Question 1

While the previous year's earnings are often used as a base for forecasting future earnings, the recent year's earnings do not always provide an accurate forecast of the future.

Accepted Answer

A) True 
 B)False

Question 2

According to the capital asset pricing model, the required return by investors on a security is

Accepted Answer

A) inversely related to the risk-free rate. 
B) inversely related to the firm's beta. 
C) inversely related to the market return. 
D) None of these are correct.

Question 3

Investors can avoid unsystematic risk by

Accepted Answer

A) using the capital asset pricing model. 
B) investing in stocks with low PE ratios. 
C) holding diversified portfolios. 
D) using the free cash flow model.

Question 4

Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean price-earnings ratio of competitors in the same industry is 20, then the valuation of Fabrizio's shares is $____.

Accepted Answer

A) 13.33 
B) 3.00 
C) 20.00 
D) 30.00 
E) None of these are correct.

Question 5

Tarzak Inc. has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as Tarzak is 15. Tarzak is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzak requires a return of 12 percent. The estimated stock price of Tarzak today should be ____ using the adjusted dividend discount model.

Accepted Answer

A) $116.41 
B) $104.91 
C) $161.15 
D) $128.64

Question 6

The credit crisis caused major problems in the mortgage market but had no impact on the stock market.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is NOT used to measure a stock's risk?

Accepted Answer

A) the stock's price volatility 
B) the stock's return 
C) the stock's beta 
D) the value-at-risk method 
E) All of these are used to measure risk.

Question 8

If the returns of two stocks are perfectly correlated, then

Accepted Answer

A) their betas should each equal 1.0. 
B) the sum of their betas should equal 1.0. 
C) their correlation coefficient should equal 1.0. 
D) their portfolio standard deviation should equal 1.0.

Question 9

For firms that do not pay dividends, the free cash flow model may be more suitable than the dividend discount model.

Accepted Answer

A) True 
 B)False

Question 10

A stock portfolio has more volatility when its individual stock returns are uncorrelated.

Accepted Answer

A) True 
 B)False

Question 11

A beta of 1.8 implies that the stock has a risk premium of 1.8 percent.

Accepted Answer

A) True 
 B)False

Question 12

____ are not a firm-specific factor that affect stock prices.

Accepted Answer

A) Exchange rates 
B) Dividend policy changes 
C) Acquisitions 
D) Earnings surprises 
E) All of these are firm-specific factors that affect stock prices.

Question 13

LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model?

Accepted Answer

A) $150.00 
B) $163.91 
C) $45.00 
D) $168.83 
E) None of these are correct.

Question 14

A firm's stock price is affected not only by macroeconomic and market conditions but also by firm-specific conditions .

Accepted Answer

A) True 
 B)False

Question 15

According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms could be ____ affected by a weak dollar.

Accepted Answer

A) adversely; favorably 
B) favorably; adversely 
C) favorably; favorably 
D) adversely; adversely

Question 16

Stock price volatility increased during the credit crisis.

Accepted Answer

A) True 
 B)False

Question 17

If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index.

Accepted Answer

A) True 
 B)False

Question 18

The capital asset pricing model (CAPM)is based on the premise that the only important risk of a firm is unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 19

The expected acquisition of a firm typically results in ____ in the target's stock price.

Accepted Answer

A) an increase 
B) a decrease 
C) no change 
D) None of these are correct.

Question 20

A higher beta for an asset reflects

Accepted Answer

A) lower risk. 
B) lower covariance between the asset's returns and market returns. 
C) higher covariance between the asset's returns and the market returns. 
D) None of these are correct.

Exam 11: Stock Valuation and Risk

While the previous year's earnings are often used as a base for forecasting future earnings, the recent year's earnings do not always provide an accurate forecast of the future.

According to the capital asset pricing model, the required return by investors on a security is

Investors can avoid unsystematic risk by

Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean price-earnings ratio of competitors in the same industry is 20, then the valuation of Fabrizio's shares is $____.

The credit crisis caused major problems in the mortgage market but had no impact on the stock market.

Which of the following is NOT used to measure a stock's risk?

If the returns of two stocks are perfectly correlated, then

For firms that do not pay dividends, the free cash flow model may be more suitable than the dividend discount model.

A stock portfolio has more volatility when its individual stock returns are uncorrelated.

A beta of 1.8 implies that the stock has a risk premium of 1.8 percent.

____ are not a firm-specific factor that affect stock prices.

A firm's stock price is affected not only by macroeconomic and market conditions but also by firm-specific conditions .

According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be affected by a weak dollar. Stock prices of U.S. importing firms could be affected by a weak dollar.

Stock price volatility increased during the credit crisis.

If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index.

The capital asset pricing model (CAPM)is based on the premise that the only important risk of a firm is unsystematic risk.

The expected acquisition of a firm typically results in ____ in the target's stock price.

A higher beta for an asset reflects