Question 1

What is the value to you of a 10 percent coupon bond with semi-annual coupon payments and a par value of $10,000 that matures in 20 years if you require an 8 percent return?

Accepted Answer

A)  $9,652.89 
B)  $10,356.65 
C)  $11,359.03 
D)  $11,979.28 
E)  $12,385.62 
A)  $9,652.89 
B)  $10,356.65 
C)  $11,359.03 
D)  $11,979.28 
E)  $12,385.62

Question 2

Which of the following statements regarding fundamental and relative valuation techniques is TRUE?

Accepted Answer

A)  Both techniques require an appropriate estimate of the required rate of return and the growth rate. 
B)  Both techniques require an estimate of a discount rate. 
C)  Both techniques require an estimate of future cash flows and a discount rate. 
D)  Both techniques require an estimate of future cash flows and a growth rate. 
E)  Both techniques require an estimate of future cash flows, the required rate of return, and a growth estimate. 
A)  Both techniques require an appropriate estimate of the required rate of return and the growth rate. 
B)  Both techniques require an estimate of a discount rate. 
C)  Both techniques require an estimate of future cash flows and a discount rate. 
D)  Both techniques require an estimate of future cash flows and a growth rate. 
E)  Both techniques require an estimate of future cash flows, the required rate of return, and a growth estimate.

Question 3

In 2018, Smiths Corp. issued a $50 par value preferred stock that pays a 6 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 7 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Accepted Answer

A)  $42.86 
B)  $30.00 
C)  $31.54 
D)  $33.38 
E)  $38.37 
A)  $42.86 
B)  $30.00 
C)  $31.54 
D)  $33.38 
E)  $38.37

Question 4

If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

Accepted Answer

A) True 
 B)False

Question 5

All of the following are ways in which a firm can increase its growth rate of equity earnings without any external financing EXCEPT

Accepted Answer

A)  decreasing its dividend payments. 
B)  increasing its retention ratio. 
C)  increasing its return on equity (RO
E) . 
D)  increasing its return on assets (RO
A) . 
E)  All of these are correct. 
A)  decreasing its dividend payments. 
B)  increasing its retention ratio. 
C)  increasing its return on equity (RO
E) . 
D)  increasing its return on assets (RO
A) . 
E)  All of these are correct.

Question 6

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8 percent per year for the next five years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.3. The present value today of dividends for years 1 to 5 is

Accepted Answer

A)  $4.06. 
B)  $10.28. 
C)  $12.40. 
D)  $14.52. 
E)  $10.0. 
A)  $4.06. 
B)  $10.28. 
C)  $12.40. 
D)  $14.52. 
E)  $10.0.

Question 7

Fundamentalists typically use the "Bottom-Up Approach", whereas technicians use the "Top-Down Approach" to the valuation process.

Accepted Answer

A) True 
 B)False

Question 8

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Fast Grow Corporation is expecting dividends to grow at a 20 percent rate for the next two years. The corporation just paid a $2 dividend, and the next dividend will be paid one year from now. After two years of rapid growth, dividends are expected to grow at a constant rate of 9 percent forever.
-Refer to Exhibit 8.5. If the required return is 14 percent, what is the value of Fast Grow Corporation common stock today?

Accepted Answer

A)  $40.26 
B)  $42.38 
C)  $46.70 
D)  $52.63 
E)  $62.78 
A)  $40.26 
B)  $42.38 
C)  $46.70 
D)  $52.63 
E)  $62.78

Question 9

Using the constant growth model, an increase in the required rate of return from 14 to 18 percent combined with an increase in the growth rate from 8 to 12 percent would cause the price to

Accepted Answer

A)  fall more than 4%0 
B)  fall less than 4%. 
C)  rise more than 4%. 
D)  rise less than 4%. 
E)  remain constant. 
A)  fall more than 4%0 
B)  fall less than 4%. 
C)  rise more than 4%. 
D)  rise less than 4%. 
E)  remain constant.

Question 10

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Fast Grow Corporation is expecting dividends to grow at a 20 percent rate for the next two years. The corporation just paid a $2 dividend, and the next dividend will be paid one year from now. After two years of rapid growth, dividends are expected to grow at a constant rate of 9 percent forever.
-Refer to Exhibit 8.5. Assume that the annual dividend grows at a constant rate of 9 percent indefinitely instead of the supernormal growth. How much is the stock worth if dividends grow annually at 9 percent?

Accepted Answer

A)  $40.00 
B)  $43.60 
C)  $45.60 
D)  $47.80 
E)  $52.40 
A)  $40.00 
B)  $43.60 
C)  $45.60 
D)  $47.80 
E)  $52.40

Question 11

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9 percent per year for the next three years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.4. The price of the stock today (P0) is

Accepted Answer

A)  $84.81. 
B)  $87.81. 
C)  $91.09. 
D)  $94.32. 
E)  $97.61. 
A)  $84.81. 
B)  $87.81. 
C)  $91.09. 
D)  $94.32. 
E)  $97.61.

