Question 1

The valuation processes for stocks and bonds are about equally accurate. Evaluate this statement.

Accepted Answer

Stock valuation is a great deal less accurate than bond valuation for two reasons. The biggest issue is related to the predictability of the future cash flows associated with the two securities. Bond payments quite reliable, because they're contractually guaranteed. Dividends and the eventual selling price of stocks, on the other hand, are generally uncertain. Second, the appropriate rate of return for use in present value computations is an estimate based on risk for stock, while it is easily observable in debt markets for bonds.

Question 2

A stock's total return is realized from two principal sources, its dividend yield and any gain from the increase in its selling price over the original purchase price of the stock.

Accepted Answer

A) True 
 B)False  True

Question 3

The constant growth model, or Gordon model, is formulated as follows: $$p _ { 0 } = \frac { D _ { 0 } ( 1 + g ) } { k - g }$$ The model can be recast to focus on the expected return implied by the constant growth assumption, as follows:

Accepted Answer

A)  g = [P0(k-g)/D0] - 1. 
B)  D1 = P0(k - g). 
C)  ke = D1/(P0 - g). 
D)  ke = [D0(1+g)/P0]+ g. 
A)  g = [P0(k-g)/D0] - 1. 
B)  D1 = P0(k - g). 
C)  ke = D1/(P0 - g). 
D)  ke = [D0(1+g)/P0]+ g. D

Question 4

The process whereby a shareholder assigns the right to vote his or her shares of stock to another person is referred to as a proxy. In proxy fights, parties with conflicting interests solicit proxies for the purpose taking over the board of directors.

Accepted Answer

A) True 
 B)False

Question 5

TOYS4U stock is selling for $70 today. Similar stocks return 15%. You have estimated a capital gains yield of 10%. Calculate the next dividend expected on the stock.

Accepted Answer

A)  $2.00 
B)  $2.50 
C)  $3.00 
D)  $3.50 
A)  $2.00 
B)  $2.50 
C)  $3.00 
D)  $3.50

Question 6

The process in which a lead bank recruits other banks to share the risk of an IPO is called:

Accepted Answer

A)  copywriting. 
B)  underwriting. 
C)  registration. 
D)  syndication. 
A)  copywriting. 
B)  underwriting. 
C)  registration. 
D)  syndication.

Question 7

You are considering investing in ABC, Inc.'s stock which is selling at $45.95. Similar stocks return 16%. ABC's last dividend ABC was $4.50 and a 6% constant growth rate is anticipated. Should you purchase ABC, Inc.?

Accepted Answer

A)  No, because the stock is overpriced by $1.75. 
B)  No, because the stock is overpriced by $3.85. 
C)  Yes, because the stock is underpriced by $1.75. 
D)  Yes, because the stock is underpriced by $3.85. 
A)  No, because the stock is overpriced by $1.75. 
B)  No, because the stock is overpriced by $3.85. 
C)  Yes, because the stock is underpriced by $1.75. 
D)  Yes, because the stock is underpriced by $3.85.

Question 8

The return on any stock investment is the rate that makes the present value of estimated future cash flows equal to the price paid for the stock today.

Accepted Answer

A) True 
 B)False

Question 9

If one expects the annual dividend to be $0.95 five years from today when the current dividend is $0.62, the annual dividend growth rate must be:

Accepted Answer

A)  9%. 
B)  11%. 
C)  7%. 
D)  13%. 
A)  9%. 
B)  11%. 
C)  7%. 
D)  13%.

Question 10

What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10?

Accepted Answer

A)  8.20% 
B)  11.34% 
C)  8.82% 
D)  12.20% 
A)  8.20% 
B)  11.34% 
C)  8.82% 
D)  12.20%

Question 11

Static Inc. has had a hard time recently. In order to help the firm survive a downturn in the market for its products, management has announced that it doesn't plan to pay dividends for the next three years. A modest dividend of $2.00 is projected for the fourth year after which dividends are expected to grow at 5% indefinitely. Similar stocks return 10%. How much should Static's stock sell for today?

Accepted Answer

A)  $30.05 
B)  $20.00 
C)  $40.00 
D)  $28.69 
A)  $30.05 
B)  $20.00 
C)  $40.00 
D)  $28.69

Question 12

A security's value is equal to the future value of its past cash flows.

Accepted Answer

A) True 
 B)False

Question 13

If three seats on the board of directors are up for election, cumulative voting on common stock allow stockholders to:

Accepted Answer

A)  cast one vote per share owned for three different candidates. 
B)  cast up to three votes per share owned for any one candidate. 
C)  save votes from a prior board of directors' election and cast them in the current election. 
D)  cumulative voting only applies to preferred stock. 
E)  None of the above are true 
A)  cast one vote per share owned for three different candidates. 
B)  cast up to three votes per share owned for any one candidate. 
C)  save votes from a prior board of directors' election and cast them in the current election. 
D)  cumulative voting only applies to preferred stock. 
E)  None of the above are true

Question 14

The return on a share of stock is based on the expected dividend plus the projected selling price, all divided by the projected selling price.

Accepted Answer

A) True 
 B)False

Question 15

The process of estimating the level of investor demand and deciding on the price of a share is known as:

Accepted Answer

A)  registration. 
B)  red herring. 
C)  book building. 
D)  retailing. 
A)  registration. 
B)  red herring. 
C)  book building. 
D)  retailing.

Question 16

Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If Morton returns 13%, what was its most recent dividend?

Accepted Answer

A)  $2.70 
B)  $2.50 
C)  $4.00 
D)  None of the above 
A)  $2.70 
B)  $2.50 
C)  $4.00 
D)  None of the above

Question 17

Williamson Metals, Inc. paid a dividend last year of $3, and is expecting dividends to grow at an 18% rate in years 1 and 2 followed by constant growth of 6% per year thereafter. Similar stocks return 12%. Calculate the value of the stock today.

Accepted Answer

A)  $65.37 
B)  $73.85 
C)  $82.91 
D)  $93.76 
A)  $65.37 
B)  $73.85 
C)  $82.91 
D)  $93.76

Question 18

The constant growth model assumes dividends will grow at a constant rate that exceeds the market return.

Accepted Answer

A) True 
 B)False

Question 19

Genestek Inc. just paid a $5.00 dividend. Due to a new product about to be released, analysts expect the company to grow at a supernormal rate of 15% for three years. After that it is expected to grow at a normal rate of 4% indefinitely. Stocks similar to Genestek are currently earning shareholders a return of 12%. The estimated selling price of the stock is:

Accepted Answer

A)  $76.56 
B)  $86.10 
C)  $83.43 
D)  $91.14 
A)  $76.56 
B)  $86.10 
C)  $83.43 
D)  $91.14

Question 20

Members of the general public who have expressed interest in an IPO during the road show are referred to as:

Accepted Answer

A)  off market investors. 
B)  auction public. 
C)  retail investors. 
D)  insiders. 
A)  off market investors. 
B)  auction public. 
C)  retail investors. 
D)  insiders.

The valuation processes for stocks and bonds are about equally accurate. Evaluate this statement.

A stock's total return is realized from two principal sources, its dividend yield and any gain from the increase in its selling price over the original purchase price of the stock.

The constant growth model, or Gordon model, is formulated as follows: $p _ { 0 } = \frac { D _ { 0 } ( 1 + g ) } { k - g }$ The model can be recast to focus on the expected return implied by the constant growth assumption, as follows:

The process whereby a shareholder assigns the right to vote his or her shares of stock to another person is referred to as a proxy. In proxy fights, parties with conflicting interests solicit proxies for the purpose taking over the board of directors.

TOYS4U stock is selling for $70 today. Similar stocks return 15%. You have estimated a capital gains yield of 10%. Calculate the next dividend expected on the stock.

The process in which a lead bank recruits other banks to share the risk of an IPO is called:

You are considering investing in ABC, Inc.'s stock which is selling at $45.95. Similar stocks return 16%. ABC's last dividend ABC was $4.50 and a 6% constant growth rate is anticipated. Should you purchase ABC, Inc.?

The return on any stock investment is the rate that makes the present value of estimated future cash flows equal to the price paid for the stock today.

If one expects the annual dividend to be $0.95 five years from today when the current dividend is $0.62, the annual dividend growth rate must be:

What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10?

A security's value is equal to the future value of its past cash flows.

If three seats on the board of directors are up for election, cumulative voting on common stock allow stockholders to:

The return on a share of stock is based on the expected dividend plus the projected selling price, all divided by the projected selling price.

The process of estimating the level of investor demand and deciding on the price of a share is known as:

Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If Morton returns 13%, what was its most recent dividend?

Williamson Metals, Inc. paid a dividend last year of $3, and is expecting dividends to grow at an 18% rate in years 1 and 2 followed by constant growth of 6% per year thereafter. Similar stocks return 12%. Calculate the value of the stock today.

The constant growth model assumes dividends will grow at a constant rate that exceeds the market return.

Members of the general public who have expressed interest in an IPO during the road show are referred to as:

Foundations

Financial Background: a Review of Accounting, Financial Statements, and Taxes

Cash Flows and Financial Analysis

Financial Planning

The Financial System, Corporate Governance, and Interest

Time Value of Money

The Valuation and Characteristics of Bonds

Risk and Return

Capital Budgeting

Cash Flow Estimation

Risk Topics and Real Options in Capital Budgeting

Cost of Capital

Capital Structure and Leverage

Dividends

The Management of Working Capital Multiple Choice Questions

The Management of Working Capital

Corporate Restructuring

International Finance

Filters

Exam 8: The Valuation and Characteristics of Stock

The valuation processes for stocks and bonds are about equally accurate. Evaluate this statement.

A stock's total return is realized from two principal sources, its dividend yield and any gain from the increase in its selling price over the original purchase price of the stock.

The constant growth model, or Gordon model, is formulated as follows: p0=D0(1+g)k−gp _ { 0 } = \frac { D _ { 0 } ( 1 + g ) } { k - g }p0​=k−gD0​(1+g)​ The model can be recast to focus on the expected return implied by the constant growth assumption, as follows:

The process whereby a shareholder assigns the right to vote his or her shares of stock to another person is referred to as a proxy. In proxy fights, parties with conflicting interests solicit proxies for the purpose taking over the board of directors.

TOYS4U stock is selling for $70 today. Similar stocks return 15%. You have estimated a capital gains yield of 10%. Calculate the next dividend expected on the stock.

The process in which a lead bank recruits other banks to share the risk of an IPO is called:

You are considering investing in ABC, Inc.'s stock which is selling at $45.95. Similar stocks return 16%. ABC's last dividend ABC was $4.50 and a 6% constant growth rate is anticipated. Should you purchase ABC, Inc.?

The return on any stock investment is the rate that makes the present value of estimated future cash flows equal to the price paid for the stock today.

If one expects the annual dividend to be $0.95 five years from today when the current dividend is $0.62, the annual dividend growth rate must be:

What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10?

A security's value is equal to the future value of its past cash flows.

If three seats on the board of directors are up for election, cumulative voting on common stock allow stockholders to:

The return on a share of stock is based on the expected dividend plus the projected selling price, all divided by the projected selling price.

The process of estimating the level of investor demand and deciding on the price of a share is known as:

Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If Morton returns 13%, what was its most recent dividend?

Williamson Metals, Inc. paid a dividend last year of $3, and is expecting dividends to grow at an 18% rate in years 1 and 2 followed by constant growth of 6% per year thereafter. Similar stocks return 12%. Calculate the value of the stock today.

The constant growth model assumes dividends will grow at a constant rate that exceeds the market return.

Members of the general public who have expressed interest in an IPO during the road show are referred to as:

Foundations

Financial Background: a Review of Accounting, Financial Statements, and Taxes

Cash Flows and Financial Analysis

Financial Planning

The Financial System, Corporate Governance, and Interest

Time Value of Money

The Valuation and Characteristics of Bonds

Risk and Return

Capital Budgeting

Cash Flow Estimation

Risk Topics and Real Options in Capital Budgeting

Cost of Capital

Capital Structure and Leverage

Dividends

The Management of Working Capital Multiple Choice Questions

The Management of Working Capital

Corporate Restructuring

International Finance

Filters

The constant growth model, or Gordon model, is formulated as follows: $p _ { 0 } = \frac { D _ { 0 } ( 1 + g ) } { k - g }$ The model can be recast to focus on the expected return implied by the constant growth assumption, as follows: