Question 1

Which of the following statements is FALSE regarding profitable and unprofitable growth?

Accepted Answer

A)  If a firm wants to increase its share price, it must diversify. 
B)  If a firm retains more earnings, it will pay out less of those earnings, reducing its dividends. 
C)  A firm can increase its growth rate by retaining more of its earnings. 
D)  Cutting a firm's dividend to increase investment will raise the stock price if the new investment has a positive net present value (NPV). 
A)  If a firm wants to increase its share price, it must diversify. 
B)  If a firm retains more earnings, it will pay out less of those earnings, reducing its dividends. 
C)  A firm can increase its growth rate by retaining more of its earnings. 
D)  Cutting a firm's dividend to increase investment will raise the stock price if the new investment has a positive net present value (NPV). A

Question 2

A "round lot" consists of how many shares?

Accepted Answer

A)  1 
B)  10 
C)  100 
D)  1,000 
A)  1 
B)  10 
C)  100 
D)  1,000 C

Question 3

You placed an order to purchase stock where you specified the maximum price you were willing to pay. This type of order is known as a ________.

Accepted Answer

A)  maximum order 
B)  limit order 
C)  floor order 
D)  market order 
A)  maximum order 
B)  limit order 
C)  floor order 
D)  market order B

Question 4

What role do dividends play in stock investing?

Accepted Answer

Dividends are periodic payment

Question 5

Forecasting dividends requires forecasting the firm's earnings, dividend payout rate, and future share count.

Accepted Answer

A) True 
 B)False

Question 6

Owen Inc. has a current stock price of $15.00 and is expected to pay a $0.80 dividend in one year. If Owen's equity cost of capital is 12%, what price would its stock be expected to sell for immediately after it pays the dividend?

Accepted Answer

A)  $11.20 
B)  $12.80 
C)  $16.80 
D)  $16.00 
A)  $11.20 
B)  $12.80 
C)  $16.80 
D)  $16.00

Question 7

A stock is expected to pay $0.70 per share every year indefinitely. If the current price of the stock is $18.90, and the equity cost of capital for the company that released the shares is 7.9%, what price would an investor be expected to pay per share five years into the future?

Accepted Answer

A)  $8.86 
B)  $14.18 
C)  $14.62 
D)  $15.06 
A)  $8.86 
B)  $14.18 
C)  $14.62 
D)  $15.06

Question 8

Gremlin Industries will pay a dividend of $1.90 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. The current price of Gremlin's stock is $23.50 per share. What is Gremlin's equity cost of capital?

Accepted Answer

A)  11% 
B)  12% 
C)  14% 
D)  16% 
A)  11% 
B)  12% 
C)  14% 
D)  16%

Question 9

Sinclair Pharmaceuticals, a small drug company, develops a vaccine that will protect against Helicobacter pylori, a bacteria that is the cause of a number of diseases of the stomach. It is expected that Sinclair Pharmaceuticals will experience extremely high growth over the next three years and will reinvest all of its earnings in expanding the company over this time. Earnings were $1.10 per share before the development of the vaccine and are expected to grow by 40% per year for the next three years. After this time, it is expected that growth will drop to 5% and stay there for the expected future. Four years from now Sinclair will pay dividends that are 75% of its earnings. If its equity cost of capital is 12%, what is the value of a share of Sinclair Pharmaceuticals today?

Accepted Answer

A)  $20.62 
B)  $24.17 
C)  $33.96 
D)  $33.51 
A)  $20.62 
B)  $24.17 
C)  $33.96 
D)  $33.51

Question 10

The above screen shot from Google Finance shows basic stock information for PepsiCo. If you owned   of PepsiCo for the period shown, how much would you have earned in dividend payments?

Accepted Answer

A)  $480.00 
B)  $658.44 
C)  $584.80 
D)  $688.00 
A)  $480.00 
B)  $658.44 
C)  $584.80 
D)  $688.00

Question 11

Assuming everything else remains unchanged, how does a firm's decision to increase its dividend-payout ratio affect its growth rate?

Accepted Answer

Increasing dividend-payout rat

Question 12

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 13

Can the dividend-discount model handle negative growth rates?

Accepted Answer

Yes, the dividend-discount model can han

Question 14

Von Bora Corporation (VBC) is expected to pay a $3.00 dividend at the end of this year. If you expect VBC's dividend to grow by 6% per year forever and VBC's equity cost of capital to be 13%, then the value of a share of VBC stock is closest to ________.

Accepted Answer

A)  $42.86 
B)  $15.79 
C)  $25.72 
D)  $17.14 
A)  $42.86 
B)  $15.79 
C)  $25.72 
D)  $17.14

Question 15

The Busby Corporation had a share price at the start of the year of $26.10, paid a dividend of $0.59 at the end of the year, and had a share price of $29.50 at the end of the year. Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period?

Accepted Answer

A)  14% 
B)  13% 
C)  12% 
D)  15% 
A)  14% 
B)  13% 
C)  12% 
D)  15%

Question 16

Which of the following statements is FALSE of the dividend-discount model?

Accepted Answer

A)  We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth. 
B)  As firms mature, their growth slows to rates more typical of established companies. 
C)  The dividend-discount model values the stock based on a forecast of the future dividends paid to shareholders. 
D)  The simplest forecast for the firm's future dividends states that they will grow at a constant rate, i.e., forever. 
A)  We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth. 
B)  As firms mature, their growth slows to rates more typical of established companies. 
C)  The dividend-discount model values the stock based on a forecast of the future dividends paid to shareholders. 
D)  The simplest forecast for the firm's future dividends states that they will grow at a constant rate, i.e., forever.

Question 17

Stocks that do not pay a dividend must have a value of $0.

Accepted Answer

A) True 
 B)False

Question 18

Kirkevue Industries pays out all its earnings as dividends, currently expects earnings to be constant and has a share price of $27. In order to expand, Kirkevue announces it will cut its dividend payments from $2.15 to $1.75 per share and reinvest the retained funds. What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged?

Accepted Answer

A)  1.48% 
B)  0.14% 
C)  0.17% 
D)  0.15% 
A)  1.48% 
B)  0.14% 
C)  0.17% 
D)  0.15%

Question 19

You expect KT Industries (KTI) will have earnings per share of $5 this year and expect that they will pay out $1.25 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 13% and their equity cost of capital is 15%. The expected growth rate for KTI's dividends is closest to ________.

Accepted Answer

A)  11.3% 
B)  9.8% 
C)  5.9% 
D)  3.9% 
A)  11.3% 
B)  9.8% 
C)  5.9% 
D)  3.9%

Question 20

Aaron Inc. has 321 million shares outstanding. It expects earnings at the end of the year to be $641 million. The firm's equity cost of capital is 11%. Aaron pays out 50% of its earnings in total: 30% paid out as dividends and 20% used to repurchase shares. If Aaron's earnings are expected to grow at a constant 7% per year, what is Aaron's share price?

Accepted Answer

A)  $12.48 
B)  $24.96 
C)  $37.44 
D)  $49.92 
A)  $12.48 
B)  $24.96 
C)  $37.44 
D)  $49.92

Exam 7: Stock Valuation

Which of the following statements is FALSE regarding profitable and unprofitable growth?

A "round lot" consists of how many shares?

You placed an order to purchase stock where you specified the maximum price you were willing to pay. This type of order is known as a ________.

What role do dividends play in stock investing?

Forecasting dividends requires forecasting the firm's earnings, dividend payout rate, and future share count.

Owen Inc. has a current stock price of $15.00 and is expected to pay a $0.80 dividend in one year. If Owen's equity cost of capital is 12%, what price would its stock be expected to sell for immediately after it pays the dividend?

A stock is expected to pay $0.70 per share every year indefinitely. If the current price of the stock is $18.90, and the equity cost of capital for the company that released the shares is 7.9%, what price would an investor be expected to pay per share five years into the future?

Gremlin Industries will pay a dividend of $1.90 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. The current price of Gremlin's stock is $23.50 per share. What is Gremlin's equity cost of capital?

The above screen shot from Google Finance shows basic stock information for PepsiCo. If you owned of PepsiCo for the period shown, how much would you have earned in dividend payments?

Assuming everything else remains unchanged, how does a firm's decision to increase its dividend-payout ratio affect its growth rate?

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

Can the dividend-discount model handle negative growth rates?

Von Bora Corporation (VBC) is expected to pay a $3.00 dividend at the end of this year. If you expect VBC's dividend to grow by 6% per year forever and VBC's equity cost of capital to be 13%, then the value of a share of VBC stock is closest to ________.

Which of the following statements is FALSE of the dividend-discount model?

Stocks that do not pay a dividend must have a value of $0.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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