Question 12

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

Accepted Answer

A) True 
 B)False

Question 13

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9 percent per year for the next three years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.4. The future price of the stock in year 3 is

Accepted Answer

A)  $81.75. 
B)  $84.81. 
C)  $92.56. 
D)  $101.85. 
E)  $111.16. 
A)  $81.75. 
B)  $84.81. 
C)  $92.56. 
D)  $101.85. 
E)  $111.16.

Question 14

The required rate of return is determined by (1) the real risk-free rate, (2) the expected rate of inflation, and (3) liquidity risk.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is NOT considered a basic economic force?

Accepted Answer

A)  fiscal policy 
B)  monetary policy 
C)  inflation 
D)  P/E ratio 
E)  All of these are basic economic forces. 
A)  fiscal policy 
B)  monetary policy 
C)  inflation 
D)  P/E ratio 
E)  All of these are basic economic forces.

Question 16

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6 percent annual growth rate indefinitely. If the required rate of return on this investment is 12 percent, what is the current value of this common stock?

Accepted Answer

A)  $1.50 
B)  $12.50 
C)  $13.25 
D)  $25.00 
E)  $26.50 
A)  $1.50 
B)  $12.50 
C)  $13.25 
D)  $25.00 
E)  $26.50

Question 17

Many analysts recommend that you should read an annual report forwards, that is, you would read the footnotes last.

Accepted Answer

A) True 
 B)False

Question 18

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9 percent per year for the next three years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.4. The dividends for years 1, 2, and 3 are

Accepted Answer

A)  $1.5, $2.0, and $2.05. 
B)  $1.64, $1.78, and $1.94. 
C)  $1.64, $1.94, and $2.24. 
D)  $1.5, $2.40, and $3.30. 
E)  $2.07, $2.14, and $2.21. 
A)  $1.5, $2.0, and $2.05. 
B)  $1.64, $1.78, and $1.94. 
C)  $1.64, $1.94, and $2.24. 
D)  $1.5, $2.40, and $3.30. 
E)  $2.07, $2.14, and $2.21.

Question 19

Using the constant growth model, an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

Accepted Answer

A)  rise more than 1%. 
B)  rise less than 1%. 
C)  remain constant. 
D)  fall more than 1%. 
E)  fall less than 1%. 
A)  rise more than 1%. 
B)  rise less than 1%. 
C)  remain constant. 
D)  fall more than 1%. 
E)  fall less than 1%.

Question 20

An undervalued investment is so expensive that we will not receive a fair return if we bought it.

Accepted Answer

A) True 
 B)False

What is the value to you of a 10 percent coupon bond with semi-annual coupon payments and a par value of $10,000 that matures in 20 years if you require an 8 percent return?

Which of the following statements regarding fundamental and relative valuation techniques is TRUE?

If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

All of the following are ways in which a firm can increase its growth rate of equity earnings without any external financing EXCEPT

Fundamentalists typically use the "Bottom-Up Approach", whereas technicians use the "Top-Down Approach" to the valuation process.

Using the constant growth model, an increase in the required rate of return from 14 to 18 percent combined with an increase in the growth rate from 8 to 12 percent would cause the price to

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

The required rate of return is determined by (1) the real risk-free rate, (2) the expected rate of inflation, and (3) liquidity risk.

Which of the following is NOT considered a basic economic force?

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6 percent annual growth rate indefinitely. If the required rate of return on this investment is 12 percent, what is the current value of this common stock?

Many analysts recommend that you should read an annual report forwards, that is, you would read the footnotes last.

Using the constant growth model, an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

An undervalued investment is so expensive that we will not receive a fair return if we bought it.

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 8: Equity Valuation

What is the value to you of a 10 percent coupon bond with semi-annual coupon payments and a par value of $10,000 that matures in 20 years if you require an 8 percent return?

Which of the following statements regarding fundamental and relative valuation techniques is TRUE?

If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

All of the following are ways in which a firm can increase its growth rate of equity earnings without any external financing EXCEPT

Fundamentalists typically use the "Bottom-Up Approach", whereas technicians use the "Top-Down Approach" to the valuation process.

Using the constant growth model, an increase in the required rate of return from 14 to 18 percent combined with an increase in the growth rate from 8 to 12 percent would cause the price to

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

The required rate of return is determined by (1) the real risk-free rate, (2) the expected rate of inflation, and (3) liquidity risk.

Which of the following is NOT considered a basic economic force?

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6 percent annual growth rate indefinitely. If the required rate of return on this investment is 12 percent, what is the current value of this common stock?

Many analysts recommend that you should read an annual report forwards, that is, you would read the footnotes last.

Using the constant growth model, an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

An undervalued investment is so expensive that we will not receive a fair return if we bought it.

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters