Question 1

Which of the following statements is most correct?

Accepted Answer

A)  Preferred stockholders have priority over common stockholders. 
B)  A big advantage of preferred stock is that preferred stock dividends are tax deductible for the issuing corporation. 
C)  Most preferred stock is owned by corporations. 
D)  Statements a and b are correct. 
E)  Statements a and c are correct.

Question 2

Nahanni Treasures Corporation is planning a new common stock issue of five million shares to fund a new project. The increase in shares will bring to 25 million the number of shares outstanding. Nahanni's long-term growth rate is 6 percent, and its current required rate of return is 12.6 percent. The firm just paid a $1.00 dividend and the stock sells for $16.06 in the market. On the announcement of the new equity issue, the firm's stock price dropped. Nahanni estimates that the company's growth rate will increase to 6.5 percent with the new project, but since the project is riskier than average, the firm's cost of capital will increase to 13.5 percent. Using the DCF growth model, what is the change in the equilibrium stock price?

Accepted Answer

A)  -$1.77 
B)  -$1.06 
C)  -$0.85 
D)  -$0.66 
E)  -$0.08

Question 3

Club Auto Parts' last dividend, D0, was $0.50, and the company expects to experience no growth for the next 2 years. However, Club will grow at an annual rate of 5 percent in the third and fourth years, and, beginning with the fifth year, it should attain a 10 percent growth rate which it will sustain thereafter. Club has a required rate of return of 12 percent. What should be the price per share of Club stock at the end of the second year, ?

Accepted Answer

A)  $19.98 
B)  $25.06 
C)  $31.21 
D)  $19.48 
E)  $27.55

Question 4

The Textbook Production Company has been hit hard due to increased competition. The company's analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually forever. Assume that rs = 11 percent and D0 = $2.00. What will be the price of the company's stock three years from now?

Accepted Answer

A)  $27.17 
B)  $ 6.23 
C)  $28.50 
D)  $10.18 
E)  $20.63

Question 5

Assume that the average firm in your company's industry is expected to grow at a constant rate of 5 percent, and its dividend yield is 4 percent. Your company is about as risky as the average firm in the industry, but it has just developed a line of innovative new products which leads you to expect that its earnings and dividends will grow at a rate of 40 percent (D1 = D0(1 + g) = D0(1.40)) this year and 25 percent the following year, after which growth should match the 5 percent industry average rate. The last dividend paid (D0) was $2. What is the value per share of your firm's stock?

Accepted Answer

A)  $ 42.60 
B)  $ 82.84 
C)  $ 91.88 
D)  $101.15 
E)  $110.37

Question 6

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

A) True 
 B)False

Question 7

Johnston Corporation is growing at a constant rate of 6 percent per year. It has both common stock and non-participating preferred stock outstanding. The cost of preferred stock (rps) is 8 percent. The par value of the preferred stock is $120, and the stock has a stated dividend of 10 percent of par. What is the market value of the preferred stock?

Accepted Answer

A)  $125 
B)  $120 
C)  $175 
D)  $150 
E)  $200

Question 8

If the stock market is semistrong efficient, which of the following statements is most correct?

Accepted Answer

A)  All stocks should have the same expected returns; however, they may have different realized returns. 
B)  In equilibrium, stocks and bonds should have the same expected returns. 
C)  Investors can outperform the market if they have access to information which has not yet been publicly revealed. 
D)  If the stock market has been performing strongly over the past several months, stock prices are more likely to decline than increase over the next several months. 
E)  None of the statements above is correct.

Question 9

The expected rate of return on the common stock of Northwest Corporation is 14 percent. The stock's dividend is expected to grow at a constant rate of 8 percent a year. The stock currently sells for $50 a share. Which of the following statements is most correct?

Accepted Answer

A)  The stock's dividend yield is 8 percent. 
B)  The stock's dividend yield is 7 percent. 
C)  The current dividend per share is $4.00. 
D)  The stock price is expected to be $54 a share in one year. 
E)  The stock price is expected to be $57 a share in one year.

Question 10

Which of the following statements is most correct?

Accepted Answer

A)  If a stock's beta increased but its growth rate remained the same, then the new equilibrium price of the stock will be higher (assuming dividends continue to grow at the constant growth rate). 
B)  Market efficiency says that the actual realized returns on all stocks will be equal to the expected rates of return. 
C)  An implication of the semistrong form of the efficient markets hypothesis is that you cannot consistently benefit from trading on information reported in The Wall Street Journal. 
D)  Statements a and b are correct. 
E)  All of the statements above are correct.

Question 11

According to the textbook model, under conditions of nonconstant growth, the dis¬count rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is most correct.

Accepted Answer

A)  The stock valuation model, P0 = D1/(rs - g), can be used for firms which have negative growth rates. 
B)  If a stock has a required rate of return rs = 12 percent, and its dividend grows at a constant rate of 5 percent, this implies that the stock's dividend yield is 5 percent. 
C)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
D)  Statements a and c are correct. 
E)  All of the statements above are correct.

Question 13

An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

Accepted Answer

A)  Increase. 
B)  Decrease. 
C)  Fluctuate. 
D)  Remain constant. 
E)  Possibly increase, possibly decrease, or possibly remain unchanged.

Question 14

Newburn Entertainment's stock is expected to pay a year-end dividend of $3.00 a share. (D1 = $3.00, the dividend at time 0, D0, has already been paid.) The stock's dividend is expected to grow at a constant rate of 5 percent a year. The risk-free rate, rRF, is 6 percent and the market risk premium, (rM - rRF), is 5 percent. The stock has a beta of 0.8. What is the stock's expected price five years from now?

Accepted Answer

A)  $60.00 
B)  $76.58 
C)  $96.63 
D)  $72.11 
E)  $68.96

Question 15

Which of the following statements is most correct?

Accepted Answer

A)  If the stock market is weak-form efficient this means you cannot use private information to outperform the market. 
B)  If the stock market is semistrong-form efficient, this means the expected return on stocks and bonds should be the same. 
C)  If the stock market is semistrong-form efficient, this means that high beta stocks should have the same expected return as low beta stocks. 
D)  Statements b and c are correct. 
E)  None of the statements above is correct.

Question 16

Kirkland Motors expects to pay a $2.00 a share dividend on its common stock at the end of the year . The dividend is expected to grow at some constant rate over time. What is the expected stock price five years from now, that is, what is ?

Accepted Answer

A)  $21.65 
B)  $22.08 
C)  $25.64 
D)  $35.25 
E)  $36.78

Question 17

Garcia Inc. has a current dividend of $3.00 per share (D0 = $3.00). Analysts expect that the dividend will grow at a rate of 25 percent a year for the next three years, and thereafter it will grow at a constant rate of 10 percent a year. The company's cost of equity capital is estimated to be 15 percent. What is the current stock price of Garcia Inc.?

Accepted Answer

A)  $ 75.00 
B)  $ 88.55 
C)  $ 95.42 
D)  $103.25 
E)  $110.00

Question 18

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is most correct?

Accepted Answer

A)  All common stocks fall into one of three classes: A, B, and C. 
B)  Most firms have several classes of common stock outstanding. 
C)  All common stock, regardless of class, must have voting rights. 
D)  All common stock, regardless of class, must have the same dividend privileges. 
E)  None of the statements above is necessarily true.

Question 19

Rogers Robotics currently (2009) does not pay a dividend. However, the company is expected to pay a $1.00 dividend two years from today (2011). The dividend is then expected to grow at a rate of 20 percent a year for the following three years. After the dividend is paid in 2014, it is expected to grow forever at a constant rate of 7 percent. Currently, the risk-free rate is 6 percent, market risk premium (rM - rRF) is 5 percent, and the stock's beta is 1.4. What should be the price of the stock today?

Accepted Answer

A)  $22.91 
B)  $21.20 
C)  $30.82 
D)  $28.80 
E)  $20.16

Question 20

Which of the following statements is most correct?

Accepted Answer

A)  The constant growth model takes into consideration the capital gains earned on a stock. 
B)  It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant. 
C)  Two firms with the same dividend and growth rate must also have the same stock price. 
D)  Statements a and c are correct. 
E)  All of the statements above are correct.

Exam 5: Basic Stock Valuation

Which of the following statements is most correct?

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

If the stock market is semistrong efficient, which of the following statements is most correct?

The expected rate of return on the common stock of Northwest Corporation is 14 percent. The stock's dividend is expected to grow at a constant rate of 8 percent a year. The stock currently sells for $50 a share. Which of the following statements is most correct?

Which of the following statements is most correct?

According to the textbook model, under conditions of nonconstant growth, the dis¬count rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period.

Which of the following statements is most correct.

An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

Which of the following statements is most correct?

Kirkland Motors expects to pay a $2.00 a share dividend on its common stock at the end of the year . The dividend is expected to grow at some constant rate over time. What is the expected stock price five years from now, that is, what is ?

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is most correct?

Which of the following statements is most correct?