Question 1

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

Accepted Answer

A)  $16.28 
B)  $16.70 
C)  $17.13 
D)  $17.57 
E)  $18.01

Question 2

Classified stock differentiates various classes of common stock,and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Accepted Answer

A) True 
 B)False

Question 3

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Accepted Answer

A) True 
 B)False

Question 4

Heath and Logan Inc.forecasts the free cash flows (in millions)shown below.The weighted average cost of capital is 13%,and the FCFs are expected to continue growing at a 5% rate after Year 3.Assuming that the ROIC is expected to remain constant in Year 3 and beyond,what is the Year 0 value of operations,in millions? $\begin{array}{lccc}
\text { Year: } & 1 & 2 & 3 \
\hline \text { Free cash flow: } & -\$ 15 & \$ 10 & \$ 40
\end{array}$

Accepted Answer

A)  $315 
B)  $331 
C)  $348 
D)  $367 
E)  $386

Question 5

If D1 = $1.50,g (which is constant)= 6.5%,and P0 = $56,what is the stock's expected capital gains yield for the coming year?

Accepted Answer

A)  6.50% 
B)  6.83% 
C)  7.17% 
D)  7.52% 
E)  7.90%

Question 6

Stocks A and B have the following data.The market risk premium is 6.0% and the risk-free rate is 6.4%.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? $\begin{array}{lcr}
&\underline { A } & \underline { B } \
\text { Beta } & 1.10 & 0.90 \
\text { Constant growth rate } & 7.00 \% & 7.00 \%
\end{array}$

Accepted Answer

A)  Stock A must have a higher dividend yield than Stock B. 
B)  Stock B's dividend yield equals its expected dividend growth rate. 
C)  Stock B must have the higher required return. 
D)  Stock B could have the higher expected return. 
E)  Stock A must have a higher stock price than Stock B.

Question 7

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

Accepted Answer

A)  Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well. 
B)  A stock's dividend yield can never exceed its expected growth rate. 
C)  A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return. 
D)  Other things held constant, the higher a company's beta coefficient, the lower its required rate of return. 
E)  The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.

Question 8

A proxy is a document giving one party the authority to act for another party,including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. 
B)  The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. 
C)  One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. 
D)  One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. 
E)  A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.

Question 10

Sawchuck Consulting has been profitable for the last 5 years,but it has never paid a dividend.Management has indicated that it plans to pay a $0.25 dividend 3 years from today,then to increase it at a relatively rapid rate for 2 years,and then to increase it at a constant rate of 8.00% thereafter.Management's forecast of the future dividend stream,along with the forecasted growth rates,is shown below.Assuming a required return of 11.00%,what is your estimate of the stock's current value? $\begin{array}{lccccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Growth rate } & \text { NA } & \text { NA } & \text { NA } & \text { NA } & 50.00 \% & 25.00 \% & 8.00 \% \
\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506
\end{array}$

Accepted Answer

A)  $9.94 
B)  $10.19 
C)  $10.45 
D)  $10.72 
E)  $10.99

Question 11

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Accepted Answer

A) True 
 B)False

Question 12

$35.50 per share is the current price for Foster Farms' stock.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,rs,is 9.00%.What is the stock's expected price 3 years from today?

Accepted Answer

A)  $37.86 
B)  $38.83 
C)  $39.83 
D)  $40.85 
E)  $41.69

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. 
B)  The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. 
C)  The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates. 
D)  The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required returns. 
E)  If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

Question 14

If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.

Accepted Answer

A) True 
 B)False

Question 15

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

Accepted Answer

A)  $23.11 
B)  $23.70 
C)  $24.31 
D)  $24.93 
E)  $25.57

Question 16

Gere Furniture forecasts a free cash flow of $40 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%,what is the horizon value,in millions at t = 3?

Accepted Answer

A)  $840 
B)  $882 
C)  $926 
D)  $972 
E)  $1,021

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  Two firms with the same expected dividend and growth rates must also have the same stock price. 
B)  It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
C)  If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
D)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
E)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

Question 18

The corporate valuation model cannot be used unless a company doesn't pay dividends.

Accepted Answer

A) True 
 B)False

Question 19

The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?

Accepted Answer

A)  $1,714,750 
B)  $1,805,000 
C)  $1,900,000 
D)  $2,000,000 
E)  $2,100,000

Question 20

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%,at what price should the preferred stock sell?

Accepted Answer

A)  $104.27 
B)  $106.95 
C)  $109.69 
D)  $112.50 
E)  $115.38

Exam 7: Valuation of Stocks and Corporations

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

Classified stock differentiates various classes of common stock,and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

If D₁ = $1.50,g (which is constant) = 6.5%,and P₀ = $56,what is the stock's expected capital gains yield for the coming year?

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

A proxy is a document giving one party the authority to act for another party,including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Which of the following statements is CORRECT?

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

$35.50 per share is the current price for Foster Farms' stock.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,r_s,is 9.00%.What is the stock's expected price 3 years from today?

Which of the following statements is CORRECT?

If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

Gere Furniture forecasts a free cash flow of $40 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%,what is the horizon value,in millions at t = 3?

Which of the following statements is CORRECT?

The corporate valuation model cannot be used unless a company doesn't pay dividends.

The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%,at what price should the preferred stock sell?

Exam 7: Valuation of Stocks and Corporations

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

Classified stock differentiates various classes of common stock,and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

If D1 = $1.50,g (which is constant) = 6.5%,and P0 = $56,what is the stock's expected capital gains yield for the coming year?

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

A proxy is a document giving one party the authority to act for another party,including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Which of the following statements is CORRECT?

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

$35.50 per share is the current price for Foster Farms' stock.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,rs,is 9.00%.What is the stock's expected price 3 years from today?

Which of the following statements is CORRECT?

If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

Gere Furniture forecasts a free cash flow of $40 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%,what is the horizon value,in millions at t = 3?

Which of the following statements is CORRECT?

The corporate valuation model cannot be used unless a company doesn't pay dividends.

The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%,at what price should the preferred stock sell?

If D₁ = $1.50,g (which is constant) = 6.5%,and P₀ = $56,what is the stock's expected capital gains yield for the coming year?

$35.50 per share is the current price for Foster Farms' stock.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,r_s,is 9.00%.What is the stock's expected price 3 years from today?

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?