Question 1

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? $\begin{array}{llcc}
  \text {Expected dividend, } \mathrm{D}_{1 } & \$3.00 \
 \text {Current Price, Po  } &\$50\
 \text {Expected constant growth rate  } &6.0\%\
\end{array}$

Accepted Answer

A) The stock's expected dividend yield and growth rate are equal. 
B) The stock's expected dividend yield is 5%. 
C) The stock's expected capital gains yield is 5%. 
D) The stock's expected price 10 years from now is $100.00. 
E) The stock's required return is 10%.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A) Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. 
B) The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. 
C) One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. 
D) One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. 
E) A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.

Question 3

Kellner Motor Co.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Kellner's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D0?

Accepted Answer

A) $0.95 
B) $1.05 
C) $1.16 
D) $1.27 
E) $1.40

Question 4

If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

A) The stock's dividend yield is 5%. 
B) The price of the stock is expected to decline in the future. 
C) The stock's required return must be equal to or less than 5%. 
D) The stock's price one year from now is expected to be 5% above the current price. 
E) The expected return on the stock is 5% a year.

Question 5

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,rs,is 11.50%.What is the stock's expected price 5 years from now?

Accepted Answer

A) $40.17 
B) $41.20 
C) $42.26 
D) $43.34 
E) $44.46

Question 6

Huxley Building Supplies' last free cash flow was $1.75 million.Its free cash flow growth rate is expected to be constant at 25% for 2 years,after which free cash flows are expected to grow at a rate of 6% forever.Its weighted average cost of capital WACC is 12%.Huxley has $5 million in short-term investments and $7 million in debt and has 1 million shares outstanding.What is the best estimate of the current intrinsic stock price?

Accepted Answer

A) $39.58 
B) $40.64 
C) $41.71 
D) $42.80 
E) $44.92

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A) The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
B) The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
C) The free cash flow valuation model, Vops =FCF1/(WACC − g), cannot be used for firms that have negative growth rates. 
D) The free cash flow valuation model, Vops = FCF1/(WACC − g), can be used only for firms whose growth rates exceed their WACC. 
E) If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

Question 8

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

Accepted Answer

A) Stock B must have a higher dividend yield than Stock A. 
B) Stock A must have a higher dividend yield than Stock B. 
C) If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's. 
D) Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B. 
E) If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.

Question 9

Atchley Corporation's last free cash flow was $1.55 million.The free cash flow growth rate is expected to be constant at 1.5% for 2 years,after which free cash flows are expected to grow at a rate of 8.0% forever.The firm's weighted average cost of capital (WACC)is 12.0%.Atchley has $2 million in short-term debt and $14 million in debt and 1 million shares outstanding.What is the best estimate of the intrinsic stock price?

Accepted Answer

A) $25.05 
B) $26.16 
C) $27.30 
D) $28.48 
E) $29.70

Question 10

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? $$\begin{array} { l c c } 
& \mathrm { X } & \mathrm { Y } \
\text { Price } & \$ 30 & \$ 30 \
\text { Expected growth (constant) } & 6 \% & 4 \% \
\text { Required return } & 12 \% & 10 \%
\end{array}$$

Accepted Answer

A) Stock Y has a higher dividend yield than Stock X. 
B) One year from now, Stock X's price is expected to be higher than Stock Y's price. 
C) Stock X has the higher expected year-end dividend. 
D) Stock Y has a higher capital gains yield. 
E) Stock X has a higher dividend yield than Stock Y.

Question 11

Hirshfeld Corporation's stock has a required rate of return of 10.25%,and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D1?

Accepted Answer

A) $2.20 
B) $2.44 
C) $2.69 
D) $2.96 
E) $3.25

Question 12

If D1 = $1.25,g (which is constant)= 4.7%,and P0 = $26.00,what is the stock's expected dividend yield for the coming year?

