Question 1

A firm's liquidation value is the amount:

Accepted Answer

A) necessary to repurchase all shares of common stock. 
B) realized from selling all assets and repaying debts. 
C) a purchaser would pay for the firm in bankruptcy. 
D) equal to the book value of equity. 
A) necessary to repurchase all shares of common stock. 
B) realized from selling all assets and repaying debts. 
C) a purchaser would pay for the firm in bankruptcy. 
D) equal to the book value of equity. B

Question 2

Which of the following best characterizes the difference between growth stocks and income stocks?

Accepted Answer

A) growth stocks do not pay dividends 
B) income stocks offer higher rates of return 
C) income stocks are seasoned issues 
D) growth stocks have greater PRESENT VALUE OF GROWTH OPPORTUNITIES 
A) growth stocks do not pay dividends 
B) income stocks offer higher rates of return 
C) income stocks are seasoned issues 
D) growth stocks have greater PRESENT VALUE OF GROWTH OPPORTUNITIES D

Question 3

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

Accepted Answer

A) at least one of the stocks becomes temporarily mispriced 
B) this is a common occurrence indicating that one stock has more PRESENT VALUE OF GROWTH OPPORTUNITIES 
C) this cannot happen if the shares are traded in an auction market 
D) the expected risk levels will change until the expected returns are equal 
A) at least one of the stocks becomes temporarily mispriced 
B) this is a common occurrence indicating that one stock has more PRESENT VALUE OF GROWTH OPPORTUNITIES 
C) this cannot happen if the shares are traded in an auction market 
D) the expected risk levels will change until the expected returns are equal A

Question 4

Common stock can be valued using the perpetuity valuation formula if the:

Accepted Answer

A) discount rate is expected to remain constant. 
B) dividends are not expected to grow. 
C) growth rate in dividends is not constant. 
D) investor does not intend to sell the stock. 
A) discount rate is expected to remain constant. 
B) dividends are not expected to grow. 
C) growth rate in dividends is not constant. 
D) investor does not intend to sell the stock.

Question 5

The statement that there are no free lunches on Wall Street suggests that:

Accepted Answer

A) the market is strong-form efficient. 
B) there is no return to technical or fundamental analysis. 
C) security prices reflect all available information. 
D) food purveyors are capitalists. 
A) the market is strong-form efficient. 
B) there is no return to technical or fundamental analysis. 
C) security prices reflect all available information. 
D) food purveyors are capitalists.

Question 6

Investors may obtain the same securities at the same time in either the primary or secondary markets.

Accepted Answer

A) True 
 B)False

Question 7

When investors are not capable of making superior investment decisions on a continual basis based on past prices, public or private information, the market is said to be:

Accepted Answer

A) weak-form efficient. 
B) semi-strong-form efficient. 
C) strong-form efficient. 
D) fundamentally efficient. 
A) weak-form efficient. 
B) semi-strong-form efficient. 
C) strong-form efficient. 
D) fundamentally efficient.

Question 8

Which group of investors is capable of earning consistent, superior profits if financial markets are strong-form efficient?

Accepted Answer

A) only technical analysts will be able to profit 
B) only fundamental analysts will be able to profit 
C) only inside traders will be able to profit 
D) no one will be capable of sustained, superior profits 
A) only technical analysts will be able to profit 
B) only fundamental analysts will be able to profit 
C) only inside traders will be able to profit 
D) no one will be capable of sustained, superior profits

Question 9

What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

Accepted Answer

A) 25.00 percent 
B) 33.33 percent 
C) 66.67 percent 
D) 75.00 percent 
A) 25.00 percent 
B) 33.33 percent 
C) 66.67 percent 
D) 75.00 percent

Question 10

The dividend discount model should not be used to value stocks in which the dividend does not grow.

Accepted Answer

A) True 
 B)False

Question 11

The dividend discount model indicate that the value of a stock is the present value of the dividends it will pay over the investor's horizon plus the present value of the expected stock price at the end of that horizon.

