Deck 4: The Value of Common Stocks

Question 1

Super Computer Company's stock is selling for $100 per share today. It is expected that this stock will pay a dividend of 6 dollars per share, and then be sold for $114 per share at the end of one year. Calculate the expected rate of return for the shareholders.

A) 20%
B) 15%
C) 10%
D) 25%

Answer 1

20%

Question 2

In which of the following exchanges a computer acts as the auctioneer:
I. New York Stock Exchange, II) London Stock Exchange,
III. Tokyo Stock Exchange
IV. Frankfurt Stock Exchange

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

Answer 2

II, III, and IV only

Question 3

CK Company stockholders expect to receive a year-end dividend of $5 per share and then be sold for $115 dollars per share. If the required rate of return for the stock is 20%, what is the current value of the stock?

A) $100
B) $122
C) $132
D) $110

Answer 3

$100

Question 4

The major secondary market for GE shares is:

A) London Stock Exchange
B) New York Stock Exchange
C) Nasdaq
D) none of the above

Question 5

The constant dividend growth formula P0 = Div1/(r - g) assumes:
I. the dividends are growing at a constant rate g forever.
II. r > g
III. g is never negative.

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

Question 6

In which of the following stock exchange specialists act as the auctioneers:

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

Question 7

The following are foreign companies that are traded on the New York Stock Exchange:
I. Toyota, II) Brasil Telecom,
III. Nokia,
IV. Endesa, V) General Electric

A) I, II and III only
B) I,II, III and IV only
C) I,II,III and V only
D) All of the given companies are foreign companies

Question 8

World-Tour Co. has just now paid a dividend of $2.83 per share (D0); the dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 16%, what is the current value on stock, after paying the dividend?

A) $30
B) $56
C) $70
D) $48

Question 9

Assume General Electric (GE) has about 10.3 billion shares outstanding and the stock price is $37.10. Also assume the P/E ratio is about 18.3. Calculate the market capitalization for GE. (Approximately)

A) $679 billion
B) $188 billion
C) $382 billion
D) None of the above

Question 10

The exchange-traded fund (EFT) that tracks the Nasdaq 100 index is called:

A) SPDR
B) DIAMONDS
C) QQQQ
D) None of the above

Question 11

Deluxe Company expects to pay a dividend of $2 per share at the end of year-1, $3 per share at the end of year-2 and then be sold for $32 per share. If the required rate on the stock is 15%, what is the current value of the stock?

A) $28.20
B) $32.17
C) $32.00
D) None of the given answers

Question 12

The following are auction markets except:

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

Question 13

The Wall Street Journal quotation for a company has the following values: Div: $1.12, PE:
18)3, Close: $37.22. Calculate the dividend pay out ratio for the company (Approximately).

A) 18%
B) 55%
C) 45%
D) None of the above

Question 14

The following is an example of a dealer market:

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

Question 15

If the Wall Street Journal Quotation for a company has the following values close: 55.14; Net chg: = + 1.04; then the closing price for the stock for the previous trading day was?

A) $56.18
B) $54.10
C) $55.66
D) None of the above.

Question 16

If the Volume is reported in 100s as 292,059 in the Wall Street Journal quotation, then the trading volume for that day of trading is:

A) 292,059 shares
B) 2,920,590 shares
C) 29,205,900 shares
D) 292,059,000 shares

Question 17

Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and these dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 18%, what is current value of the stock today?

A) $25
B) $50
C) $100
D) $54

Question 18

Will Co. is expected to pay a dividend of $2 per share at the end of year -1(D1) and the dividends are expected to grow at a constant rate of 4% forever. If the current price of the stock is $20 per share calculate the expected return or the cost of equity capital for the firm.

A) 10%
B) 4%
C) 14%
D) None of the above.

Question 19

The dividend yield reported as Yld. % in The Wall Street Journal quotation is calculated as follows:

A) (dividends/hi)
B) (dividends/lo)
C) (dividends/close)
D) None of the above

Question 20

The value of a common stock today depends on:

A) Number of shares outstanding and the number of shareholders
B) The expected future dividends and the discount rate
C) The Wall Street analysts
D) Present value of the future earnings per share

Question 21

Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are expected to grow at 20% per year for the next four years and then grow 6% per year thereafter. Calculate the expected dividend in year 5.

A) $4.15
B) $2.95
C) $4.40
D) $3.81

Question 22

Otobai Motor Company is currently paying a dividend of $1.40 per year. The dividends are expected 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 in year 5?

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

Question 23

Seven-Seas Co. has paid a dividend $3 per share out of earnings of $5 per share. If the book value per share is $40 and the market price is 52.50 per share, calculate the required rate of return on the stock.

A) 12%
B) 11%
C) 5%
D) 6%

Question 24

The following stocks are examples of income stocks except:

A) Cummins, Inc.
B) Dow Chemicals
C) Starbucks
D) All of the above are income stocks

Question 25

Company X has a P/E ratio of 10 and a stock price of $50 per share. Calculate earnings per share of the company.

A) $6 per share
B) $10 per share
C) $0.20 per share
D) $5 per share

Question 26

Which of the following stocks is (are) an income stock(s)?

A) Dow Chemicals
B) Starbucks
C) Microsoft
D) None of the above

Question 27

A high proportion of the value of a growth stock comes from:

A) Past dividend payments
B) Past earnings
C) PVGO (Present Value of the Growth Opportunities)
D) Both A and B

Question 28

Summer Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per share. If the required rate of return on the stock is 15% and dividends are growing at a current rate of 10% per year, calculate the present value of the growth opportunity for the stock (PVGO).

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

Question 29

Generally high growth stocks pay:

A) Low or no dividends
B) High dividends
C) Erratic dividends
D) Both A and C

Question 30

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

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

Question 31

Which of the following formulas regarding earnings to price ratio is true:

A) EPS/Po = r[1 + (PVGO/Po]
B) EPS/Po = r[1 - (PVGO/Po)]
C) EPS/Po = [r + (PVGO/Po)]
D) EPS/Po = [r + (1 + (PVGO/Po)]/r

Question 32

The expected rate of return or the cost of equity capital is estimated as follows:

A) Dividend yield - expected rate of growth in dividends
B) Dividend yield + expected rate of growth in dividends
C) Dividend yield/expected rate of growth in dividends
D) (Dividend yield) * (expected rate of growth in dividends)

Question 33

R&D Technology Corporation has just paid a dividend of $0.50 per share. The dividends are expected to grow at 24% per year for the next two years and at 8% per year thereafter. If the required rate of return in the stock is 16% (APR), calculate the current value of the stock.

A) $1.11
B) $7.71
C) $8.82
D) None of the above

Question 34

Dividend growth rate for a stable firm can be estimated as:

A) Plow back rate/the return on equity (ROE)
B) Plow back rate * the return on equity (ROE)
C) Plow back rate + the return on equity (ROE)
D) Plow back rate - the return on equity (ROE)

Question 35

The growth rate in dividends is a function of two ratios. They are:

A) ROA and ROE.
B) Dividend yield and growth rate in dividends.
C) ROE and the Retention Ratio.
D) Book value per share and EPS.

Question 36

Parcel Corporation is expected to pay a dividend of $5 per share next year, and the dividends pay out ratio is 50%. If the 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 the growth opportunity.

A) $100
B) $76.92
C) $23.08
D) None of the above

Question 37

MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the stable dividend growth rate for the firm?

A) 9%
B) 5%
C) 6%
D) 15%

Question 38

Ocean Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book value per share is $25, what is the expected growth rate in dividends (g)?

A) 16%
B) 12%
C) 8%
D) 4%

Question 39

River Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book value per share is $25 and is currently selling for $40 per share, calculate the required rate of return on the stock.

A) 15.2%
B) 7.2%
C) 14.7%
D) 13.4%

Question 40

The In-Tech Co. has just paid a dividend of $1 per share. The dividends are expected to grow at 25% per year for the next three years and at the rate of 5% per year thereafter. If the required rate of return on the stock is 18%(APR), what is the current value of the stock?

A) $12.97
B) $11.93
C) $15.20
D) None of the above

Question 41

A company forecasts growth of 6% for 5 years and 3% thereafter. Given last year's cash flow was $100, what is the horizon value if the company cost of capital is 8%?

A) $0
B) $1,672
C) $2,000
D) $2,676

Question 42

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

Question 43

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

Question 44

The constant growth formula for stock valuation does not work for firms with negative growth (declining) rates in dividends.

Question 45

The following stocks are examples of growth stocks except:

A) Scottish Power
B) e2v Technologies
C) Microsoft
D) Starbucks

Question 46

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

Question 47

An increase in PVGO will almost always coincide with a decrease in dividends.

Question 48

The discounted-cash-flow formulas that is used to value common stocks can also be used to value entire businesses.

Question 49

It is more likely than not that a high tech growth company which reports record earnings and announces its first ever dividend will have the stock price of the firm drop.

Question 50

Universal Air is a no growth firm and has two million shares outstanding. It is expected to earn a constant 20 million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 10%, calculate the current price per share for the stock.

A) $200
B) $150
C) $100
D) $50

Question 51

The only payoff to the owners of common stocks is in the form cash dividends.

Question 52

Everyone regards Microsoft as an income stock and Cummins as a growth stock.

Question 53

The New York Stock Exchange is the only stock market in the US.

Question 54

Explain the term "primary market."

Question 55

Explain the term "secondary market."

Question 56

The cost of equity equals the dividend yield minus the growth rate in dividends for a constant dividend growth stock.

Question 57

A large percentage of the total value of a growth stock comes from the growth opportunity.

Question 58

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

Question 59

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

A) $0
B) $1.37
C) $1.96
D) $4.87

Question 60

Which of the following stocks is/are a growth stock(s)?

A) Unilever
B) Cummins, Inc
C) Starbucks
D) All of the above are growth stocks

Question 61

Briefly explain the major types of exchanges prevalent in the USA.

Question 62

Discuss the general principle in the valuation of a common stock.

Question 63

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

Question 64

Briefly explain why Microsoft experienced a significant drop in price when it announced its first ever regular dividend along with huge profits.

Question 65

Briefly explain the term "market capitalization rate."

Question 66

Briefly explain how the formulas that are used for valuing common stocks can also be used to value businesses.

Question 67

Briefly explain the assumptions associated with the constant dividend growth formula.