Question 1

Ocean Co. just paid a dividend of $2 per share out of earnings of $4 per share. If the book value per share is $25, what is the expected growth rate in dividends (g)?

Accepted Answer

A)  16 percent
B)  12 percent
C)  8 percent
D)  4 percent C

Question 2

Discuss the general principle at work in valuing a common stock.

Accepted Answer

The value of a common stock is the expected present value of all the dividends received by owning the stock, discounted at the market capitalization rate, or the cost of equity. This is the discounted cash flow (DCF)method.

Question 3

In which of the following exchanges does a computer act as the sole auctioneer?

Accepted Answer

A)  New York Stock Exchange, London Stock Exchange, Tokyo Stock Exchange, and Deutsche Borse
B)  New York Stock Exchange, Tokyo Stock Exchange, and Deutsche Borse only
C)  New York Stock Exchange, London Stock Exchange, and Tokyo Stock Exchange only
D)  London Stock Exchange, Shanghai Stock Exchange, Tokyo Stock Exchange, and Deutsche Borse only D

Question 4

A company forecasts growth of 6 percent for the next five years and 3 percent thereafter. Given last year's free cash flow was $100, what is its horizon value (PV looking forward from year 4)if the company cost of capital is 8 percent?

Accepted Answer

A)  $0
B)  $1,672
C)  $2,000
D)  $2,676

Question 5

The following are auction markets EXCEPT:

Accepted Answer

A)  New York Stock Exchange.
B)  London Stock Exchange.
C)  Tokyo Stock Exchange.
D)  Nasdaq.

Question 6

Michigan Co. just paid a dividend of $2 per share. Analysts expect future dividends to grow at 20 percent per year for the next four years and then grow at 6 percent per year thereafter. Calculate the expected dividend in year 5.

Accepted Answer

A)  $4.15
B)  $2.95
C)  $4.40
D)  $3.81

Question 7

An investor who uses a limit order instructs his brokerage firm to buy a limited quantity of shares at the best available price.

Accepted Answer

A) True 
 B)False

Question 8

One can estimate the dividend growth rate for a stable firm as

Accepted Answer

A)  plow-back rate/the return on equity (RO
E)  .
B)  plow-back rate - the return on equity (RO
E)  .
C)  plow-back rate + the return on equity (RO
E)  .
D)  plow-back rate × the return on equity (RO
E)  .

Question 9

Otobai Motor Company just paid a dividend of $1.40. Analysts expect its dividend to grow at a rate of 18 percent for the next three years and then a constant rate of 5 percent thereafter. What is the expected dividend per share at the end of year 5?

Accepted Answer

A)  $2.35
B)  $2.54
C)  $2.91
D)  $1.50

Question 10

It is not possible to value a firm that has a supernormal (variable)growth rate for the first few years of its life.

Accepted Answer

A) True 
 B)False

Question 11

Seven-Seas Co. just paid a dividend of $3 per share out of earnings of $5 per share. If its book value per share is $40.00 and its market price is $52.50 per share, calculate the required rate of return on the stock.

Accepted Answer

A)  12 percent
B)  11 percent
C)  5 percent
D)  6 percent

Question 12

River Co. just paid a dividend of $2 per share out of earnings of $4 per share. If its book value per share is $25 and its stock is currently selling for $40 per share, calculate the required rate of return on the stock.

Accepted Answer

A)  15.2 percent
B)  7.2 percent
C)  14.7 percent
D)  13.4 percent

Question 13

Most of the trading on the NYSE is in ordinary common stocks.

Accepted Answer

A) True 
 B)False

Question 14

Deluxe Company expects to pay a dividend of $2 per share at the end of year 1, $3 per share at the end of year 2, and then be sold for $32 per share at the end of year 2. If the required rate of return on the stock is 15 percent, what is the current value of the stock?

Accepted Answer

A)  $28.20
B)  $32.17
C)  $32.00
D)  $29.18

Question 15

For most firms, market value is usually greater than book value.

Accepted Answer

A) True 
 B)False

Question 16

Assume Boeing has about 10.3 billion shares outstanding and the stock price is $37.10. Also, assume the P/E ratio is about 18.3. Calculate the approximate market capitalization for GE.

Accepted Answer

A)  $679 billion
B)  $188 billion
C)  $382 billion
D)  $103 billion

Question 17

The dividend yield reported on finance.yahoo.com is calculated as follows:

Accepted Answer

A)  (dividend/year-high stock price) .
B)  (dividend/year-low stock price) .
C)  (dividend/closing stock price) .
D)  (dividends/earnings) .

Question 18

The growth rate in dividends is a function of two ratios. They are

Accepted Answer

A)  ROA and ROE.
B)  dividend yield and growth rate in stock price.
C)  ROE and the plowback ratio.
D)  book value per share and EPS.

Question 19

A stock's price is based on the expected present value, at the market capitalization rate, of all the stock's future earnings.

Accepted Answer

A) True 
 B)False

Question 20

Explain the term primary market.

Accepted Answer

The answer of Explain the term primary market....

Exam 4: The Value of Common Stocks

Ocean Co. just paid a dividend of $2 per share out of earnings of $4 per share. If the book value per share is $25, what is the expected growth rate in dividends (g) ?

Discuss the general principle at work in valuing a common stock.

In which of the following exchanges does a computer act as the sole auctioneer?

A company forecasts growth of 6 percent for the next five years and 3 percent thereafter. Given last year's free cash flow was $100, what is its horizon value (PV looking forward from year 4) if the company cost of capital is 8 percent?

The following are auction markets EXCEPT:

Michigan Co. just paid a dividend of $2 per share. Analysts expect future dividends to grow at 20 percent per year for the next four years and then grow at 6 percent per year thereafter. Calculate the expected dividend in year 5.

An investor who uses a limit order instructs his brokerage firm to buy a limited quantity of shares at the best available price.

One can estimate the dividend growth rate for a stable firm as

Otobai Motor Company just paid a dividend of $1.40. Analysts expect its dividend to grow at a rate of 18 percent for the next three years and then a constant rate of 5 percent thereafter. What is the expected dividend per share at the end of year 5?

It is not possible to value a firm that has a supernormal (variable)growth rate for the first few years of its life.

Seven-Seas Co. just paid a dividend of $3 per share out of earnings of $5 per share. If its book value per share is $40.00 and its market price is $52.50 per share, calculate the required rate of return on the stock.

River Co. just paid a dividend of $2 per share out of earnings of $4 per share. If its book value per share is $25 and its stock is currently selling for $40 per share, calculate the required rate of return on the stock.

Most of the trading on the NYSE is in ordinary common stocks.

Deluxe Company expects to pay a dividend of $2 per share at the end of year 1, $3 per share at the end of year 2, and then be sold for $32 per share at the end of year 2. If the required rate of return on the stock is 15 percent, what is the current value of the stock?

For most firms, market value is usually greater than book value.

Assume Boeing has about 10.3 billion shares outstanding and the stock price is $37.10. Also, assume the P/E ratio is about 18.3. Calculate the approximate market capitalization for GE.

The dividend yield reported on finance.yahoo.com is calculated as follows:

The growth rate in dividends is a function of two ratios. They are

A stock's price is based on the expected present value, at the market capitalization rate, of all the stock's future earnings.

Explain the term primary market.