Question 1

If investors believe a company will have the opportunity to make very profitable investments in the future, they will pay more for the company's stock today.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following should increase the firm's sustainable growth rate?

Accepted Answer

A) increase the dividend payout ratio 
B) decrease the required return 
C) decrease the ROE 
D) increase the plowback ratio 
A) increase the dividend payout ratio 
B) decrease the required return 
C) decrease the ROE 
D) increase the plowback ratio

Question 3

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

Accepted Answer

A) its stock price will remain constant 
B) its stock price will increase by the sustainable growth rate 
C) its stock price will decline unless dividend payout ratio is zero 
D) its stock price will decline unless plowback rate exceeds required return 
A) its stock price will remain constant 
B) its stock price will increase by the sustainable growth rate 
C) its stock price will decline unless dividend payout ratio is zero 
D) its stock price will decline unless plowback rate exceeds required return

Question 4

In general, if a firm has positive present value of growth opportunities, then its price-earnings ratio:

Accepted Answer

A) is greater than its required rate of return. 
B) is less than its required rate of return. 
C) equals its required rate of return. 
D) will be lower than the industry average. 
A) is greater than its required rate of return. 
B) is less than its required rate of return. 
C) equals its required rate of return. 
D) will be lower than the industry average.

Question 5

In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.

Accepted Answer

A) guaranteed; not guaranteed 
B) guaranteed; guaranteed 
C) not guaranteed; not guaranteed 
D) not guaranteed; guaranteed 
A) guaranteed; not guaranteed 
B) guaranteed; guaranteed 
C) not guaranteed; not guaranteed 
D) not guaranteed; guaranteed

Question 6

Dividing a stock's earnings per share by the expected rate of return will value the share correctly if no new shares are issued and the dividend yield:

Accepted Answer

A) exceeds the required return. 
B) equals the required return. 
C) is zero. 
D) is constant. 
A) exceeds the required return. 
B) equals the required return. 
C) is zero. 
D) is constant.

Question 7

What is the expected constant growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18 percent?

Accepted Answer

A) 3.41 percent 
B) 5.50 percent 
C) 9.26 percent 
D) 12.5 percent 
A) 3.41 percent 
B) 5.50 percent 
C) 9.26 percent 
D) 12.5 percent

Question 8

Stocks that have the same expected risk should:

Accepted Answer

A) offer the same dividend payment. 
B) have the same sustainable growth rate. 
C) have the same price. 
D) have the same expected rate of return. 
A) offer the same dividend payment. 
B) have the same sustainable growth rate. 
C) have the same price. 
D) have the same expected rate of return.

Question 9

What is the value of the expected dividend per share for a stock that has a required return of 16 percent, a price of $45, and a constant growth rate of 10 percent?

Accepted Answer

A) $2.70 
B) $3.60 
C) $4.50 
D) $7.20 
A) $2.70 
B) $3.60 
C) $4.50 
D) $7.20

Question 10

The value of common stock will likely decrease if:

Accepted Answer

A) the investment horizon decreases. 
B) the growth rate of dividends increases. 
C) the discount rate increases. 
D) dividends are discounted back to the present. 
A) the investment horizon decreases. 
B) the growth rate of dividends increases. 
C) the discount rate increases. 
D) dividends are discounted back to the present.

Question 11

The valuation horizon is?

Accepted Answer

A) Arbitrary 
B) A formula 
C) Dependent on industry 
D) Dependent on Interest Rates 
A) Arbitrary 
B) A formula 
C) Dependent on industry 
D) Dependent on Interest Rates

Question 12

If the liquidation value of a firm is negative, then:

Accepted Answer

A) the firm's debt exceeds the market value of assets. 
B) the firm's debt exceeds the book value of equity. 
C) the book value of assets exceeds the firm's debt. 
D) the market value of assets exceeds the firm's debt. 
A) the firm's debt exceeds the market value of assets. 
B) the firm's debt exceeds the book value of equity. 
C) the book value of assets exceeds the firm's debt. 
D) the market value of assets exceeds the firm's debt.

