Question 1

For a stock to be in equilibrium,two conditions are necessary:
 (1)The stock's market price must equal its intrinsic value as seen by the marginal investor and (2)the expected return as seen by the marginal investor must equal this investor's required return.

Accepted Answer

A) True 
 B)False

Question 2

Wall Inc.forecasts that it will have the free cash flows (in millions)shown below.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions? ​

Accepted Answer

A) $2,650.00 
B) $2,789.47 
C) $2,928.95 
D) $3,075.39 
E) $3,229.16

Question 3

Agarwal Technologies was founded 10 years ago.It has been profitable for the last 5 years,but it has needed all of its earnings to support growth and thus has never paid a dividend.Management has indicated that it plans to pay a $0.25 dividend 3 years from today,then to increase it at a relatively rapid rate for 2 years,and then to increase it at a constant rate of 8.00% thereafter.Management's forecast of the future dividend stream,along with the forecasted growth rates,is shown below.Assuming a required return of 11.00%,what is your estimate of the stock's current value? ​

Accepted Answer

A) $ 9.94 
B) $10.19 
C) $10.45 
D) $10.72 
E) $10.99

Question 4

Francis Inc.'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 5

Reddick Enterprises' stock currently sells for $35.50 per share.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,rs,is 9.00%.What is the stock's expected price 3 years from today?

Accepted Answer

A) $37.86 
B) $38.83 
C) $39.83 
D) $40.85 
E) $41.69

Question 6

You have been assigned the task of using the corporate,or free cash flow,model to estimate Petry Corporation's intrinsic value.The firm's WACC is 10.00%,its end-of-year free cash flow (FCF1)is expected to be $75.0 million,the FCFs are expected to grow at a constant rate of 5.00% a year in the future,the company has $200 million of long-term debt and preferred stock,and it has 30 million shares of common stock outstanding.What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

A) $40.35 
B) $41.82 
C) $43.33 
D) $44.85 
E) $46.42

Question 7

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs)is 11%,what is its current stock price?

Accepted Answer

A) $30.57 
B) $31.52 
C) $32.49 
D) $33.50 
E) $34.50

Question 8

If D0 = $1.75,g (which is constant)= 3.6%,and P0 = $32.00,what is the stock's expected total return for the coming year?

Accepted Answer

A) 8.37% 
B) 8.59% 
C) 8.81% 
D) 9.03% 
E) 9.27%

Question 9

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Accepted Answer

A) True 
 B)False

Question 10

Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

Accepted Answer

A) $104.27 
B) $106.95 
C) $109.69 
D) $112.50 
E) $115.38

Question 11

Based on the corporate valuation model,Wang Inc.'s total corporate value is $750 million.Its balance sheet shows $100 million notes payable,$200 million of long-term debt,$40 million of common stock (par plus paid-in-capital),and $160 million of retained earnings.What is the best estimate for the firm's value of equity,in millions?

Accepted Answer

A) $386 
B) $406 
C) $428 
D) $450 
E) $473

Question 12

Based on the corporate valuation model,the total corporate value of Chen Lin Inc.is $900 million.Its balance sheet shows $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 its stock price per share?

Accepted Answer

A) $22.03 
B) $24.48 
C) $27.20 
D) $29.92 
E) $32.91

Question 13

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

Question 14

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

Accepted Answer

A) The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield. 
B) Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well. 
C) A stock's dividend yield can never exceed its expected growth rate. 
D) A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return. 
E) Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.

Question 15

Church Inc.is presently enjoying relatively high growth because of a surge in the demand for its new product.Management expects earnings and dividends to grow at a rate of 25% for the next 4 years,after which competition will probably reduce the growth rate in earnings and dividends to zero,i.e.,g = 0.The company's last dividend,D0,was $1.25,its beta is 1.20,the market risk premium is 5.50%,and the risk-free rate is 3.00%.What is the current price of the common stock?

Accepted Answer

A) $26.77 
B) $27.89 
C) $29.05 
D) $30.21 
E) $31.42

Question 16

Sorenson Corp.'s expected year-end dividend is D1 = $1.60,its required return is rs = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Sorenson's expected stock price in 7 years,i.e.,what is ?

Accepted Answer

A) $37.52 
B) $39.40 
C) $41.37 
D) $43.44 
E) $45.61

Question 17

Preferred stock is a hybrid: a sort of cross between a common stock and a bond: in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Accepted Answer

A) True 
 B)False

Question 18

Kedia Inc.forecasts a negative free cash flow for the coming year,FCF1 = −$10 million,but it expects positive numbers thereafter,with FCF2 = $25 million.After Year 2,FCF is expected to grow at a constant rate of 4% forever.If the weighted average cost of capital is 14.0%,what is the firm's total corporate value,in millions?

Accepted Answer

A) $200.00 
B) $210.53 
C) $221.05 
D) $232.11 
E) $243.71

Question 19

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Accepted Answer

A) True 
 B)False

Question 20

For a stock to be in equilibrium,that is,for there to be no long-term pressure for its price to depart from its current level,then

Accepted Answer

A) the expected future return must be less than the most recent past realized return. 
B) the past realized return must be equal to the expected return during the same period. 
C) the required return must equal the realized return in all periods. 
D) the expected return must be equal to both the required future return and the past realized return. 
E) the expected future return must be equal to the required return.

Exam 9: Stocks and Their Valuation

For a stock to be in equilibrium,two conditions are necessary: (1)The stock's market price must equal its intrinsic value as seen by the marginal investor and (2)the expected return as seen by the marginal investor must equal this investor's required return.

Wall Inc.forecasts that it will have the free cash flows (in millions) shown below.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions?

Francis Inc.'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?

Reddick Enterprises' stock currently sells for $35.50 per share.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,r_s,is 9.00%.What is the stock's expected price 3 years from today?

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s) is 11%,what is its current stock price?

If D₀ = $1.75,g (which is constant) = 3.6%,and P₀ = $32.00,what is the stock's expected total return for the coming year?

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

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?

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

Sorenson Corp.'s expected year-end dividend is D₁ = $1.60,its required return is r_s = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Sorenson's expected stock price in 7 years,i.e.,what is ?

Preferred stock is a hybrid: a sort of cross between a common stock and a bond: in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

For a stock to be in equilibrium,that is,for there to be no long-term pressure for its price to depart from its current level,then

Exam 9: Stocks and Their Valuation

For a stock to be in equilibrium,two conditions are necessary: (1)The stock's market price must equal its intrinsic value as seen by the marginal investor and (2)the expected return as seen by the marginal investor must equal this investor's required return.

Wall Inc.forecasts that it will have the free cash flows (in millions) shown below.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions? ​

Francis Inc.'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?

Reddick Enterprises' stock currently sells for $35.50 per share.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,rs,is 9.00%.What is the stock's expected price 3 years from today?

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs) is 11%,what is its current stock price?

If D0 = $1.75,g (which is constant) = 3.6%,and P0 = $32.00,what is the stock's expected total return for the coming year?

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

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?

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

Sorenson Corp.'s expected year-end dividend is D1 = $1.60,its required return is rs = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Sorenson's expected stock price in 7 years,i.e.,what is ?

Preferred stock is a hybrid: a sort of cross between a common stock and a bond: in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

For a stock to be in equilibrium,that is,for there to be no long-term pressure for its price to depart from its current level,then

Wall Inc.forecasts that it will have the free cash flows (in millions) shown below.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions?

Francis Inc.'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?

Reddick Enterprises' stock currently sells for $35.50 per share.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,r_s,is 9.00%.What is the stock's expected price 3 years from today?

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s) is 11%,what is its current stock price?

If D₀ = $1.75,g (which is constant) = 3.6%,and P₀ = $32.00,what is the stock's expected total return for the coming year?

Sorenson Corp.'s expected year-end dividend is D₁ = $1.60,its required return is r_s = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Sorenson's expected stock price in 7 years,i.e.,what is ?