Question 1

A floor broker is a person at the NASDAQ with a trading license who represents orders on the floor.

Accepted Answer

A) True 
 B)False  False

Question 2

Which of the following will be a source of cash flows for a shareholder of a certain stock?
I. Sale of the shares at a future date
II. The firm in which the shares are held paying out cash to shareholders in the form of dividends
III. The firm in which the shares are held increasing the total number of shares outstanding through a stock split

Accepted Answer

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

Question 3

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 A

Question 4

Use the figure for the question(s) below.  
-The above screen shot from Google Finance shows the basic stock information for Kraft Foods Inc. after the close of the stock market on May 30, 2008. What is the highest that the stock has traded at in the last 12 months?

Accepted Answer

A)  $32.44 
B)  $32.48 
C)  $32.99 
D)  $35.29 
A)  $32.44 
B)  $32.48 
C)  $32.99 
D)  $35.29

Question 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

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).

Question 8

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 9

Matilda Industries pays a dividend of $2.10 per share and is expected to pay this amount indefinitely. If Matilda's equity cost of capital is 9%, which of the following would be closest to Matilda's stock price?

Accepted Answer

A)  $14.00 
B)  $18.66 
C)  $23.33 
D)  $29.16 
A)  $14.00 
B)  $18.66 
C)  $23.33 
D)  $29.16

Question 10

Sunnyfax Publishing pays out all its earnings and has a share price of $37. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 13%. If the reinvestment does not affect Sunnyfax's equity cost of capital and earnings before the dividend cut were expected to be constant, what is the expected share price as a consequence of this decision?

Accepted Answer

A)  $36.67 
B)  $41.90 
C)  $52.38 
D)  $62.86 
A)  $36.67 
B)  $41.90 
C)  $52.38 
D)  $62.86

Question 11

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 12

What role do dividends play in stock investing?

Accepted Answer

Dividends are periodic payment

Question 13

Which of the following models directly values all of the firm's equity, rather than a single share?
I. Dividend-discount model
II. Total payout model
III. Discounted cash flow model

Accepted Answer

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

Question 14

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 15

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 16

Credenza Industries is expected to pay a dividend of $1.70 at the end of the coming year. It is expected to sell for $62 at the end of the year. If its equity cost of capital is 9%, what is the expected capital gain from the sale of this stock at the end of the coming year?

Accepted Answer

A)  $3.56 
B)  $56.88 
C)  $5.12 
D)  $58.44 
A)  $3.56 
B)  $56.88 
C)  $5.12 
D)  $58.44

Question 17

Spacefood Products will pay a dividend of $2.40 per share this year. It is expected that this dividend will grow by 5% per year each year in the future. What will be the current value of a single share of Spacefood's stock if the firm's equity cost of capital is 12%?

Accepted Answer

A)  $24.00 
B)  $22.29 
C)  $30.86 
D)  $34.29 
A)  $24.00 
B)  $22.29 
C)  $30.86 
D)  $34.29

Question 18

Use the figure for the question(s) below.  
-The above screen shot from Google Finance shows the price history of Progenics, a pharmaceutical company. In the time period shown, Progenics released information that an intravenously-administered formulation of their leading product had failed in a Phase III clinical trial. In which of the months shown in the price history is this most likely to have occurred?

Accepted Answer

A)  February 2008 
B)  March 2008 
C)  April 2008 
D)  May 2008 
A)  February 2008 
B)  March 2008 
C)  April 2008 
D)  May 2008

Question 19

What is a major assumption about growth rate in the dividend-discount model?

Accepted Answer

It is assumed that t

Question 20

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 10%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends is closest to ________.

Accepted Answer

A)  5.5% 
B)  14.5% 
C)  11.0% 
D)  5.0% 
A)  5.5% 
B)  14.5% 
C)  11.0% 
D)  5.0%

Exam 7: Stock Valuation

A floor broker is a person at the NASDAQ with a trading license who represents orders on the floor.

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

Use the figure for the question(s) below. -The above screen shot from Google Finance shows the basic stock information for Kraft Foods Inc. after the close of the stock market on May 30, 2008. What is the highest that the stock has traded at in the last 12 months?

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?

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

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

Matilda Industries pays a dividend of $2.10 per share and is expected to pay this amount indefinitely. If Matilda's equity cost of capital is 9%, which of the following would be closest to Matilda's stock price?

What role do dividends play in stock investing?

Which of the following models directly values all of the firm's equity, rather than a single share? I. Dividend-discount model II. Total payout model III. Discounted cash flow model

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

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

Credenza Industries is expected to pay a dividend of $1.70 at the end of the coming year. It is expected to sell for $62 at the end of the year. If its equity cost of capital is 9%, what is the expected capital gain from the sale of this stock at the end of the coming year?

Spacefood Products will pay a dividend of $2.40 per share this year. It is expected that this dividend will grow by 5% per year each year in the future. What will be the current value of a single share of Spacefood's stock if the firm's equity cost of capital is 12%?

What is a major assumption about growth rate in the dividend-discount model?

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 10%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends is closest to ________.

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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