Question 1

According to the dividend growth model, if a company were to declare that it would never pay dividends, its value would be

Accepted Answer

A) Based on earnings. 
B) Based on expectations regarding. 
C) Higher than similar firms since it could reinvest a greater amount in new projects. 
D) Zero. 
E) Based on the capital asset pricing model. 
A) Based on earnings. 
B) Based on expectations regarding. 
C) Higher than similar firms since it could reinvest a greater amount in new projects. 
D) Zero. 
E) Based on the capital asset pricing model.

Question 2

Exhibit 11.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%.
-Refer to Exhibit 11.7. The price of the stock today (P0) is

Accepted Answer

A) $84.81 
B) $87.81 
C) $91.09 
D) $94.32 
E) $97.61 
A) $84.81 
B) $87.81 
C) $91.09 
D) $94.32 
E) $97.61

Question 3

Exhibit 12.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent.
-Empirical studies have shown that the market factor has increased over time and now accounts for the majority of an individual stock's price variance.

Accepted Answer

A) True 
 B)False

Question 4

Exhibit 11.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A major retailer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 8 years remaining until maturity. The bonds were issued with a 6.5 percent coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 4.25 percent.
-Refer to Exhibit 11.1. What will be the value of these securities in one year if the required return is 7 percent?

Accepted Answer

A) $970.14 
B) $388.13 
C) $1031.15 
D) $1035.81 
E) $972.52 
A) $970.14 
B) $388.13 
C) $1031.15 
D) $1035.81 
E) $972.52

Question 5

Exhibit 12.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent.
-The general economic influences would include inflation, political upheavals, monetary policy, and fiscal policy initiatives.

Accepted Answer

A) True 
 B)False

Question 6

All of the following are ways in which a firm can increase its growth rate of equity earnings without any external financing except

Accepted Answer

A) Decreasing its dividend payments 
B) Increasing its retention ratio 
C) Increasing its return on equity (RO
E)  
D) Increasing its return on assets (RO
A)  
E) All of the above will increase the firm's growth rate without external financing 
A) Decreasing its dividend payments 
B) Increasing its retention ratio 
C) Increasing its return on equity (RO
E)  
D) Increasing its return on assets (RO
A)  
E) All of the above will increase the firm's growth rate without external financing

Question 7

In 2004, Venus Fly Co. issued a $75 par value preferred stock which pays a 7 percent annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring a 5 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Accepted Answer

A) $125 
B) $84 
C) $91 
D) $145 
E) $105 
A) $125 
B) $84 
C) $91 
D) $145 
E) $105

Question 8

Which securities can be valued by dividing the annual dividend by the required rate of return?

Accepted Answer

A) Low coupon bonds 
B) Junk bonds 
C) Common stocks 
D) Preferred stocks 
E) Constant growth common stocks 
A) Low coupon bonds 
B) Junk bonds 
C) Common stocks 
D) Preferred stocks 
E) Constant growth common stocks

Question 9

Exhibit 11.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%.
-Refer to Exhibit 11.6. The price of the stock today (P0) is

Accepted Answer

A) $136.29 
B) $133.03 
C) $120.33 
D) $123.43 
E) $126.60 
A) $136.29 
B) $133.03 
C) $120.33 
D) $123.43 
E) $126.60

Question 10

Exhibit 11.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%.
-Refer to Exhibit 11.6. The dividends for years 1, 2, and 3 are

Accepted Answer

A) $2, $2.08, $2.16 
B) $2, $2.05, $2.10 
C) $2.16, $2.24, $2.32 
D) $2.16, $2.33, $2.52 
E) $2.07, $2.14, $2.21 
A) $2, $2.08, $2.16 
B) $2, $2.05, $2.10 
C) $2.16, $2.24, $2.32 
D) $2.16, $2.33, $2.52 
E) $2.07, $2.14, $2.21

Question 11

An equity investor's required rate of return is influenced by the economy's real risk-free rate, the expected rate of inflation, and a risk premium.

Accepted Answer

A) True 
 B)False

Question 12

Exhibit 12.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent.
-In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.

Accepted Answer

A) True 
 B)False

Question 13

Using the constant growth model, an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

Accepted Answer

A) Rise more than 1% 
B) Rise less than 1%. 
C) Remain constant. 
D) Fall more than 1%. 
E) Fall less than 1%. 
A) Rise more than 1% 
B) Rise less than 1%. 
C) Remain constant. 
D) Fall more than 1%. 
E) Fall less than 1%.

Question 14

The Absolute Finance Company (AFC) earned $5 a share last year and paid a dividend of $2 per share. Next year, you expect AFC to earn $6 a share next year and continue its payout ratio. Assume that you expect to sell the stock for $45 a year from now. If you require a 13 percent return on this stock, how much would you be willing to pay for it?

Accepted Answer

A) $41.95 
B) $43.21 
C) $45.13 
D) $46.72 
E) $47.40 
A) $41.95 
B) $43.21 
C) $45.13 
D) $46.72 
E) $47.40

Question 15

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6% annual growth rate indefinitely. If the required rate of return on this investment is 12%, what is the current value of this common stock?

Accepted Answer

A) $1.50 
B) $12.50 
C) $13.25 
D) $25.00 
E) $26.50 
A) $1.50 
B) $12.50 
C) $13.25 
D) $25.00 
E) $26.50

Question 16

Exhibit 11.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A major retailer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 8 years remaining until maturity. The bonds were issued with a 6.5 percent coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 4.25 percent.
-Refer to Exhibit 11.1. What is the current value of these securities?

Accepted Answer

A) $1149.94 
B) $433.15 
C) $1151.92 
D) $860.50 
E) $863.35 
A) $1149.94 
B) $433.15 
C) $1151.92 
D) $860.50 
E) $863.35

Question 17

Exhibit 11.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Davenport Corporation's last dividend was $2.70 and the directors expect to maintain the historic 3 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 5 percent for the next three years and the stock will then reach $25 per share.
-Refer to Exhibit 11.4. How much should you be willing to pay for the stock if you require a 17 percent return?

Accepted Answer

A) $16.97 
B) $22.16 
C) $21.32 
D) $32.63 
E) $23.63 
A) $16.97 
B) $22.16 
C) $21.32 
D) $32.63 
E) $23.63

Question 18

The growth rate in equity without any external financing is determined by multiplying the payout ratio times the return on equity (ROE).

Accepted Answer

A) True 
 B)False

Question 19

Exhibit 12.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent.
-The most difficult part of valuing a bond is determining the required rate of return on this investment.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is not a consideration in the three-step valuation process?

Accepted Answer

A) Analysis of alternative economies 
B) Analysis of security markets 
C) Analysis of alternative industries 
D) Analysis of individual companies 
E) None of the above (that is, all are considerations in the three-step valuation process) 
A) Analysis of alternative economies 
B) Analysis of security markets 
C) Analysis of alternative industries 
D) Analysis of individual companies 
E) None of the above (that is, all are considerations in the three-step valuation process)

According to the dividend growth model, if a company were to declare that it would never pay dividends, its value would be

All of the following are ways in which a firm can increase its growth rate of equity earnings without any external financing except

Which securities can be valued by dividing the annual dividend by the required rate of return?

An equity investor's required rate of return is influenced by the economy's real risk-free rate, the expected rate of inflation, and a risk premium.

Using the constant growth model, an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6% annual growth rate indefinitely. If the required rate of return on this investment is 12%, what is the current value of this common stock?

The growth rate in equity without any external financing is determined by multiplying the payout ratio times the return on equity (ROE).

Which of the following is not a consideration in the three-step valuation process?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 11: Introduction to Security Valuation

According to the dividend growth model, if a company were to declare that it would never pay dividends, its value would be

All of the following are ways in which a firm can increase its growth rate of equity earnings without any external financing except

Which securities can be valued by dividing the annual dividend by the required rate of return?

An equity investor's required rate of return is influenced by the economy's real risk-free rate, the expected rate of inflation, and a risk premium.

Using the constant growth model, an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6% annual growth rate indefinitely. If the required rate of return on this investment is 12%, what is the current value of this common stock?

The growth rate in equity without any external financing is determined by multiplying the payout ratio times the return on equity (ROE).

Which of the following is not a consideration in the three-step valuation process?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters