Question 1

Which of the following is NOT a situation where a trader is able to identify positive NPV trading opportunities in the securities markets?

Accepted Answer

A)  An investor who has access to information known only to a few investors. 
B)  An investor who has lower trading costs than other market participants. 
C)  An investor who gets up really early in the morning so he can be the first to read and act upon the information contained in that day's Wall Street Journal. 
D)  An investor who has expertise in a highly complicated area for which a company has just released information.

Question 2

The forward price-earning ratio is based on

Accepted Answer

A)  the expected earnings over the coming 12 months and predicted share price in the next 12 months. 
B)  the earnings in the previous 12 months and predicted share price in the next 12 months. 
C)  the expected earnings over the coming 12 months and current share price. 
D)  the previous earnings in the past 12 months and the current share price.

Question 3

Which of the following formulas is incorrect?

Accepted Answer

A)  Divt =  × Dividend Payout Rate 
B)  PN =  
C)  earnings growth rate = retention rate × return on new investment 
D)  P0 =  +
 + ... +
 +
 ×

Question 4

If you want to value a firm but don't want to explicitly forecast its dividends,share repurchases,or its use of debt,what is the simplest model for you to use?

Accepted Answer

A)  Discounted free cash flow model 
B)  Dividend discount model 
C)  Enterprise value model 
D)  Total payout model

Question 5

Which of the following equations is incorrect?

Accepted Answer

A)  P0 =  
B)  V0 =  +
 + ... +
 +
 
C)  Free Cash Flow = EBIT × (1 - τc) + Depreciation - Capital Expenditures - NWC 
D)  Enterprise Value = Market Value of Equity + Debt - Cash

Question 6

Which of the following statements is false?

Accepted Answer

A)  The firm's weighted average cost of capital (WAC
C)  denoted rwacc is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt. 
B)  Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model the firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings. 
C)  We interpret rwacc as the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together. 
D)  When using the discounted free cash flow model we should use the firm's equity cost of capital.

Question 7

You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.If the average P/E ratio for the appliance industry sector is 17.0,then the value of a share of Whirlpool stock based upon the comparables approach is closest to:

Accepted Answer

A)  $103.75 
B)  $27.90 
C)  $35.90 
D)  $23.10

Question 8

Because of a catastrophic plane crash,the FAA announced that it is withdrawing its air worthiness certification for Fly by Night Aviation's (FBNA)new four seat private plane.As a result FBNA's future expected free cash flows will decline by $40 million a year for the next eight years.FBNA has 20 million shares outstanding,no debt,and an equity cost of capital of 12%.If this news is a complete surprise to investors,then the amount that FBNA's stock price should fall upon the announcement is closest to:

Accepted Answer

A)  $2.00 
B)  $16.00 
C)  $16.70 
D)  $9.90

Question 9

Which of the following statements is false?

Accepted Answer

A)  A common approximation is to assume that in the long run, dividends will grow at a constant rate. 
B)  The dividend each year is the firm's earnings per share (EPS) multiplied by its dividend payout rate. 
C)  There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends. 
D)  During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

Question 10

The trailing price-earning ratio is based on

Accepted Answer

A)  the earnings over the previous 12 months and current share price. 
B)  the estimated earnings over the next 12 months and current share price. 
C)  the earnings over the previous 12 months and the average share price of the past 12 months. 
D)  the estimated earnings over the next 12 months and the average share price of the past 12 months.

Question 11

Von Bora Corporation (VBC)is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBC stock is closest to:

Accepted Answer

A)  $25.00 
B)  $40.00 
C)  $15.40 
D)  $11.10

Question 12

Growing Real Fast Company (GRF)is expected to have a 25 percent growth rate for the next four years (affecting D₁,D₂,D₃,and D₄).Beginning in year five,the growth rate is expected to drop to 7 percent per year and last indefinitely.If GRF just paid a $2.00 dividend and the appropriate discount rate is 15 percent,then what is the value of a share of GRF?

Accepted Answer

The answer of Growing Real Fast Company (GRF)is expected to...

Question 13

You expect that KT Industries (KTI)will have earnings per share of $3 this year and that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The expected growth rate for KTI's dividends is closest to:

Accepted Answer

A)  6.0% 
B)  7.5% 
C)  4.5% 
D)  3.0%

Question 14

Which of the following statements regarding profitable and unprofitable growth is false?

Accepted Answer

A)  If a firm wants to increase its share price, it must cut its dividend and invest more. 
B)  If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the firm will have to reduce its dividend. 
C)  A firm can increase its growth rate by retaining more of its earnings. 
D)  Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive NPV.

Question 15

Which of the following statements is false?

Accepted Answer

A)  We cannot use the general dividend discount model to value the stock of a firm with rapid or changing growth. 
B)  As firms mature, their growth slows to rates more typical of established companies. 
C)  The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders. 
D)  The simplest forecast for the firm's future dividends states that they will grow at a constant rate, g, forever.

Question 16

NoGrowth Industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

Accepted Answer

A)  $10.00 
B)  $15.00 
C)  $14.00 
D)  $12.50

Question 17

Use the information for the question(s) below.
Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future. Defenestration's equity cost of capital is 13%.
-Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the remaining $2 per share to repurchase stock.If Defenestration maintains this dividend and total payout rate,then the rate at which Defenestration's dividends and earnings per share are expected to grow is closest to:

Accepted Answer

A)  7% 
B)  13% 
C)  9% 
D)  5%

Question 18

When discounting dividends you should use

Accepted Answer

A)  the weighted average cost of capital. 
B)  the after-tax weighted average cost of capital. 
C)  the equity cost of capital. 
D)  the before tax cost of debt.

Question 19

Use the information for the question(s) below.
You expect CCM Corporation to generate the following free cash flows over the next five years:
  Following year five, you estimate that CCM's free cash flows will grow at 5% per year and that CCM's weighted average cost of capital is 13%.
-The enterprise value of CCM corporation is closest to:

Accepted Answer

A)  $396 million 
B)  $290 million 
C)  $382 million 
D)  $350 million

Question 20

JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations.Prior to this announcement,JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share.With the new expansion,JRN's dividends are expected to grow at 8% per year indefinitely.Assuming that JRN's risk is unchanged by the expansion,the value of a share of JRN after the announcement is closest to:

Accepted Answer

A)  $25.00 
B)  $15.00 
C)  $31.25 
D)  $27.50

Exam 7: Valuing Stocks

Which of the following is NOT a situation where a trader is able to identify positive NPV trading opportunities in the securities markets?

The forward price-earning ratio is based on

Which of the following formulas is incorrect?

If you want to value a firm but don't want to explicitly forecast its dividends,share repurchases,or its use of debt,what is the simplest model for you to use?

Which of the following equations is incorrect?

Which of the following statements is false?

You expect Whirlpool Corporation (WHR) to have earnings per share of $6.10 over the coming year.If the average P/E ratio for the appliance industry sector is 17.0,then the value of a share of Whirlpool stock based upon the comparables approach is closest to:

Which of the following statements is false?

The trailing price-earning ratio is based on

Von Bora Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBC stock is closest to:

Which of the following statements regarding profitable and unprofitable growth is false?

Which of the following statements is false?

NoGrowth Industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

When discounting dividends you should use