Question 1

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Accepted Answer

A)  6.62% 
B)  6.82% 
C)  7.03% 
D)  7.25% 
E)  7.47% 
A)  6.62% 
B)  6.82% 
C)  7.03% 
D)  7.25% 
E)  7.47%

Question 2

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)  Stock Y pays a higher dividend per share than Stock X. 
B)  Stock X pays a higher dividend per share than Stock Y. 
C)  One year from now, Stock X should have the higher price. 
D)  Stock Y has a lower expected growth rate than Stock X. 
E)  Stock Y has the higher expected capital gains yield. 
A)  Stock Y pays a higher dividend per share than Stock X. 
B)  Stock X pays a higher dividend per share than Stock Y. 
C)  One year from now, Stock X should have the higher price. 
D)  Stock Y has a lower expected growth rate than Stock X. 
E)  Stock Y has the higher expected capital gains yield.

Question 3

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Accepted Answer

A)  The two stocks must have the same dividend per share. 
B)  If one stock has a higher dividend yield, it must also have a lower dividend growth rate. 
C)  If one stock has a higher dividend yield, it must also have a higher dividend growth rate. 
D)  The two stocks must have the same dividend growth rate. 
E)  The two stocks must have the same dividend yield. 
A)  The two stocks must have the same dividend per share. 
B)  If one stock has a higher dividend yield, it must also have a lower dividend growth rate. 
C)  If one stock has a higher dividend yield, it must also have a higher dividend growth rate. 
D)  The two stocks must have the same dividend growth rate. 
E)  The two stocks must have the same dividend yield.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital. 
B)  To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital. 
C)  To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital. 
D)  To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital. 
E)  The corporate valuation model requires the assumption of a constant growth rate in all years. 
A)  To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital. 
B)  To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital. 
C)  To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital. 
D)  To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital. 
E)  The corporate valuation model requires the assumption of a constant growth rate in all years.

Question 5

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

Accepted Answer

A)  $16.28 
B)  $16.70 
C)  $17.13 
D)  $17.57 
E)  $18.01 
A)  $16.28 
B)  $16.70 
C)  $17.13 
D)  $17.57 
E)  $18.01

Question 6

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

Accepted Answer

A)  the stock is experiencing supernormal growth. 
B)  the stock should be sold. 
C)  the stock is a good buy. 
D)  management is probably not trying to maximize the price per share. 
E)  dividends are not likely to be declared. 
A)  the stock is experiencing supernormal growth. 
B)  the stock should be sold. 
C)  the stock is a good buy. 
D)  management is probably not trying to maximize the price per share. 
E)  dividends are not likely to be declared.

Question 7

An increase in a firm's expected growth rate would cause its required rate of return to

Accepted Answer

A)  increase. 
B)  decrease. 
C)  fluctuate less than before. 
D)  fluctuate more than before. 
E)  possibly increase, possibly decrease, or possibly remain constant. 
A)  increase. 
B)  decrease. 
C)  fluctuate less than before. 
D)  fluctuate more than before. 
E)  possibly increase, possibly decrease, or possibly remain constant.

Question 8

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

A) True 
 B)False

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

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Accepted Answer

A)  The company's current stock price is $20. 
B)  The company's dividend yield 5 years from now is expected to be 10%. 
C)  The constant growth model cannot be used because the growth rate is negative. 
D)  The company's expected capital gains yield is 5%. 
E)  The company's expected stock price at the beginning of next year is $9.50. 
A)  The company's current stock price is $20. 
B)  The company's dividend yield 5 years from now is expected to be 10%. 
C)  The constant growth model cannot be used because the growth rate is negative. 
D)  The company's expected capital gains yield is 5%. 
E)  The company's expected stock price at the beginning of next year is $9.50.

Question 11

The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

Accepted Answer

A)  $41.58 
B)  $42.64 
C)  $43.71 
D)  $44.80 
E)  $45.92 
A)  $41.58 
B)  $42.64 
C)  $43.71 
D)  $44.80 
E)  $45.92

Question 12

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

Accepted Answer

A)  $18.62 
B)  $19.08 
C)  $19.56 
D)  $20.05 
E)  $20.55 
A)  $18.62 
B)  $19.08 
C)  $19.56 
D)  $20.05 
E)  $20.55

Question 13

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. 
B)  The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. 
C)  Corporations cannot buy the preferred stocks of other corporations. 
D)  Preferred dividends are not generally cumulative. 
E)  A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. 
A)  Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. 
B)  The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. 
C)  Corporations cannot buy the preferred stocks of other corporations. 
D)  Preferred dividends are not generally cumulative. 
E)  A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.

Question 15

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 16

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

Question 17

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights. 
B)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
C)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
D)  The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates. 
E)  The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required return. 
A)  If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights. 
B)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
C)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
D)  The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates. 
E)  The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required return.

Question 19

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

Accepted Answer

A)  If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate. 
B)  If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. 
C)  If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. 
D)  The stocks must sell for the same price. 
E)  Stock Y must have a higher dividend yield than Stock X. 
A)  If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate. 
B)  If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. 
C)  If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. 
D)  The stocks must sell for the same price. 
E)  Stock Y must have a higher dividend yield than Stock X.

Question 20

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. 
B)  The corporate valuation model discounts free cash flows by the required return on equity. 
C)  The corporate valuation model can be used to find the value of a division. 
D)  An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. 
E)  Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or continuing, value. 
A)  The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. 
B)  The corporate valuation model discounts free cash flows by the required return on equity. 
C)  The corporate valuation model can be used to find the value of a division. 
D)  An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. 
E)  Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or continuing, value.

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

An increase in a firm's expected growth rate would cause its required rate of return to

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

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.

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Which of the following statements is CORRECT?

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.

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Which of the following statements is CORRECT?

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Hybrid Financing

Mergers

Filters

Exam 10: Stocks

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

An increase in a firm's expected growth rate would cause its required rate of return to

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

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.

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Which of the following statements is CORRECT?

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.

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Which of the following statements is CORRECT?

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Hybrid Financing

Mergers

Filters