Question 1

Stock value is always increased whenever earnings are plowed back into the firm.

Accepted Answer

A) True 
 B)False

Question 2

An analyst who relies upon past cycles of stock pricing to make investment decisions is:

Accepted Answer

A) performing fundamental analysis. 
B) relying upon the strong-form of market efficiency. 
C) assuming that the market is not weak-form efficient. 
D) relying upon the random walk of stock prices. 
A) performing fundamental analysis. 
B) relying upon the strong-form of market efficiency. 
C) assuming that the market is not weak-form efficient. 
D) relying upon the random walk of stock prices.

Question 3

How much of a stock's $30 price is reflected in PRESENT VALUE OF GROWTH OPPORTUNITIES if it expects to earn $4 per share, has an expected dividend of $2.50, and a required return of 20 percent?

Accepted Answer

A) $0 
B) $6.00 
C) $8.00 
D) $10.00 
A) $0 
B) $6.00 
C) $8.00 
D) $10.00

Question 4

The terminal value of a share of stock:

Accepted Answer

A) is similar to the maturity value of a bond. 
B) refers to the share value at the end of the investor's holding period. 
C) is the value received by investors upon liquidation of the firm. 
D) is the price for shares traded through a dealers' market. 
A) is similar to the maturity value of a bond. 
B) refers to the share value at the end of the investor's holding period. 
C) is the value received by investors upon liquidation of the firm. 
D) is the price for shares traded through a dealers' market.

Question 5

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's current price?

Accepted Answer

A) $4.50 
B) $18.00 
C) $22.22 
D) $40.50 
A) $4.50 
B) $18.00 
C) $22.22 
D) $40.50

Question 6

Explain why the market value of common stock often differs from its liquidation value or its book value.

Accepted Answer

A firm's liquidation value represents th

Question 7

Firms having a higher expected return have a higher:

Accepted Answer

A) level of expected risk. 
B) dividend yield. 
C) market value of equity. 
D) degree of certainty concerning their returns. 
A) level of expected risk. 
B) dividend yield. 
C) market value of equity. 
D) degree of certainty concerning their returns.

Question 8

Which of the following statements is correct about a stock currently selling for $50 per share that has a 16 percent expected return and a 10 percent expected capital appreciation?

Accepted Answer

A) its expected dividend exceeds the actual dividend 
B) its expected return will exceed the actual return 
C) it is expected to pay $3 in annual dividends 
D) it is expected to pay $8 in annual dividends 
A) its expected dividend exceeds the actual dividend 
B) its expected return will exceed the actual return 
C) it is expected to pay $3 in annual dividends 
D) it is expected to pay $8 in annual dividends

Question 9

Lincoln Thomas believes that the Harris Group will pay a dividend of $4 on its common stock in year 2.Thereafter, you expect dividends to grow at a rate of 12 percent a year in perpetuity.If Lincoln requires a return of 24 percent on his investment, how much should he be willing to pay for the stock?

Accepted Answer

P0 = DIV1/

Question 10

If next year's dividend is forecast to be $5.00, the constant growth rate is 4 percent, and the discount rate is 16 percent, then the current stock price should be:

Accepted Answer

A) $31.25 
B) $40.00 
C) $41.67 
D) $43.33 
A) $31.25 
B) $40.00 
C) $41.67 
D) $43.33

Question 11

Technical analysts have no effect upon the efficiency of the stock market.

Accepted Answer

A) True 
 B)False

Question 12

A stock offers an expected dividend of $3.50, has a required return of 14%, and has historically exhibited a growth rate of 6%.Its current price is $35.00 and shows no tendency to change.How can you explain this price based on the constant growth dividend discount model?

Accepted Answer

The constant growth dividend discount mo

Question 13

How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:

Accepted Answer

A) will be paid to a different investor. 
B) will not be paid by the firm. 
C) have an insignificant present value. 
D) ignore the tax consequences of future dividends. 
A) will be paid to a different investor. 
B) will not be paid by the firm. 
C) have an insignificant present value. 
D) ignore the tax consequences of future dividends.

Question 14

Depreciation (amortization) is:

Accepted Answer

A) not adjusted for inflation. 
B) adjusted for inflation. 
C) adjusted using time value of money. 
D) adjusted for inflation and time value of money. 
A) not adjusted for inflation. 
B) adjusted for inflation. 
C) adjusted using time value of money. 
D) adjusted for inflation and time value of money.

Question 15

A payout ratio of 35 percent for a company indicates that:

Accepted Answer

A) 35 percent of dividends are plowed back for growth. 
B) 65 percent of dividends are plowed back for growth. 
C) 65 percent of earnings are paid out as dividends. 
D) 35 percent of earnings are paid out as dividends. 
A) 35 percent of dividends are plowed back for growth. 
B) 65 percent of dividends are plowed back for growth. 
C) 65 percent of earnings are paid out as dividends. 
D) 35 percent of earnings are paid out as dividends.

Question 16

The main purpose of a market-value balance sheet is to:

Accepted Answer

A) show an inflated value of the firm. 
B) avoid the recording of certain liabilities. 
C) value assets and liabilities without GAAP restrictions. 
D) improve the credit rating of the firm. 
A) show an inflated value of the firm. 
B) avoid the recording of certain liabilities. 
C) value assets and liabilities without GAAP restrictions. 
D) improve the credit rating of the firm.

Question 17

According to the dividend discount model, the current value of a stock is equal to the:

Accepted Answer

A) present value of all expected future dividends. 
B) sum of all future expected dividends. 
C) next expected dividend, discounted to the present. 
D) discounted value of all dividends growing at a constant rate. 
A) present value of all expected future dividends. 
B) sum of all future expected dividends. 
C) next expected dividend, discounted to the present. 
D) discounted value of all dividends growing at a constant rate.

Question 18

How can an analyst be credible in stating that the value of a stock is equal to the discounted value of all future dividends when a company may pay dividends indefinitely and it is virtually impossible to predict dividends beyond some reasonable horizon?

Accepted Answer

At most reasonable discount rates for co

Question 19

What is the required return for a stock that has a 6% constant growth rate, a price of $25, an expected dividend of $2, and a P/E ratio of 10?

Accepted Answer

A) 5% 
B) 10% 
C) 14% 
D) 22% 
A) 5% 
B) 10% 
C) 14% 
D) 22%

Question 20

What might be included in building a case for "appropriate" P/E ratios in the currently high stock markets?

Accepted Answer

Many firms have invested heavily in inta

Exam 7: Valuing Stocks

Stock value is always increased whenever earnings are plowed back into the firm.

An analyst who relies upon past cycles of stock pricing to make investment decisions is:

How much of a stock's $30 price is reflected in PRESENT VALUE OF GROWTH OPPORTUNITIES if it expects to earn $4 per share, has an expected dividend of $2.50, and a required return of 20 percent?

The terminal value of a share of stock:

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's current price?

Explain why the market value of common stock often differs from its liquidation value or its book value.

Firms having a higher expected return have a higher:

Which of the following statements is correct about a stock currently selling for $50 per share that has a 16 percent expected return and a 10 percent expected capital appreciation?

If next year's dividend is forecast to be $5.00, the constant growth rate is 4 percent, and the discount rate is 16 percent, then the current stock price should be:

Technical analysts have no effect upon the efficiency of the stock market.

A stock offers an expected dividend of $3.50, has a required return of 14%, and has historically exhibited a growth rate of 6%.Its current price is $35.00 and shows no tendency to change.How can you explain this price based on the constant growth dividend discount model?

How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:

Depreciation (amortization) is:

A payout ratio of 35 percent for a company indicates that:

The main purpose of a market-value balance sheet is to:

According to the dividend discount model, the current value of a stock is equal to the:

How can an analyst be credible in stating that the value of a stock is equal to the discounted value of all future dividends when a company may pay dividends indefinitely and it is virtually impossible to predict dividends beyond some reasonable horizon?

What is the required return for a stock that has a 6% constant growth rate, a price of $25, an expected dividend of $2, and a P/E ratio of 10?

What might be included in building a case for "appropriate" P/E ratios in the currently high stock 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

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