Question 1

Which of the following is a limitation of the dividend-discount model?

Accepted Answer

A)  It cannot handle negative growth rates. 
B)  It requires accurate dividend forecasts, which is not possible. 
C)  It requires that the growth rate always be higher than the required rate of return, which is not realistic. 
D)  It does not consider past earnings and performance.

Question 2

Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15 in one year's time, immediately after it pays a dividend of $0.28. Which of the following is closest to Jumbuck Exploration's equity cost of capital?

Accepted Answer

A)  7.17% 
B)  8.60% 
C)  14.33% 
D)  17.91%

Question 3

Rylan Industries is expected to pay a dividend of $5.70 year for the next four years. If the current price of Rylan stock is $31.27, and Rylan's equity cost of capital is 12%, what price would you expect Rylan's stock to sell for at the end of the four years?

Accepted Answer

A)  $21.96 
B)  $39.53 
C)  $17.57 
D)  $61.49

Question 4

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 5

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

Accepted Answer

A) True 
 B)False

Question 6

Spacefood Products will pay a dividend of $2.40 per share this year. It is expected that this dividend will grow by 5% per year each year in the future. What will be the current value of a single share of Spacefood's stock if the firm's equity cost of capital is 12%?

Accepted Answer

A)  $24.00 
B)  $22.29 
C)  $30.86 
D)  $34.29

Question 7

Sunnyfax Publishing pays out all its earnings and has a share price of $37. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 13%. If the reinvestment does not affect Sunnyfax's equity cost of capital and earnings before the dividend cut were expected to be constant, what is the expected share price as a consequence of this decision?

Accepted Answer

A)  $36.67 
B)  $41.90 
C)  $52.38 
D)  $62.86

Question 8

Jumbo Transport, an air-cargo company, expects to have earnings per share of $2.00 in the coming year. It decides to retain 10% of these earnings in order to lease new aircraft. The return on this investment will be 25%. If its equity cost of capital is 11%, what is the expected share price of Jumbo Transport?

Accepted Answer

A)  $12.71 
B)  $14.83 
C)  $16.94 
D)  $21.18

Question 9

Use the figure for the question(s) below. 
-The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA) after the close of business on August 22, 2008. What is the difference between the opening and closing price of the stock on this date?

Accepted Answer

A)  $0.49 
B)  $0.27 
C)  $0.24 
D)  $0.03

Question 10

JRN Enterprises just announced that it plans to cut its dividend from $3.00 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 indefinitely at 4% per year and JRN's stock was trading at $25.50 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)  $19.32 
B)  $12.75 
C)  $38.63 
D)  $25.50

Question 11

Sultan Services has 1.2 million shares outstanding. It expects earnings at the end of the year of $6.0 million. Sultan pays out 60% of its earnings in total: 40% paid out as dividends and 20% used to repurchase shares. If Sultan's earnings are expected to grow by 5% per year, these payout rates do not change, and Sultan's equity cost of capital is 10%, what is Sultan's share price?

Accepted Answer

A)  $12.00 
B)  $24.00 
C)  $36.00 
D)  $60.00

Question 12

NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to ________.

Accepted Answer

A)  $9.60 
B)  $14.40 
C)  $13.20 
D)  $12.00

Question 13

Valence Electronics has 213 million shares outstanding. It expects earnings at the end of the year of $800 million. Valence pays out 40% of its earnings in total-15% paid out as dividends and 25% used to repurchase shares. If Valence's earnings are expected to grow by 7% per year, these payout rates do not change, and Valence's equity cost of capital is 9%, what is Valence's share price?

Accepted Answer

A)  $11.27 
B)  $22.54 
C)  $60.10 
D)  $75.12

Question 14

A floor broker is a person at the NASDAQ with a trading license who represents orders on the floor.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is FALSE?

Accepted Answer

A)  Estimating dividends, especially for the distant future, is difficult. 
B)  A firm can only pay out its earnings to investors or reinvest their earnings. 
C)  Successful young firms often have high initial earnings growth rates. 
D)  According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

Question 16

Use the figure for the question(s) below. 
-The above screen shot from Google Finance shows the basic stock information for Kraft Foods Inc. after the close of the stock market on May 30, 2008. What is the highest that the stock has traded at in the last 12 months?

Accepted Answer

A)  $32.44 
B)  $32.48 
C)  $32.99 
D)  $35.29

Question 17

Coolibah Holdings is expected to pay dividends of $1.20 every six months for the next three years. If the current price of Coolibah stock is $22.60, and Coolibah's equity cost of capital is 18%, what price would you expect Coolibah's stock to sell for at the end of three years?

Accepted Answer

A)  $28.87 
B)  $31.76 
C)  $33.20 
D)  $34.64

Question 18

Which of the following is NOT a way that a firm can increase its dividend?

Accepted Answer

A)  by increasing its retention rate 
B)  by decreasing its shares outstanding 
C)  by increasing its earnings (net income) 
D)  by increasing its dividend payout rate

Question 19

Chittenden Enterprises has 643 million shares outstanding. It expects earnings at the end of the year to be $960 million. The firm's equity cost of capital is 9%. Chittenden pays out 30% of its earnings in total: 20% paid out as dividends and 10% used to repurchase shares. If Chittenden's earnings are expected to grow at a constant 3% per year, what is Chittenden's share price?

Accepted Answer

A)  $3.74 
B)  $2.24 
C)  $7.47 
D)  $14.94

Question 20

Which of the following formulas is INCORRECT?

Accepted Answer

A)  Divt = EPSt × Dividend Payout Rate 
B)  PN = (rE - g) × DivN+1 
C)  earnings growth rate = retention rate × return on new investment 
D)  rE = (Divt / P0) + g

Exam 7: Stock Valuation