Question 1

Which of the following is a characteristic of secondary markets for common stock?

Accepted Answer

A) only low-priced shares are traded in these markets. 
B) only high-risk shares are traded in these markets. 
C) secondary markets are where corporations borrow funds. 
D) secondary-market trades do not provide funds for corporations whose stock is traded. 
A) only low-priced shares are traded in these markets. 
B) only high-risk shares are traded in these markets. 
C) secondary markets are where corporations borrow funds. 
D) secondary-market trades do not provide funds for corporations whose stock is traded.

Question 2

The dividend discount model states that today's stock price equals the present value of all expected future dividends.

Accepted Answer

A) True 
 B)False

Question 3

Firms with valuable intangible assets are more likely to show a(n):

Accepted Answer

A) excess of book value over market value of equity. 
B) high going-concern value. 
C) low liquidation value. 
D) low P/E ratio. 
A) excess of book value over market value of equity. 
B) high going-concern value. 
C) low liquidation value. 
D) low P/E ratio.

Question 4

Technical analysts can provide:

Accepted Answer

A) no role in stock market efficiency. 
B) an important role in stock market efficiency. 
C) a zero correlation between stock prices. 
D) the data necessary for fundamental analysis. 
A) no role in stock market efficiency. 
B) an important role in stock market efficiency. 
C) a zero correlation between stock prices. 
D) the data necessary for fundamental analysis.

Question 5

Show numerically that investment horizon has no bearing on current stock price.For your illustration assume investment horizons of three versus five years and the following facts: the stock is correctly priced at $40.00, has a required return of 17 percent, a growth rate of 7 percent, and has just paid a $3.74 dividend.
Note: The variation between $40.01 and $39.98 is, of course, a rounding error.

Accepted Answer

For a three-year horizon:
Po =

Question 6

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

Accepted Answer

A) True 
 B)False

Question 7

The dividend discount model does not hold for investors who have a preference for capital gains.

Accepted Answer

A) True 
 B)False

Question 8

According to the constant dividend growth model, a stock price should equal the:

Accepted Answer

A) sum of all future dividends. 
B) sum of dividends to be received within the investor's holding period. 
C) dividend yield plus the constant growth rate. 
D) sum of all discounted future dividends. 
A) sum of all future dividends. 
B) sum of dividends to be received within the investor's holding period. 
C) dividend yield plus the constant growth rate. 
D) sum of all discounted future dividends.

Question 9

Dividends that are expected to be paid far into the future have:

Accepted Answer

A) great impact on current stock price, due to their expected size. 
B) equal impact on current stock price as near-term dividends. 
C) lesser impact on current stock price due to discounting. 
D) no impact on current stock price because they are uncertain. 
A) great impact on current stock price, due to their expected size. 
B) equal impact on current stock price as near-term dividends. 
C) lesser impact on current stock price due to discounting. 
D) no impact on current stock price because they are uncertain.

Question 10

A company with a return on equity of 15 percent and a plowback ratio of 60 percent would expect a constant growth rate of:

Accepted Answer

A) 4 percent 
B) 9 percent 
C) 21 percent 
D) 25 percent 
A) 4 percent 
B) 9 percent 
C) 21 percent 
D) 25 percent

Question 11

An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return.Which of the following seems most likely?

Accepted Answer

A) the 20% stock is a better investment. 
B) the 14% stock is overpriced. 
C) Both stocks will have approximately the same return. 
D) Both stocks are priced correctly given their perceived risk. 
A) the 20% stock is a better investment. 
B) the 14% stock is overpriced. 
C) Both stocks will have approximately the same return. 
D) Both stocks are priced correctly given their perceived risk.

Question 12

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8 percent and the firm's ROE is 20 percent?

Accepted Answer

A) 8 percent 
B) 12 percent 
C) 20 percent 
D) 40 percent 
A) 8 percent 
B) 12 percent 
C) 20 percent 
D) 40 percent

Question 13

How can we claim that the Dividend Discount Model works when many actual investors may be seeking capital gains and planning to hold their shares for just a few years?

Accepted Answer

The value of a share of common stock equ

Question 14

Securities with the same expected risk should offer the same expected rate of return.

Accepted Answer

A) True 
 B)False

Question 15

How do you estimate Expected Rates of Return in the Constant-Growth Dividend Discount Model?

Accepted Answer

In constant-growth business situations,

Question 16

Other things equal, a firm's sustainable growth rate could increase as a result of:

Accepted Answer

A) increasing the plowback ratio. 
B) increasing the payout ratio. 
C) decreasing the return on equity. 
D) increasing total assets. 
A) increasing the plowback ratio. 
B) increasing the payout ratio. 
C) decreasing the return on equity. 
D) increasing total assets.

Question 17

Which of the following is more likely to be responsible for a firm having low PRESENT VALUE OF GROWTH OPPORTUNITIES?

Accepted Answer

A) ROE exceeds required return. 
B) Plowback is very high. 
C) Payout is very high. 
D) Book value of equity is low. 
A) ROE exceeds required return. 
B) Plowback is very high. 
C) Payout is very high. 
D) Book value of equity is low.

Question 18

The intent of technical analysis is to discover patterns in past stock prices.

Accepted Answer

A) True 
 B)False

Question 19

ABC common stock is expected to have extraordinary growth of 20 percent per year for two years, at which time the growth rate will settle into a constant 6 percent.If the discount rate is 15 percent and the most recent dividend was $2.50, what should be the current share price?

Accepted Answer

A) $31.16 
B) $33.23 
C) $37.39 
D) $47.77 
A) $31.16 
B) $33.23 
C) $37.39 
D) $47.77

Question 20

If a stock's price decreased during the past week, what is the most likely prediction about this week's price change?

Accepted Answer

A) price will reverse last week's loss and go up 
B) price will continue last week's decline 
C) price will stand still until new information is released 
D) either direction of price change is equally likely 
A) price will reverse last week's loss and go up 
B) price will continue last week's decline 
C) price will stand still until new information is released 
D) either direction of price change is equally likely

Exam 7: Valuing Stocks

Which of the following is a characteristic of secondary markets for common stock?

The dividend discount model states that today's stock price equals the present value of all expected future dividends.

Firms with valuable intangible assets are more likely to show a(n):

Technical analysts can provide:

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

The dividend discount model does not hold for investors who have a preference for capital gains.

According to the constant dividend growth model, a stock price should equal the:

Dividends that are expected to be paid far into the future have:

A company with a return on equity of 15 percent and a plowback ratio of 60 percent would expect a constant growth rate of:

An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return.Which of the following seems most likely?

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8 percent and the firm's ROE is 20 percent?

How can we claim that the Dividend Discount Model works when many actual investors may be seeking capital gains and planning to hold their shares for just a few years?

Securities with the same expected risk should offer the same expected rate of return.

How do you estimate Expected Rates of Return in the Constant-Growth Dividend Discount Model?

Other things equal, a firm's sustainable growth rate could increase as a result of:

Which of the following is more likely to be responsible for a firm having low PRESENT VALUE OF GROWTH OPPORTUNITIES?

The intent of technical analysis is to discover patterns in past stock prices.

ABC common stock is expected to have extraordinary growth of 20 percent per year for two years, at which time the growth rate will settle into a constant 6 percent.If the discount rate is 15 percent and the most recent dividend was $2.50, what should be the current share price?

If a stock's price decreased during the past week, what is the most likely prediction about this week's price change?

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