Accepted Answer

A) 4.12% 
B) 4.34% 
C) 4.57% 
D) 4.81% 
E) 5.05%

Question 13

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

Accepted Answer

A) $16.28 
B) $16.70 
C) $17.13 
D) $17.57 
E) $18.01

Question 14

The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A) The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. 
B) Corporations cannot buy the preferred stocks of other corporations. 
C) Preferred dividends are not generally cumulative. 
D) A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. 
E) Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.

Question 16

Classified stock differentiates various classes of common stock,and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Accepted Answer

A) True 
 B)False

Question 17

If D0 = $2.25,g (which is constant)= 3.5%,and P0 = $50,what is the stock's expected dividend yield for the coming year?

Accepted Answer

A) 4.42% 
B) 4.66% 
C) 4.89% 
D) 5.13% 
E) 5.39%

Question 18

Gere Furniture forecasts a free cash flow of $40 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%,what is the horizon value,in millions at t = 3?

Accepted Answer

A) $840 
B) $882 
C) $926 
D) $972 
E) $1,021

Question 19

Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year,and that dividend is expected to grow at a constant rate of 6.00% per year in the future.The company's beta is 1.15,the market risk premium is 5.50%,and the risk-free rate is 4.00%.What is Dyer's current stock price?

Accepted Answer

A) $28.90 
B) $29.62 
C) $30.36 
D) $31.12 
E) $31.90

Question 20

The value of Broadway-Brooks Inc.'s operations is $900 million,based on the free cash flow valuation model.Its balance sheet shows $70 million in accounts receivable,$50 million in inventory,$30 million in short-term investments that are unrelated to operations,$20 million in accounts payable,$110 million in notes payable,$90 million in long-term debt,$20 million in preferred stock,$140 million in retained earnings,and $280 million in total common equity.If the company has 25 million shares of stock outstanding,what is the best estimate of the stock's price per share?

Accepted Answer

A) $23.00 
B) $25.56 
C) $28.40 
D) $31.24 
E) $34.36

Exam 8: Basic Stock Valuation

Which of the following statements is CORRECT?

Kellner Motor Co.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Kellner's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D₀?

If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,r_s,is 11.50%.What is the stock's expected price 5 years from now?

Which of the following statements is CORRECT?

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

Hirshfeld Corporation's stock has a required rate of return of 10.25%,and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

If D₁ = $1.25,g (which is constant) = 4.7%,and P₀ = $26.00,what is the stock's expected dividend yield for the coming year?

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Which of the following statements is CORRECT?

Classified stock differentiates various classes of common stock,and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

If D₀ = $2.25,g (which is constant) = 3.5%,and P₀ = $50,what is the stock's expected dividend yield for the coming year?

Gere Furniture forecasts a free cash flow of $40 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%,what is the horizon value,in millions at t = 3?

Exam 8: Basic Stock Valuation

Which of the following statements is CORRECT?

Kellner Motor Co.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Kellner's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D0?

If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,rs,is 11.50%.What is the stock's expected price 5 years from now?

Which of the following statements is CORRECT?

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

Hirshfeld Corporation's stock has a required rate of return of 10.25%,and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D1?

If D1 = $1.25,g (which is constant) = 4.7%,and P0 = $26.00,what is the stock's expected dividend yield for the coming year?

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Which of the following statements is CORRECT?

Classified stock differentiates various classes of common stock,and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

If D0 = $2.25,g (which is constant) = 3.5%,and P0 = $50,what is the stock's expected dividend yield for the coming year?

Gere Furniture forecasts a free cash flow of $40 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%,what is the horizon value,in millions at t = 3?

Kellner Motor Co.'s stock has a required rate of return of 11.50%,and it sells for $25.00 per share.Kellner's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D₀?

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,r_s,is 11.50%.What is the stock's expected price 5 years from now?

Hirshfeld Corporation's stock has a required rate of return of 10.25%,and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

If D₁ = $1.25,g (which is constant) = 4.7%,and P₀ = $26.00,what is the stock's expected dividend yield for the coming year?

If D₀ = $2.25,g (which is constant) = 3.5%,and P₀ = $50,what is the stock's expected dividend yield for the coming year?