Question 1

A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction?

Accepted Answer

A)  3.48% 
B)  8.70% 
C)  13.91% 
D)  17.39% 
A)  3.48% 
B)  8.70% 
C)  13.91% 
D)  17.39%

Question 2

Can the dividend-discount model handle negative growth rates?

Accepted Answer

Yes, the dividend-discount model can han

Question 3

The ownership in a corporation is divided into shares of stock, which carry rights to a share in the profits of the firm through future dividend payments.

Accepted Answer

A) True 
 B)False

Question 4

You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean's equity cost of capital is 10%, then the price of a share of Bean's stock is closest to ________.

Accepted Answer

A)  $24.82 
B)  $16.54 
C)  $41.36 
D)  $66.18 
A)  $24.82 
B)  $16.54 
C)  $41.36 
D)  $66.18

Question 5

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 = Div1 / (rE - g) 
D)  rE = (Div1 / P0) - g 
A)  g = Retention Rate × Return on New Investment 
B)  Divt = EPSt × Dividend Payout Rate 
C)  P0 = Div1 / (rE - g) 
D)  rE = (Div1 / P0) - g

Question 6

A stock is expected to pay $2.60 per share every year indefinitely and the equity cost of capital for the company is 11%. What price would an investor be expected to pay per share next year?

Accepted Answer

A)  $5.91 
B)  $11.82 
C)  $17.73 
D)  $23.64 
A)  $5.91 
B)  $11.82 
C)  $17.73 
D)  $23.64

Question 7

Avril Synchronistics will pay a dividend of $1.20 per share this year. It is expected that this dividend will grow by 3% each year in the future. What will be the current value of a single share of Avril's stock if the firm's equity cost of capital is 16%?

Accepted Answer

A)  $6.46 
B)  $6.92 
C)  $9.23 
D)  $10.15 
A)  $6.46 
B)  $6.92 
C)  $9.23 
D)  $10.15

Question 8

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 8.4%. What price would an investor be expected to pay per share ten years in the future?

Accepted Answer

A)  $14.88 
B)  $22.32 
C)  $29.76 
D)  $37.20 
A)  $14.88 
B)  $22.32 
C)  $29.76 
D)  $37.20

Question 9

Valence Electronics has 213 million shares outstanding. It expects earnings at the end of the year of $800 million. Valence pays out 40% of its earnings in total-15% paid out as dividends and 25% used to repurchase shares. If Valence's earnings are expected to grow by 7% per year, these payout rates do not change, and Valence's equity cost of capital is 9%, what is Valence's share price?

Accepted Answer

A)  $11.27 
B)  $22.54 
C)  $60.10 
D)  $75.12 
A)  $11.27 
B)  $22.54 
C)  $60.10 
D)  $75.12

Question 10

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

Question 11

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 share of the profits paid to each shareholder on the basis of the number of shares they hold 
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 share of the profits paid to each shareholder on the basis of the number of shares they hold

Question 12

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 13

You expect KT industries (KTI) will have earnings per share of $4 this year and expect that they will pay out $1.75 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 10%. The value of a share of KTI's stock today is closest to ________.

Accepted Answer

A)  $78.14 
B)  $39.07 
C)  $65.12 
D)  $26.05 
A)  $78.14 
B)  $39.07 
C)  $65.12 
D)  $26.05

Question 14

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 15

Rylan Industries is expected to pay a dividend of $5.70 year for the next four years. If the current price of Rylan stock is $31.27, and Rylan's equity cost of capital is 12%, what price would you expect Rylan's stock to sell for at the end of the four years?

Accepted Answer

A)  $21.96 
B)  $39.53 
C)  $17.57 
D)  $61.49 
A)  $21.96 
B)  $39.53 
C)  $17.57 
D)  $61.49

Question 16

NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to ________.

Accepted Answer

A)  $9.60 
B)  $14.40 
C)  $13.20 
D)  $12.00 
A)  $9.60 
B)  $14.40 
C)  $13.20 
D)  $12.00

Question 17

Which of the following will NOT increase a company's dividend payments?

Accepted Answer

A)  It can issue more shares. 
B)  It can increase its earnings. 
C)  It can decrease the number of shares outstanding. 
D)  It can increase its dividend payout rate. 
A)  It can issue more shares. 
B)  It can increase its earnings. 
C)  It can decrease the number of shares outstanding. 
D)  It can increase its dividend payout rate.

Question 18

Which of the following formulas is INCORRECT?

Accepted Answer

A)  Divt = EPSt × Dividend Payout Rate 
B)  PN = (rE - g) × DivN+1 
C)  earnings growth rate = retention rate × return on new investment 
D)  rE = (Divt / P0) + g 
A)  Divt = EPSt × Dividend Payout Rate 
B)  PN = (rE - g) × DivN+1 
C)  earnings growth rate = retention rate × return on new investment 
D)  rE = (Divt / P0) + g

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is a limitation of the dividend-discount model?

Accepted Answer

A)  It cannot handle negative growth rates. 
B)  It requires accurate dividend forecasts, which is not possible. 
C)  It requires that the growth rate always be higher than the required rate of return, which is not realistic. 
D)  It does not consider past earnings and performance. 
A)  It cannot handle negative growth rates. 
B)  It requires accurate dividend forecasts, which is not possible. 
C)  It requires that the growth rate always be higher than the required rate of return, which is not realistic. 
D)  It does not consider past earnings and performance.

Exam 7: Stock Valuation

A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction?

Can the dividend-discount model handle negative growth rates?

The ownership in a corporation is divided into shares of stock, which carry rights to a share in the profits of the firm through future dividend payments.

Which of the following formulas is INCORRECT?

A stock is expected to pay $2.60 per share every year indefinitely and the equity cost of capital for the company is 11%. What price would an investor be expected to pay per share next year?

Avril Synchronistics will pay a dividend of $1.20 per share this year. It is expected that this dividend will grow by 3% each year in the future. What will be the current value of a single share of Avril's stock if the firm's equity cost of capital is 16%?

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 8.4%. What price would an investor be expected to pay per share ten years in the future?

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 are dividend payments?

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?

Rylan Industries is expected to pay a dividend of $5.70 year for the next four years. If the current price of Rylan stock is $31.27, and Rylan's equity cost of capital is 12%, what price would you expect Rylan's stock to sell for at the end of the four years?

NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to ________.

Which of the following will NOT increase a company's dividend payments?

Which of the following formulas is INCORRECT?

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

Which of the following is a limitation of the dividend-discount model?

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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