Question 1

Discounted cash flow techniques for equity valuation may use one of the following: 1) dividends, 2) Free cash flow or 3) coupons.

Accepted Answer

A) True 
 B)False

Question 2

The most difficult part of valuing a bond is determining the required rate of return on this investment.

Accepted Answer

A) True 
 B)False

Question 3

A relative valuation technique is appropriate to consider when you have a good set of comparable entities.

Accepted Answer

A) True 
 B)False

Question 4

According to the dividend growth model, if a company were to declare that it would never pay dividends, its value would be

Accepted Answer

A)  Based on earnings. 
B)  Based on expectations regarding. 
C)  Higher than similar firms since it could reinvest a greater amount in new projects. 
D)  Zero. 
E)  Based on the capital asset pricing model. 
A)  Based on earnings. 
B)  Based on expectations regarding. 
C)  Higher than similar firms since it could reinvest a greater amount in new projects. 
D)  Zero. 
E)  Based on the capital asset pricing model.

Question 5

Exhibit 20-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three 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 20-7. What is the future price of the stock in year 3?

Accepted Answer

A)  $81.75 
B)  $84.81 
C)  $92.56 
D)  $101.85 
E)  $111.16 
A)  $81.75 
B)  $84.81 
C)  $92.56 
D)  $101.85 
E)  $111.16

Question 6

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 future price of the stock in year 5?

Accepted Answer

A)  $113.40 
B)  $122.47 
C)  $132.27 
D)  $142.85 
E)  $154.35 
A)  $113.40 
B)  $122.47 
C)  $132.27 
D)  $142.85 
E)  $154.35

Question 7

Which of the following statements regarding fundamental and relative valuation techniques is true?

Accepted Answer

A)  Both techniques require an appropriate estimate of the required rate of return and the growth rate. 
B)  Both techniques require an estimate of future cash flows and a discount rate. 
C)  Both techniques require an estimate of future cash flows and a growth rate. 
D)  Both techniques require an estimate of future cash flows, the required rate of return and a growth estimate. 
E)  All of the above. 
A)  Both techniques require an appropriate estimate of the required rate of return and the growth rate. 
B)  Both techniques require an estimate of future cash flows and a discount rate. 
C)  Both techniques require an estimate of future cash flows and a growth rate. 
D)  Both techniques require an estimate of future cash flows, the required rate of return and a growth estimate. 
E)  All of the above.

Question 8

The general economic influences would include inflation, political upheavals, monetary policy, and fiscal policy initiatives.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 20-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A major retailer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 8 years remaining until maturity. The bonds were issued with a 6.5% coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 4.25%.
-Refer to Exhibit 20-1. What is the current value of these securities?

Accepted Answer

A)  $1149.94 
B)  $433.15 
C)  $1151.92 
D)  $860.50 
E)  $863.35 
A)  $1149.94 
B)  $433.15 
C)  $1151.92 
D)  $860.50 
E)  $863.35

Question 10

If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

Accepted Answer

A) True 
 B)False

Question 11

Micro Corp. just paid dividends of $2 per share. Assume that over the next three years dividends will grow as follows, 5% next year, 15% in year two, and 25% in year 3. After that growth is expected to level off to a constant growth rate of 10% per year. The required rate of return is 15%. Calculate the intrinsic value using the multistage model.

Accepted Answer

A)  $5.56 
B)  $66.4 
C)  $49.31 
D)  $43.66 
E)  none of the above 
A)  $5.56 
B)  $66.4 
C)  $49.31 
D)  $43.66 
E)  none of the above

Question 12

The growth rate of dividends and profit margin are the main determinants of the P/E ratio.

Accepted Answer

A) True 
 B)False

Question 13

Exhibit 20-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three 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 20-7. What is the present value today of dividends for years 1 to 3?

Accepted Answer

A)  $4.67 
B)  $3.08 
C)  $5.67 
D)  $4.5 
E)  $1.53 
A)  $4.67 
B)  $3.08 
C)  $5.67 
D)  $4.5 
E)  $1.53

Question 14

In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.

Accepted Answer

A) True 
 B)False

Question 15

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 feel that the 7% growth rate can be maintained indefinitely and you require a 16% return?

Accepted Answer

A)  $11.15 
B)  $14.44 
C)  $14.86 
D)  $18.90 
E)  $19.24 
A)  $11.15 
B)  $14.44 
C)  $14.86 
D)  $18.90 
E)  $19.24

Question 16

Growth rates of the (1) labour force, (2) average number of hours worked and (3) labour productivity are the main determinants of a foreign country's

Accepted Answer

A)  Dividend payout ratio. 
B)  Beta. 
C)  Real risk free rate. 
D)  Nominal risk free rate. 
E)  Risk premium. 
A)  Dividend payout ratio. 
B)  Beta. 
C)  Real risk free rate. 
D)  Nominal risk free rate. 
E)  Risk premium.

Question 17

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. If the required return is 14%, what is the value of Fast Grow Corporation common stock today?

Accepted Answer

A)  $40.26 
B)  $42.38 
C)  $46.70 
D)  $52.63 
E)  $62.78 
A)  $40.26 
B)  $42.38 
C)  $46.70 
D)  $52.63 
E)  $62.78

Question 18

The importance of an industry's performance on an individual stock's performance varies across industries.

Accepted Answer

A) True 
 B)False

Discounted cash flow techniques for equity valuation may use one of the following: 1) dividends, 2) Free cash flow or 3) coupons.

The most difficult part of valuing a bond is determining the required rate of return on this investment.

A relative valuation technique is appropriate to consider when you have a good set of comparable entities.

According to the dividend growth model, if a company were to declare that it would never pay dividends, its value would be

Which of the following statements regarding fundamental and relative valuation techniques is true?

The general economic influences would include inflation, political upheavals, monetary policy, and fiscal policy initiatives.

If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

The growth rate of dividends and profit margin are the main determinants of the P/E ratio.

In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.

Growth rates of the (1) labour force, (2) average number of hours worked and (3) labour productivity are the main determinants of a foreign country's

The importance of an industry's performance on an individual stock's performance varies across industries.

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

Discounted cash flow techniques for equity valuation may use one of the following: 1) dividends, 2) Free cash flow or 3) coupons.

The most difficult part of valuing a bond is determining the required rate of return on this investment.

A relative valuation technique is appropriate to consider when you have a good set of comparable entities.

According to the dividend growth model, if a company were to declare that it would never pay dividends, its value would be

Which of the following statements regarding fundamental and relative valuation techniques is true?

The general economic influences would include inflation, political upheavals, monetary policy, and fiscal policy initiatives.

If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

The growth rate of dividends and profit margin are the main determinants of the P/E ratio.

In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.

Growth rates of the (1) labour force, (2) average number of hours worked and (3) labour productivity are the main determinants of a foreign country's

The importance of an industry's performance on an individual stock's performance varies across industries.

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