Question 1

Kandle Company paid a dividend of $4.76 per share this year and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The requiredrate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____.

Accepted Answer

A)  39.67 
B)  41.67 
C)  33.33 
D)  31.73 
E)  none of the above

Question 2

Sorvino Co. is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, accordingto the dividend discount model, is $____.

Accepted Answer

A)  4.06 
B)  4.16 
C)  40.63 
D)  24.62 
E)  none of the above

Question 3

The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derivethe PE ratio.

Accepted Answer

A) True 
 B)False

Question 4

The U.S. government's budget deficit has a significant impact on the bond market but does not affect the stock market.

Accepted Answer

A) True 
 B)False

Question 5

The prime rate is commonly used as a proxy for the risk-free rate in the capital asset pricing model (CAPM).

Accepted Answer

A) True 
 B)False

Question 6

The limitations of the dividend discount model are more pronounced when valuing stocks

Accepted Answer

A)  that pay most of their earnings as dividends. 
B)  that retain most of their earnings. 
C)  that have a long history of dividends. 
D)  that have constant earnings growth

Question 7

Which of the following is not commonly used as an estimate of a stock's volatility?

Accepted Answer

A)  the estimate of its standard deviation of returns over a recent period 
B)  the trend of historical standard deviations of returns over recent periods 
C)  the implied volatility derived from an option pricing model 
D)  the estimate of its option premium derived from an option pricing model

Question 8

Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent, and the annual market return in recent years has been 11 percent. Based on this information, the required rate of returnon Steam Corp. stock is ____ percent.

Accepted Answer

A)  21.5 
B)  6.5 
C)  16.5 
D)  14 
E)  none of the above

Question 9

A beta of 1.1 means that for a given 1 percent change in the value of the market, the _______ is expected to change by 1.1 percent in the same direction.

Accepted Answer

A)  risk-free rate 
B)  stock's value 
C)  stock's standard deviation 
D)  correlation coefficient

Question 10

If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are

Accepted Answer

A)  weak-form efficient 
B)  semistrong-form efficient. 
C)  strong-form efficient. 
D)  B and C 
E)  none of the above

Question 11

Morgan stock has an average return minus the average risk-free rate of 12.5 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is

Accepted Answer

A)  0.0625. 
B)  0.05. 
C)  0.35. 
D)  0.03. 
E)  none of the above

Question 12

A stock's average return is 10 percent. The average risk-free rate is 7 percent. The standard deviation of the stock's return is 4 percent, and the stock's beta is 1.5. What is the Treynor indexfor the stock?

Accepted Answer

A)  0.03 
B)  0.75 
C)  1.33 
D)  0.02 
E)  50

Question 13

Which of the following is not a type of factor that drives stock prices, according to your text?

Accepted Answer

A)  economic factors 
B)  market-related factors 
C)  firm-specific factors 
D)  All of the above are factors that affect stock prices.

Question 14

Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is

Accepted Answer

A)  0.35. 
B)  0.36. 
C)  0.45. 
D)  0.28. 
E)  none of the above

Question 15

The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.

Accepted Answer

A)  Sharpe 
B)  Treynor 
C)  arbitrage 
D)  margin

Question 16

Stock price volatility increased during the credit crisis.

Accepted Answer

A) True 
 B)False

Question 17

If investors agree on a firm's forecasted earnings, they will derive the same value for that firm using the PE method to value the firm's stock.

Accepted Answer

A) True 
 B)False

Question 18

Technical analysis relies on the use of ____ to make investment decisions.

Accepted Answer

A)  interest rates 
B)  inflationary expectations 
C)  industry conditions 
D)  recent stock price trends

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

The limitations of the dividend discount model are most pronounced for a firm that

Accepted Answer

A)  has a high beta. 
B)  has high expected future earnings. 
C)  distributes most of its earnings as dividends. 
D)  retains all of its earnings. 
E)  none of the above

Exam 11: Stock Valuation and Risk

Sorvino Co. is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, accordingto the dividend discount model, is $____.

The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derivethe PE ratio.

The U.S. government's budget deficit has a significant impact on the bond market but does not affect the stock market.

The prime rate is commonly used as a proxy for the risk-free rate in the capital asset pricing model (CAPM).

The limitations of the dividend discount model are more pronounced when valuing stocks

Which of the following is not commonly used as an estimate of a stock's volatility?

Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent, and the annual market return in recent years has been 11 percent. Based on this information, the required rate of returnon Steam Corp. stock is ____ percent.

A beta of 1.1 means that for a given 1 percent change in the value of the market, the _______ is expected to change by 1.1 percent in the same direction.

If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are

Morgan stock has an average return minus the average risk-free rate of 12.5 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is

A stock's average return is 10 percent. The average risk-free rate is 7 percent. The standard deviation of the stock's return is 4 percent, and the stock's beta is 1.5. What is the Treynor indexfor the stock?

Which of the following is not a type of factor that drives stock prices, according to your text?

Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is

The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.

Stock price volatility increased during the credit crisis.

If investors agree on a firm's forecasted earnings, they will derive the same value for that firm using the PE method to value the firm's stock.

Technical analysis relies on the use of ____ to make investment decisions.

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

The limitations of the dividend discount model are most pronounced for a firm that