Question 1

An example that specifically contradicts strong-form market efficiency in U.S.stock markets is that:

Accepted Answer

A)  excess profits are observed in cases of insider trading. 
B)  stock prices follow predictable patterns in each month. 
C)  random-walk behavior is reliable. 
D)  fundamental analysts outperform the S&P 500. 
A)  excess profits are observed in cases of insider trading. 
B)  stock prices follow predictable patterns in each month. 
C)  random-walk behavior is reliable. 
D)  fundamental analysts outperform the S&P 500. A

Question 2

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 model would indicate that this stock should currently sell for $43.75,based on the following formula:   Although stocks can temporarily be out of equilibrium price,the fact that this stock price shows no tendency to change suggests that investors do not expect the past growth rate of 6% to continue into the future.Since there is no indication that the required rate of return has changed,it appears that the company many anticipate fewer positive growth opportunities than in the past.Therefore,the dividend yield has likely increased to its current 10% level,and the overall market seems to expect a growth rate of 4% rather than the historical 6%.At a growth rate of 4%,the stock would be correctly priced at $35.00.

Question 3

Show numerically that investment horizon has no bearing on current stock price.For your illustration assume investment horizons of 3 versus 5 years and the following facts: The stock is correctly priced at $40.00,has a required return of 17%,a growth rate of 7%,and has just paid a $3.74 dividend.

Accepted Answer

Note that the variation between $40.01 and $39.98 is,of course,a rounding error.

Question 4

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

Accepted Answer

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

Question 5

Market value,unlike book value and liquidation value,treats the firm as a going concern.

Accepted Answer

A) True 
 B)False

Question 6

The book value of a firm's equity is determined by:

Accepted Answer

A)  multiplying share price by shares outstanding. 
B)  multiplying share price at issue by shares outstanding. 
C)  the difference between book values of assets and liabilities. 
D)  the difference between market values of assets and liabilities. 
A)  multiplying share price by shares outstanding. 
B)  multiplying share price at issue by shares outstanding. 
C)  the difference between book values of assets and liabilities. 
D)  the difference between market values of assets and liabilities.

Question 7

With respect to the notion that stock prices follow a random walk,several researchers have concluded that:

Accepted Answer

A)  stock prices reflect a majority of available information about the firm. 
B)  successive price changes are predictable. 
C)  past stock price changes provide little useful information about current stock prices. 
D)  stock prices always rise excessively in January. 
A)  stock prices reflect a majority of available information about the firm. 
B)  successive price changes are predictable. 
C)  past stock price changes provide little useful information about current stock prices. 
D)  stock prices always rise excessively in January.

Question 8

Develop a current stock value for a firm that is expected to have extraordinary growth of 25% for 4 years,after which it will face more competition and slip into a constant-growth rate of 5%.Its required return is 14% and next year's dividend is expected to be $5.00.

Accepted Answer

The answer of Develop a current stock value for a...

Question 9

Technical analysts are most likely to be successful in a market that is considered:

Accepted Answer

A)  semistrong-form efficient. 
B)  not to be strong-form efficient. 
C)  not to be weak-form efficient. 
D)  to follow a random walk. 
A)  semistrong-form efficient. 
B)  not to be strong-form efficient. 
C)  not to be weak-form efficient. 
D)  to follow a random walk.

Question 10

Which of the following is inconsistent with a firm that sells for very near book value?

Accepted Answer

A)  Low current earning power 
B)  No intangible assets 
C)  High future earning power 
D)  Low, unstable dividend payment 
A)  Low current earning power 
B)  No intangible assets 
C)  High future earning power 
D)  Low, unstable dividend payment

Question 11

Discuss (with formula)the general dividend discount model and its three major submodels as introduced in the chapter.

Accepted Answer

The dividend discount model,or discounte

Question 12

Technical analysts would be more likely than other investors to index their portfolios.

Accepted Answer

A) True 
 B)False

Question 13

What is the expected dividend to be paid in 3 years if yesterday's dividend was $6.00,dividends are expected to grow at a constant 6% annual rate,and the firm has a 10% expected return?

Accepted Answer

A)  $6.75 
B)  $7.15 
C)  $7.80 
D)  $9.37 
A)  $6.75 
B)  $7.15 
C)  $7.80 
D)  $9.37

Question 14

At each point in time all securities of the same risk are priced to offer the same expected rate of return.

Accepted Answer

A) True 
 B)False

Question 15

What should be the price of a stock that offers a $4 annual dividend with no prospects of growth,and has a required return of 12.5%?

Accepted Answer

A)  $8.50 
B)  $25.00 
C)  $32.00 
D)  $50.00 
A)  $8.50 
B)  $25.00 
C)  $32.00 
D)  $50.00

Question 16

What are some common errors investors make in assessing the probability of uncertain outcomes? How did such errors reinforce the dot-com boom?

Accepted Answer

Psychologists have found that when judgi

Question 17

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 PVGO. 
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 PVGO. 
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.

Question 18

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

Accepted Answer

@#IMG-DLM& Thus,both the dividend discount model a

Question 19

A company reports significantly higher earnings on a Monday.You purchase the stock on Tuesday and earn superior returns in the absence of other new information.The market appears to be:

Accepted Answer

A)  weak-form efficient at best. 
B)  weak-form efficient at the least. 
C)  semistrong-form efficient at best. 
D)  strong-form efficient at the least. 
A)  weak-form efficient at best. 
B)  weak-form efficient at the least. 
C)  semistrong-form efficient at best. 
D)  strong-form efficient at the least.

Question 20

ABC common stock is expected to have extraordinary growth of 20% per year for 2 years,at which time the growth rate will settle into a constant 6%.If the discount rate is 15% and the most recent dividend was $2.50,what should be the approximate current share price?

Accepted Answer

A)  $31.16 
B)  $33.23 
C)  $37.42 
D)  $47.77 
A)  $31.16 
B)  $33.23 
C)  $37.42 
D)  $47.77

Exam 7: Valuing Stocks

An example that specifically contradicts strong-form market efficiency in U.S.stock markets is that:

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?

Show numerically that investment horizon has no bearing on current stock price.For your illustration assume investment horizons of 3 versus 5 years and the following facts: The stock is correctly priced at $40.00,has a required return of 17%,a growth rate of 7%,and has just paid a $3.74 dividend.

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

Market value,unlike book value and liquidation value,treats the firm as a going concern.

The book value of a firm's equity is determined by:

With respect to the notion that stock prices follow a random walk,several researchers have concluded that:

Develop a current stock value for a firm that is expected to have extraordinary growth of 25% for 4 years,after which it will face more competition and slip into a constant-growth rate of 5%.Its required return is 14% and next year's dividend is expected to be $5.00.

Technical analysts are most likely to be successful in a market that is considered:

Which of the following is inconsistent with a firm that sells for very near book value?

Discuss (with formula)the general dividend discount model and its three major submodels as introduced in the chapter.

Technical analysts would be more likely than other investors to index their portfolios.

What is the expected dividend to be paid in 3 years if yesterday's dividend was $6.00,dividends are expected to grow at a constant 6% annual rate,and the firm has a 10% expected return?

At each point in time all securities of the same risk are priced to offer the same expected rate of return.

What should be the price of a stock that offers a $4 annual dividend with no prospects of growth,and has a required return of 12.5%?

What are some common errors investors make in assessing the probability of uncertain outcomes? How did such errors reinforce the dot-com boom?

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

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

A company reports significantly higher earnings on a Monday.You purchase the stock on Tuesday and earn superior returns in the absence of other new information.The market appears to be:

ABC common stock is expected to have extraordinary growth of 20% per year for 2 years,at which time the growth rate will settle into a constant 6%.If the discount rate is 15% and the most recent dividend was $2.50,what should be the approximate current share price?

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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