 million,and 80 million shares outstanding,what is General Industries' expected current share price?

Accepted Answer

A) $6.60 
B) $6.72 
C) $7.67 
D) $9.48 
E) $10.53 
A) $6.60 
B) $6.72 
C) $7.67 
D) $9.48 
E) $10.53

Question 5

What are dividend payments?

Accepted Answer

A) payments made to a company by investors for a share of the ownership of that company 
B) incremental increases in the value of the stock held by an investor due to rises in share price 
C) the difference between the original cost price of a share and the price an investor receives when that share is sold 
D) a part share of the profits or earnings of a company paid to each shareholder on the basis of the number of shares they hold 
E) periodic payments to the bondholders 
A) payments made to a company by investors for a share of the ownership of that company 
B) incremental increases in the value of the stock held by an investor due to rises in share price 
C) the difference between the original cost price of a share and the price an investor receives when that share is sold 
D) a part share of the profits or earnings of a company paid to each shareholder on the basis of the number of shares they hold 
E) periodic payments to the bondholders

Question 6

What additional adjustments are required to find the share price,in case we are using the discounted cash flow model?

Accepted Answer

Discounted cash flow model giv

Question 7

Northern Railways has a current stock price of $56.75 and is expected to pay a dividend of $1.15 in one year.If Northern's equity cost of capital is 12%,what price would Northern's stock be expected to sell for immediately after it pays the dividend?

Accepted Answer

A) $57.65 
B) $63.56 
C) $62.41 
D) $57.78 
E) $55.60 
A) $57.65 
B) $63.56 
C) $62.41 
D) $57.78 
E) $55.60

Question 8

Individual investors trade conservatively,given the difficulty of finding over- and under-valued stocks.

Accepted Answer

A) True 
 B)False

Question 9

Use the information for the question(s)below.
Gonzales Corporation generated free cash flow of $88 million this year.For the next two years,the company's free cash flow is expected to grow at a rate of 8%.After that time,the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year.Suppose the weighted average cost of capital is 10% and Gonzales Corporation has cash of $100 million,debt of $300 million,and 100 million shares outstanding.
-What is Gonzales Corporation's expected free cash flow in year 2?

Accepted Answer

A) $1,779.15 
B) $95.04 
C) $1,881.80 
D) $102.64 
E) $401.52 
A) $1,779.15 
B) $95.04 
C) $1,881.80 
D) $102.64 
E) $401.52

Question 10

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 7.5%.What price would an investor be expected to pay per share ten years in the future?

Accepted Answer

A) $16.67 
B) $25.01 
C) $33.34 
D) $41.68 
E) $12.50 
A) $16.67 
B) $25.01 
C) $33.34 
D) $41.68 
E) $12.50

Question 11

What is the difference between cumulative and non-cumulative preferred stock?

Accepted Answer

With cumulative preferred stock,any unpa

Question 12

NoGrowth Industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

Accepted Answer

A) $10.00 
B) $15.00 
C) $14.00 
D) $12.50 
E) $13.00 
A) $10.00 
B) $15.00 
C) $14.00 
D) $12.50 
E) $13.00

Question 13

What is the relationship between the growth rate and the cost of equity implied in the dividend-discount model?

Accepted Answer

For the dividend-discount model equation

Question 14

Tarmac Airlines has 115 million shares outstanding and expects earnings at the end of this year of $370 million.Tarmac plans to pay out 40% of its earnings as a dividend and 20% of its earnings through share repurchases.The firm has an equity cost of capital of 8%.If Tarmac' earnings are expected to grow by 3% per year and these payout rates remain constant,what is Tarmac's share price?

Accepted Answer

A) $38.61 
B) $24.13 
C) $64.35 
D) $25.74 
E) $16.09 
A) $38.61 
B) $24.13 
C) $64.35 
D) $25.74 
E) $16.09

Question 15

Which of the following is the best statement of the efficient markets hypothesis?

Accepted Answer

A) Investors with information that a stock had a positive net present value (NPV)will buy it,while investors with information that a stock had a negative net present value (NPV)will sell it. 
B) Investor's decisions are dependent on complete current information of a firm's cash flows and accurate predictions of future cash flows. 
C) Competition between investors works to make the net present value (NPV)of all trading opportunities zero. 
D) A share's price is the aggregate of the information of many investors. 
E) Investors should only buy stocks with a positive net present value (NPV). 
A) Investors with information that a stock had a positive net present value (NPV)will buy it,while investors with information that a stock had a negative net present value (NPV)will sell it. 
B) Investor's decisions are dependent on complete current information of a firm's cash flows and accurate predictions of future cash flows. 
C) Competition between investors works to make the net present value (NPV)of all trading opportunities zero. 
D) A share's price is the aggregate of the information of many investors. 
E) Investors should only buy stocks with a positive net present value (NPV).

Question 16

Rylan Industries is expected to pay a dividend of $5.20 per year for the next four years.If the current price of Rylan stock is $32.63,and Rylan's equity cost of capital is 14%,what price would you expect Rylan's stock to sell for at the end of the four years?

Accepted Answer

A) $29.52 
B) $55.11 
C) $25.58 
D) $80.70 
E) $11.83 
A) $29.52 
B) $55.11 
C) $25.58 
D) $80.70 
E) $11.83

Question 17

A firm can either pay its earnings out to its investors,or it can keep them and reinvest them.

Accepted Answer

A) True 
 B)False

Question 18

A company has stock which costs $42.00 per share and pays a dividend of $2.50 per share this year.The company's cost of equity is 8%.What is the expected annual growth rate of the company's dividends?

Accepted Answer

A) 2% 
B) 4% 
C) 8% 
D) 11% 
E) 5% 
A) 2% 
B) 4% 
C) 8% 
D) 11% 
E) 5%

Question 19

Which of the following models can be used to value a firm without explicitly forecasting that firm's dividends,share repurchases,or its use of debt? I.Dividend-discount model

Accepted Answer

A) I only 
B) II only 
C) III only 
D) II and III 
E) I and II 
A) I only 
B) II only 
C) III only 
D) II and III 
E) I and II

Question 20

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 
E) $29.75 
A) $25.00 
B) $15.00 
C) $31.25 
D) $27.50 
E) $29.75

What are the major limitations of the dividend-discount model?

What are dividend payments?

What additional adjustments are required to find the share price,in case we are using the discounted cash flow model?

Northern Railways has a current stock price of $56.75 and is expected to pay a dividend of $1.15 in one year.If Northern's equity cost of capital is 12%,what price would Northern's stock be expected to sell for immediately after it pays the dividend?

Individual investors trade conservatively,given the difficulty of finding over- and under-valued stocks.

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 7.5%.What price would an investor be expected to pay per share ten years in the future?

What is the difference between cumulative and non-cumulative preferred stock?

NoGrowth Industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

What is the relationship between the growth rate and the cost of equity implied in the dividend-discount model?

Which of the following is the best statement of the efficient markets hypothesis?

Rylan Industries is expected to pay a dividend of $5.20 per year for the next four years.If the current price of Rylan stock is $32.63,and Rylan's equity cost of capital is 14%,what price would you expect Rylan's stock to sell for at the end of the four years?

A firm can either pay its earnings out to its investors,or it can keep them and reinvest them.

A company has stock which costs $42.00 per share and pays a dividend of $2.50 per share this year.The company's cost of equity is 8%.What is the expected annual growth rate of the company's dividends?

Which of the following models can be used to value a firm without explicitly forecasting that firm's dividends,share repurchases,or its use of debt? I.Dividend-discount model

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

Exam 7: Valuing Stocks

What are the major limitations of the dividend-discount model?

What are dividend payments?

What additional adjustments are required to find the share price,in case we are using the discounted cash flow model?

Northern Railways has a current stock price of $56.75 and is expected to pay a dividend of $1.15 in one year.If Northern's equity cost of capital is 12%,what price would Northern's stock be expected to sell for immediately after it pays the dividend?

Individual investors trade conservatively,given the difficulty of finding over- and under-valued stocks.

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 7.5%.What price would an investor be expected to pay per share ten years in the future?

What is the difference between cumulative and non-cumulative preferred stock?

NoGrowth Industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

What is the relationship between the growth rate and the cost of equity implied in the dividend-discount model?

Which of the following is the best statement of the efficient markets hypothesis?

Rylan Industries is expected to pay a dividend of $5.20 per year for the next four years.If the current price of Rylan stock is $32.63,and Rylan's equity cost of capital is 14%,what price would you expect Rylan's stock to sell for at the end of the four years?

A firm can either pay its earnings out to its investors,or it can keep them and reinvest them.

A company has stock which costs $42.00 per share and pays a dividend of $2.50 per share this year.The company's cost of equity is 8%.What is the expected annual growth rate of the company's dividends?

Which of the following models can be used to value a firm without explicitly forecasting that firm's dividends,share repurchases,or its use of debt? I.Dividend-discount model

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters