Question 1

Dividend growth is a function of what?

Accepted Answer

A)  Return on equity. 
B)  The retention rate. 
C)  The payout ratio. 
D)  All of the above. 
E)  None of the above. 
A)  Return on equity. 
B)  The retention rate. 
C)  The payout ratio. 
D)  All of the above. 
E)  None of the above.

Question 2

Exhibit 20-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%.
-Refer to Exhibit 20-6. What is the price of the stock today (P?)?

Accepted Answer

A)  $136.29 
B)  $133.03 
C)  $120.33 
D)  $123.43 
E)  $126.60 
A)  $136.29 
B)  $133.03 
C)  $120.33 
D)  $123.43 
E)  $126.60

Question 3

Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you believe that the appropriate discount rate is 15% and the long term growth rate in dividends is 6%, and earnings is 6%, then what is the firm's P/E ratio?

Accepted Answer

A)  8.33 
B)  33.33 
C)  44.44 
D)  11.11 
E)  None of the above 
A)  8.33 
B)  33.33 
C)  44.44 
D)  11.11 
E)  None of the above

Question 4

Empirical studies have shown that the market factor has increased over time and now accounts for the majority of an individual stock's price variance.

Accepted Answer

A) True 
 B)False

Question 5

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

Accepted Answer

A) True 
 B)False

Question 6

The value of a corporate bond can be derived by calculating the present value of the interest payments and the present value of the face value at the bond's

Accepted Answer

A)  Current yield. 
B)  Coupon rate. 
C)  Required rate of return. 
D)  Effective rate. 
E)  Prime rate. 
A)  Current yield. 
B)  Coupon rate. 
C)  Required rate of return. 
D)  Effective rate. 
E)  Prime rate.

Question 7

The infinite period dividend discount model (DDM) can be used to value a supernormal growth company.

Accepted Answer

A) True 
 B)False

Question 8

The risk premium is impacted by business risk, financial risk, and liquidity risk.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 20-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4% annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7% for the next three years and the stock will then reach $25.00 per share.
-Refer to Exhibit 20-5. How much should you be willing to pay for the stock if you require a 16% return?

Accepted Answer

A)  $17.34 
B)  $18.90 
C)  $19.09 
D)  $19.21 
E)  None of the above 
A)  $17.34 
B)  $18.90 
C)  $19.09 
D)  $19.21 
E)  None of the above

Question 10

Exhibit 20-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next two years. The corporation just paid a $2 dividend and the next dividend will be paid one year from now. After two years of rapid growth dividends are expected to grow at a constant rate of 9% forever.
-Refer to Exhibit 20-8. Assume that the annual dividend grows at a constant rate of 9% indefinitely instead of the supernormal growth. How much is the stock worth if dividends grow annually at 9%?

Accepted Answer

A)  $40.00 
B)  $43.60 
C)  $45.60 
D)  $47.80 
E)  $52.40 
A)  $40.00 
B)  $43.60 
C)  $45.60 
D)  $47.80 
E)  $52.40

Question 11

Exhibit 20-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A major manufacturer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 7 years remaining till maturity. The bonds were issued with an 8% coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 10%.
-Refer to Exhibit 20-2. What will be the value of these securities in one year if the required return is 6%?

Accepted Answer

A)  $1151.92 
B)  $972.52 
C)  $1100.15 
D)  $900.18 
E)  $936.72 
A)  $1151.92 
B)  $972.52 
C)  $1100.15 
D)  $900.18 
E)  $936.72

Question 12

The required rate of return is determined by 1) the real risk free rate, 2) the expected rate of inflation and 3) liquidity risk.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following factors influence an investor's required rate of return?

Accepted Answer

A)  The economy's real risk-free rate (RFR) 
B)  The expected rate of inflation (I) 
C)  A risk premium 
D)  All of the above. 
E)  None of the above. 
A)  The economy's real risk-free rate (RFR) 
B)  The expected rate of inflation (I) 
C)  A risk premium 
D)  All of the above. 
E)  None of the above.

Question 14

Exhibit 20-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Davenport Corporation's last dividend was $2.70 and the directors expect to maintain the historic 3% annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 5% for the next three years and the stock will then reach $25 per share.
-Refer to Exhibit 20-4. How much should you be willing to pay for the stock if you require a 17% return?

Accepted Answer

A)  $16.97 
B)  $22.16 
C)  $21.32 
D)  $32.63 
E)  $23.63 
A)  $16.97 
B)  $22.16 
C)  $21.32 
D)  $32.63 
E)  $23.63

Question 15

Using the constant growth model, an increase in the required rate of return from 19 to 17% combined with an increase in the growth rate from 11 to 9% would cause the price to

Accepted Answer

A)  Fall more than 2% 
B)  Fall less than 2%. 
C)  Remain constant. 
D)  Rise more than 2%. 
E)  Rise less than 3%. 
A)  Fall more than 2% 
B)  Fall less than 2%. 
C)  Remain constant. 
D)  Rise more than 2%. 
E)  Rise less than 3%.

Question 16

The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries and 3) analysis of industry influences.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is an underlying assumption of the constant growth dividend discount model (DDM)?

Accepted Answer

A)  Dividends have a constant growth rate 
B)  The constant growth rate of dividends will continue for an infinite time period 
C)  The required rate of return is greater than the expected growth rate 
D)  All of the above. 
E)  None of the above. 
A)  Dividends have a constant growth rate 
B)  The constant growth rate of dividends will continue for an infinite time period 
C)  The required rate of return is greater than the expected growth rate 
D)  All of the above. 
E)  None of the above.

Question 18

Which of the following is not a consideration in the three-step valuation process?

Accepted Answer

A)  Analysis of alternative economies 
B)  Analysis of security markets 
C)  Analysis of alternative industries 
D)  Analysis of individual companies 
E)  None of the above (that is, all are considerations in the three-step valuation process) 
A)  Analysis of alternative economies 
B)  Analysis of security markets 
C)  Analysis of alternative industries 
D)  Analysis of individual companies 
E)  None of the above (that is, all are considerations in the three-step valuation process)

Question 19

Using the constant growth model, an increase in the required rate of return from 14 to 18% combined with an increase in the growth rate from 8 to 12% would cause the price to

Accepted Answer

A)  Fall more than 4% 
B)  Fall less than 4%. 
C)  Rise more than 4% 
D)  Rise less than 4%. 
E)  Remain constant. 
A)  Fall more than 4% 
B)  Fall less than 4%. 
C)  Rise more than 4% 
D)  Rise less than 4%. 
E)  Remain constant.

Question 20

In 2009, Montpelier Inc. issued a $100 par value preferred stock that pays a 9% annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring a 10% return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Accepted Answer

A)  $100 
B)  $110 
C)  $75 
D)  $90 
E)  $85 
A)  $100 
B)  $110 
C)  $75 
D)  $90 
E)  $85

Dividend growth is a function of what?

Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you believe that the appropriate discount rate is 15% and the long term growth rate in dividends is 6%, and earnings is 6%, then what is the firm's P/E ratio?

Empirical studies have shown that the market factor has increased over time and now accounts for the majority of an individual stock's price variance.

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

The value of a corporate bond can be derived by calculating the present value of the interest payments and the present value of the face value at the bond's

The infinite period dividend discount model (DDM) can be used to value a supernormal growth company.

The risk premium is impacted by business risk, financial risk, and liquidity risk.

The required rate of return is determined by 1) the real risk free rate, 2) the expected rate of inflation and 3) liquidity risk.

Which of the following factors influence an investor's required rate of return?

Using the constant growth model, an increase in the required rate of return from 19 to 17% combined with an increase in the growth rate from 11 to 9% would cause the price to

The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries and 3) analysis of industry influences.

Which of the following is an underlying assumption of the constant growth dividend discount model (DDM)?

Which of the following is not a consideration in the three-step valuation process?

Using the constant growth model, an increase in the required rate of return from 14 to 18% combined with an increase in the growth rate from 8 to 12% would cause the price to

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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Exam 20: An Introduction to Security Valuation

Dividend growth is a function of what?

Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you believe that the appropriate discount rate is 15% and the long term growth rate in dividends is 6%, and earnings is 6%, then what is the firm's P/E ratio?

Empirical studies have shown that the market factor has increased over time and now accounts for the majority of an individual stock's price variance.

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

The value of a corporate bond can be derived by calculating the present value of the interest payments and the present value of the face value at the bond's

The infinite period dividend discount model (DDM) can be used to value a supernormal growth company.

The risk premium is impacted by business risk, financial risk, and liquidity risk.

The required rate of return is determined by 1) the real risk free rate, 2) the expected rate of inflation and 3) liquidity risk.

Which of the following factors influence an investor's required rate of return?

Using the constant growth model, an increase in the required rate of return from 19 to 17% combined with an increase in the growth rate from 11 to 9% would cause the price to

The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries and 3) analysis of industry influences.

Which of the following is an underlying assumption of the constant growth dividend discount model (DDM)?

Which of the following is not a consideration in the three-step valuation process?

Using the constant growth model, an increase in the required rate of return from 14 to 18% combined with an increase in the growth rate from 8 to 12% would cause the price to

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters