Question 1

Praetorian Industries will pay a dividend of $2.50 per share this year and has an an equity cost of capital of 8%.Praetorian's stock is currently trading at $84 per share.By comparing Praetorian with similar firms,an investor expects that its dividends will grow by up to 5% per year.What is the best next step that the investor should take regarding Praetorian's stock?

Accepted Answer

A) Sell any Praetorian stock that she owns. 
B) Short Praetorian's stock. 
C) Revise Praetorian's equity cost of capital. 
D) Revise her estimate of Praetorian's dividend growth. 
E) Compare Praetorian's equity cost of capital with similar firms.

Question 2

Harbour Corporation pays a dividend of $2.15 per year,which is expected to grow at a rate of 3% per year.Harbour has a cost of capital of 12%,and an EPS of $4.42.Its competitor,Pallantine Inc.,pays a yearly dividend of $1.25 per year,which is expected to grow at a rate of 6% per year.Pallantine has an EPS of $5.19.What would be the expected price of Pallantine stock,if estimated using the method of comparables?

Accepted Answer

A) $19.33 
B) $20.84 
C) $23.89 
D) $21.04 
E) $28.05

Question 3

Kirkevue Industries pays out all its earnings as dividends and has a share price of $24.In order to expand,Kirkevue announces it will cut its dividend payments from $2.00 to $1.80 per share and reinvest the retained funds.What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged?

Accepted Answer

A) 0.83% 
B) 15.33% 
C) 18.23% 
D) 17.97% 
E) 12.35%

Question 4

Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time,immediately after it pays a dividend of $0.26.Which of the following is closest to Jumbuck Exploration's equity cost of capital?

Accepted Answer

A) 9% 
B) 12% 
C) 18% 
D) 22% 
E) 26%

Question 5

Individual investors who grow up and live during a time of high stock returns are more likely to invest in stocks.

Accepted Answer

A) True 
 B)False

Question 6

The ownership in a corporation is divided into shares of stock,which carry rights to share in the profits of the firm through future dividend payments.

Accepted Answer

A) True 
 B)False

Question 7

The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt directly.

Accepted Answer

A) True 
 B)False

Question 8

Valorous Corporation will pay a dividend of $1.80 per share at this year's end and a dividend of $2.40 per share at the end of next year.It is expected that the price of Valorous' stock will be $44 per share after two years.If Valorous has an equity cost of capital of 8%,what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?

Accepted Answer

A) $39.27 
B) $40.22 
C) $41.45 
D) $42.40 
E) $43.50

Question 9

What is a major assumption about growth rate in the dividend-discount model?

Accepted Answer

The answer of What is a major assumption about growth...

Question 10

Which of the following situations is a potential source of cash flows for a shareholder of a certain stock? I.The investor may be able to sell the shares at a future date.

Accepted Answer

A) I only 
B) II only 
C) I and II 
D) II and III 
E) I and III

Question 11

The Busby Corporation had a share price at the start of the year of $26.20,paid a dividend of $0.56 at the end of the year,and had a share price of $29.00 at the end of the year.Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period?

Accepted Answer

A) 5% 
B) 7% 
C) 9% 
D) 13% 
E) 15%

Question 12

Suppose CP Rail has a current share price of $194.83 and an EPS of 9.01.Its competitor,CN Rail,has an EPS of 4.27.Using the method of comparables,what is the expected price of CN Rail stock?

Accepted Answer

A) $411.10 
B) $45.63 
C) $21.62 
D) $92.33 
E) $102.86

Question 13

Individual investors' tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as:

Accepted Answer

A) the disposition effect. 
B) the investor attention hypothesis. 
C) the investor overconfidence hypothesis. 
D) the excessive trading costs hypothesis. 
E) the investor mood hypothesis.

Question 14

Use the table for the question(s)below.
 
-The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry.Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm?

Accepted Answer

A) P/E 
B) Price/Book 
C) Enterprise Value/Sales 
D) Enterprise Value/EBITDA 
E) Free cash flow/EBITDA

Question 15

Gremlin Industries will pay a dividend of $1.80 per share at the end of this year.It is expected that this dividend will grow by 4% per year each year in the future.The current price of Gremlin's stock is $22.40 per share.What is Gremlin's equity cost of capital?

Accepted Answer

A) 11% 
B) 12% 
C) 14% 
D) 16% 
E) 18%

Question 16

A stock is bought for $22.00 and sold for $26.00 one year later,immediately after it has paid a dividend of $1.50.What is the capital gain rate for this transaction?

Accepted Answer

A) 0.27% 
B) 4.00% 
C) 15.00% 
D) 18.18% 
E) 20.00%

Question 17

Several methods should be used to provide an estimate of a stock's value since no single method provides a definitive value.

Accepted Answer

A) True 
 B)False

Question 18

Luther Industries has a dividend yield of 4.5% and and a cost of equity capital of 12%.Luther Industries' dividends are expected to grow at a constant rate indefinitely.The growth rate of Luther's dividends is closest to:

Accepted Answer

A) 7.5% 
B) 5.5% 
C) 16.5% 
D) 12% 
E) 4.5%

Question 19

A study of trading behavior of individual investors at a discount brokerage found that individual investors:

Accepted Answer

A) trade very actively,despite the fact that their performance is actually worse because of trading costs. 
B) trade very conservatively,despite the fact that their performance is actually worse because of trading costs. 
C) trade very actively,partly because their performance is better than the professionals' because of low trading costs. 
D) trade very conservatively,partly because their performance is better than the professionals' because of low trading costs. 
E) trade very actively,because they avoid the costs associated with hiring a professional.

Question 20

What is the difference between common stock and preferred stock?

Accepted Answer

The answer of What is the difference between common stock...

Exam 7: Valuing Stocks

Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time,immediately after it pays a dividend of $0.26.Which of the following is closest to Jumbuck Exploration's equity cost of capital?

Individual investors who grow up and live during a time of high stock returns are more likely to invest in stocks.

The ownership in a corporation is divided into shares of stock,which carry rights to share in the profits of the firm through future dividend payments.

The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt directly.

What is a major assumption about growth rate in the dividend-discount model?

Which of the following situations is a potential source of cash flows for a shareholder of a certain stock? I.The investor may be able to sell the shares at a future date.

Suppose CP Rail has a current share price of $194.83 and an EPS of 9.01.Its competitor,CN Rail,has an EPS of 4.27.Using the method of comparables,what is the expected price of CN Rail stock?

Individual investors' tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as:

Use the table for the question(s) below. -The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry.Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm?

Gremlin Industries will pay a dividend of $1.80 per share at the end of this year.It is expected that this dividend will grow by 4% per year each year in the future.The current price of Gremlin's stock is $22.40 per share.What is Gremlin's equity cost of capital?

A stock is bought for $22.00 and sold for $26.00 one year later,immediately after it has paid a dividend of $1.50.What is the capital gain rate for this transaction?

Several methods should be used to provide an estimate of a stock's value since no single method provides a definitive value.

Luther Industries has a dividend yield of 4.5% and and a cost of equity capital of 12%.Luther Industries' dividends are expected to grow at a constant rate indefinitely.The growth rate of Luther's dividends is closest to:

A study of trading behavior of individual investors at a discount brokerage found that individual investors:

What is the difference between common stock and preferred stock?