Question 1

Discuss the term price-earnings (P/E)ratio.

Accepted Answer

The P/E ratio is a widely used financial

Question 2

The constant dividend growth formula P0 = Div1/(r - g)assumes:
i.that dividends grow at a constant rate g,forever; II)r > g; III)g is never negative

Accepted Answer

A) I only 
B) II only 
C) I and II only 
D) III only 
A) I only 
B) II only 
C) I and II only 
D) III only

Question 3

A firm forecasts a project's net cash flows ($millions)in years 1 thru 4 as $120,$130,$135,and $137,respectively.If the project ends at the end of the fourth year,what is the horizon value of the project? Assume that the company had a historical growth rate of 3% and has a discount rate of 10%.

Accepted Answer

A) $0.00 
B) $1.37 
C) $1.96 
D) $4.87 
A) $0.00 
B) $1.37 
C) $1.96 
D) $4.87

Question 4

In which of the following stock exchanges are there specialists who act as auctioneers?

Accepted Answer

A) New York Stock Exchange 
B) London Stock Exchange 
C) Tokyo Stock Exchange 
D) Frankfurt Stock Exchange 
A) New York Stock Exchange 
B) London Stock Exchange 
C) Tokyo Stock Exchange 
D) Frankfurt Stock Exchange

Question 5

All securities in an equivalent risk class are priced to offer the same expected return.

Accepted Answer

A) True 
 B)False

Question 6

A Wall Street Journal quotation for a company has the following values: Div: $1.12,PE: 18.3,Close: $37.22.Calculate the approximate dividend payout ratio for the company.

Accepted Answer

A) 18% 
B) 35% 
C) 45% 
D) 55% 
A) 18% 
B) 35% 
C) 45% 
D) 55%

Question 7

The dividend yield reported on finance.yahoo.com is calculated as follows:

Accepted Answer

A) (dividend/year-high stock price). 
B) (dividend/year-low stock price). 
C) (dividend/closing stock price). 
D) (dividends/earnings). 
A) (dividend/year-high stock price). 
B) (dividend/year-low stock price). 
C) (dividend/closing stock price). 
D) (dividends/earnings).

Question 8

Summer Co.expects to pay a dividend of $4.00 per share-one year from now-out of earnings of $7.50 per share.If the required rate of return on the stock is 15% and its dividends are growing at a constant rate of 10% per year,calculate the present value of growth opportunities for the stock (PVGO).

Accepted Answer

A) $80 
B) $30 
C) $50 
D) $26 
A) $80 
B) $30 
C) $50 
D) $26

Question 9

One can estimate the dividend growth rate for a stable firm as:

Accepted Answer

A) plow-back rate/the return on equity (RO
E) . 
B) plow-back rate - the return on equity (RO
E) . 
C) plow-back rate + the return on equity (RO
E) . 
D) plow-back rate × the return on equity (RO
E) . 
A) plow-back rate/the return on equity (RO
E) . 
B) plow-back rate - the return on equity (RO
E) . 
C) plow-back rate + the return on equity (RO
E) . 
D) plow-back rate × the return on equity (RO
E) .

Question 10

Lake Co.just paid a dividend of $3 per share out of earnings of $5 per share.If its book value per share is $40,what is the expected growth rate in dividends?

Accepted Answer

A) 7.5% 
B) 8% 
C) 12.5% 
D) 5% 
A) 7.5% 
B) 8% 
C) 12.5% 
D) 5%

Question 11

It is not possible to value a firm that has a supernormal (variable)growth rate for the first few years of its life.

Accepted Answer

A) True 
 B)False

Question 12

The return that is expected by investors from a common stock is also called its market capitalization rate,or cost of equity capital.

Accepted Answer

A) True 
 B)False

Question 13

For most firms,market value is usually greater than book value.

Accepted Answer

A) True 
 B)False

Question 14

Goodyear is an example of:

Accepted Answer

A) a growth stock. 
B) an income stock. 
C) a high dividend stock. 
D) a low plowback stock. 
A) a growth stock. 
B) an income stock. 
C) a high dividend stock. 
D) a low plowback stock.

Question 15

Otobai Motor Company just paid a dividend of $1.40.Analysts expect its dividend to grow at a rate of 18% for the next three years and then a constant rate of 5% thereafter.What is the expected dividend per share at the end of year 5?

Accepted Answer

A) $2.35 
B) $2.54 
C) $2.91 
D) $1.50 
A) $2.35 
B) $2.54 
C) $2.91 
D) $1.50

Question 16

Briefly explain the major types of exchanges prevalent in the U.S.

Accepted Answer

There are two types of exchanges prevale

Question 17

Parcel Corporation expects to pay a dividend of $5 per share next year,and the dividend payout ratio is 50%.If dividends are expected to grow at a constant rate of 8% forever,and the required rate of return on the stock is 13%,calculate the present value of growth opportunities.

Accepted Answer

A) $100.00 
B) $76.92 
C) $23.08 
A) $100.00 
B) $76.92 
C) $23.08

Question 18

Most of the trading on the NYSE is in ordinary common stocks.

Accepted Answer

A) True 
 B)False

Question 19

Explain the term secondary market.

Accepted Answer

When already issued stocks are

Question 20

The constant growth formula for stock valuation does not work for a firm with a negative growth rate (i.e.,a declining growth rate)in its dividend.

Accepted Answer

A) True 
 B)False

Exam 4: The Value of Common Stocks

Discuss the term price-earnings (P/E)ratio.

The constant dividend growth formula P0 = Div1/(r - g)assumes: i.that dividends grow at a constant rate g,forever; II)r > g; III)g is never negative

A firm forecasts a project's net cash flows ($millions)in years 1 thru 4 as $120,$130,$135,and $137,respectively.If the project ends at the end of the fourth year,what is the horizon value of the project? Assume that the company had a historical growth rate of 3% and has a discount rate of 10%.

In which of the following stock exchanges are there specialists who act as auctioneers?

All securities in an equivalent risk class are priced to offer the same expected return.

A Wall Street Journal quotation for a company has the following values: Div: $1.12,PE: 18.3,Close: $37.22.Calculate the approximate dividend payout ratio for the company.

The dividend yield reported on finance.yahoo.com is calculated as follows:

Summer Co.expects to pay a dividend of $4.00 per share-one year from now-out of earnings of $7.50 per share.If the required rate of return on the stock is 15% and its dividends are growing at a constant rate of 10% per year,calculate the present value of growth opportunities for the stock (PVGO).

One can estimate the dividend growth rate for a stable firm as:

Lake Co.just paid a dividend of $3 per share out of earnings of $5 per share.If its book value per share is $40,what is the expected growth rate in dividends?

It is not possible to value a firm that has a supernormal (variable)growth rate for the first few years of its life.

The return that is expected by investors from a common stock is also called its market capitalization rate,or cost of equity capital.

For most firms,market value is usually greater than book value.

Goodyear is an example of:

Otobai Motor Company just paid a dividend of $1.40.Analysts expect its dividend to grow at a rate of 18% for the next three years and then a constant rate of 5% thereafter.What is the expected dividend per share at the end of year 5?

Briefly explain the major types of exchanges prevalent in the U.S.

Parcel Corporation expects to pay a dividend of $5 per share next year,and the dividend payout ratio is 50%.If dividends are expected to grow at a constant rate of 8% forever,and the required rate of return on the stock is 13%,calculate the present value of growth opportunities.

Most of the trading on the NYSE is in ordinary common stocks.

Explain the term secondary market.

The constant growth formula for stock valuation does not work for a firm with a negative growth rate (i.e.,a declining growth rate)in its dividend.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

The constant dividend growth formula P₀ = Div₁/(r - g)assumes: i.that dividends grow at a constant rate g,forever; II)r > g; III)g is never negative