Question 13

What would be the expected price of a stock when dividends are expected to grow at a 25 percent rate for three years, and then grow at a constant rate of 5 percent, if the stock's required return is 13 percent and next year's dividend will be $4.00?

Accepted Answer

A) $61.60 
B) $62.08 
C) $68.64 
D) $79.44 
A) $61.60 
B) $62.08 
C) $68.64 
D) $79.44

Question 14

A high P/E ratio indicates high level of risk.
It indicates low levels of risk.

Accepted Answer

A) True 
 B)False

Question 15

If The Globe and Mail lists a stock's dividend as $1, then it is most likely the case that the stock:

Accepted Answer

A) pays $1 quarterly, or an estimated $4 annually. 
B) pays $0.25 quarterly, or an estimated $1 annually. 
C) paid $1 during the past quarter, with no future dividends forecast. 
D) paid $1 during the past year, with no future dividends forecast. 
A) pays $1 quarterly, or an estimated $4 annually. 
B) pays $0.25 quarterly, or an estimated $1 annually. 
C) paid $1 during the past quarter, with no future dividends forecast. 
D) paid $1 during the past year, with no future dividends forecast.

Question 16

Investors are willing to purchase stocks having high P/E ratios because:

Accepted Answer

A) they expect these shares to sell for a lower price. 
B) they expect these shares to offer higher dividend payments. 
C) these shares are accompanied by guaranteed earnings. 
D) they expect these shares to have greater growth opportunities. 
A) they expect these shares to sell for a lower price. 
B) they expect these shares to offer higher dividend payments. 
C) these shares are accompanied by guaranteed earnings. 
D) they expect these shares to have greater growth opportunities.

Question 17

Lincoln and Donovan's will pay a dividend of $5 per share in year 1.It sells at $60 a share, and firms in the same industry provide an expected rate of return of 14 percent.What must be the expected growth rate of the company's dividend?

Accepted Answer

60 = 5/.14

Question 18

A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14 percent.What might investors expect to pay for the stock one year from now?

Accepted Answer

A) $82.20 
B) $86.20 
C) $87.20 
D) $91.20 
A) $82.20 
B) $86.20 
C) $87.20 
D) $91.20

Question 19

Which of the following values treats the firm as a going concern?

Accepted Answer

A) market value 
B) book value 
C) liquidation value 
D) Both book value and liquidation value 
A) market value 
B) book value 
C) liquidation value 
D) Both book value and liquidation value

Question 20

How does competition among investors lead to efficient markets?

Accepted Answer

The search for information and insightfu

Exam 7: Valuing Stocks

If investors believe a company will have the opportunity to make very profitable investments in the future, they will pay more for the company's stock today.

Which of the following should increase the firm's sustainable growth rate?

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

In general, if a firm has positive present value of growth opportunities, then its price-earnings ratio:

In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.

Dividing a stock's earnings per share by the expected rate of return will value the share correctly if no new shares are issued and the dividend yield:

What is the expected constant growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18 percent?

Stocks that have the same expected risk should:

What is the value of the expected dividend per share for a stock that has a required return of 16 percent, a price of $45, and a constant growth rate of 10 percent?

The value of common stock will likely decrease if:

The valuation horizon is?

If the liquidation value of a firm is negative, then:

What would be the expected price of a stock when dividends are expected to grow at a 25 percent rate for three years, and then grow at a constant rate of 5 percent, if the stock's required return is 13 percent and next year's dividend will be $4.00?

A high P/E ratio indicates high level of risk. It indicates low levels of risk.

If The Globe and Mail lists a stock's dividend as $1, then it is most likely the case that the stock:

Investors are willing to purchase stocks having high P/E ratios because:

Lincoln and Donovan's will pay a dividend of $5 per share in year 1.It sells at $60 a share, and firms in the same industry provide an expected rate of return of 14 percent.What must be the expected growth rate of the company's dividend?

A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14 percent.What might investors expect to pay for the stock one year from now?

Which of the following values treats the firm as a going concern?

How does competition among investors lead to efficient markets?

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

In the calculation of rates of return on common stock, dividends are _ and capital gains are .