Accepted Answer

A) True 
 B)False

Question 12

The study of published financial information on a company in order to make investment decisions is known as:

Accepted Answer

A) technical analysis. 
B) fundamental analysis. 
C) efficiency analysis. 
D) random pricing analysis. 
A) technical analysis. 
B) fundamental analysis. 
C) efficiency analysis. 
D) random pricing analysis.

Question 13

For a firm that expects earnings next year of $10.00 per share, has a plowback ratio of 35 percent, a return on equity of 20 percent, and a required return of 15 percent, show the current stock value and next year's expected stock value, assuming that growth is to be constant.

Accepted Answer

g = return on equity x plowback ratio
=

Question 14

Given the efficiency of our financial markets,:

Accepted Answer

A) there is no justification for technical analysts. 
B) there is no justification for fundamental analysts. 
C) both technical and fundamental analysts serve a useful function. 
D) all investors should index their portfolio. 
A) there is no justification for technical analysts. 
B) there is no justification for fundamental analysts. 
C) both technical and fundamental analysts serve a useful function. 
D) all investors should index their portfolio.

Question 15

According to the dividend discount model, a stock's price today depends on the investor's horizon for holding the stock.

Accepted Answer

A) True 
 B)False

Question 16

When valuing stock with the dividend discount model, the present value of future dividends will:

Accepted Answer

A) change depending upon the time horizon selected. 
B) remain constant regardless of the time horizon selected. 
C) remain constant regardless of growth rate. 
D) always equal the present value of the terminal price. 
A) change depending upon the time horizon selected. 
B) remain constant regardless of the time horizon selected. 
C) remain constant regardless of growth rate. 
D) always equal the present value of the terminal price.

Question 17

What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15 percent, an expected dividend of $2.80, and a constant dividend growth rate of 7 percent?

Accepted Answer

A) $37.45 
B) $37.80 
C) $40.25 
D) $43.05 
A) $37.45 
B) $37.80 
C) $40.25 
D) $43.05

Question 18

If the market is efficient, stock prices should only be expected to react to new information that is released.

Accepted Answer

A) True 
 B)False

Question 19

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8 percent?

Accepted Answer

A) $22.86 
B) $28.00 
C) $42.00 
D) $43.75 
A) $22.86 
B) $28.00 
C) $42.00 
D) $43.75

Question 20

Show the breakdown of stock price between a firm's assets that are already in place and its present value of growth opportunities, assuming: next year's expected earnings equal $5.00, 13 percent required rate of return, 17 percent return on equity, 45 percent plowback ratio.

Accepted Answer

Present value of assets in pla

Exam 7: Valuing Stocks

A firm's liquidation value is the amount:

Which of the following best characterizes the difference between growth stocks and income stocks?

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

Common stock can be valued using the perpetuity valuation formula if the:

The statement that there are no free lunches on Wall Street suggests that:

Investors may obtain the same securities at the same time in either the primary or secondary markets.

When investors are not capable of making superior investment decisions on a continual basis based on past prices, public or private information, the market is said to be:

Which group of investors is capable of earning consistent, superior profits if financial markets are strong-form efficient?

What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

The dividend discount model should not be used to value stocks in which the dividend does not grow.

The dividend discount model indicate that the value of a stock is the present value of the dividends it will pay over the investor's horizon plus the present value of the expected stock price at the end of that horizon.

The study of published financial information on a company in order to make investment decisions is known as:

For a firm that expects earnings next year of $10.00 per share, has a plowback ratio of 35 percent, a return on equity of 20 percent, and a required return of 15 percent, show the current stock value and next year's expected stock value, assuming that growth is to be constant.

Given the efficiency of our financial markets,:

According to the dividend discount model, a stock's price today depends on the investor's horizon for holding the stock.

When valuing stock with the dividend discount model, the present value of future dividends will:

What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15 percent, an expected dividend of $2.80, and a constant dividend growth rate of 7 percent?

If the market is efficient, stock prices should only be expected to react to new information that is released.

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8 percent?

Show the breakdown of stock price between a firm's assets that are already in place and its present value of growth opportunities, assuming: next year's expected earnings equal $5.00, 13 percent required rate of return, 17 percent return on equity, 45 percent plowback ratio.

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters