Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.
B)   To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT)  at the weighted average cost of capital.
C)   To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital.
D)   To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital.
E)   The corporate valuation model requires the assumption of a constant growth rate in all years.F) A) and D)
G) A) and C)

Question 2

Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs)  is 12.0%. What is the best estimate of the current stock price?

Accepted Answer

A)   $37.05
B)   $38.16
C)   $39.30
D)   $40.48
E)   $41.70F) C) and D)
G) B) and C)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
B)   If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
C)   The stock valuation model, P0 = D1/(rs - g) , can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
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 cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.F) A) and E)
G) C) and D)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.
B)   The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
C)   Corporations cannot buy the preferred stocks of other corporations.
D)   Preferred dividends are not generally cumulative.
E)   A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.F) All of the above
G) A) and D)

Question 5

Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective)  annual rate of return?

Accepted Answer

A)   8.03%
B)   8.24%
C)   8.45%
D)   8.67%
E)   8.89%F) A) and B)
G) A) and E)

Question 6

Savickas Petroleum's stock has a required return of 12%, and the stock sells for $40 per share. The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 = $1.00(1.30) 4 = $2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stock's expected constant growth rate after t = 4, i.e., what is X?

Accepted Answer

A)   5.17%
B)   5.44%
C)   5.72%
D)   6.02%
E)   6.34%F) A) and D)
G) A) and C)

Question 7

Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Accepted Answer

A)   $40.17
B)   $41.20
C)   $42.26
D)   $43.34
E)   $44.46F) A) and B)
G) A) and C)

Question 11

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Accepted Answer

A) True 
 B)False

Question 12

(9A) . For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Accepted Answer

A)   the expected future return must be less than the most recent past realized return.
B)   the past realized return must be equal to the expected return during the same period.
C)   the required return must equal the realized return in all periods.
D)   the expected return must be equal to both the required future return and the past realized return.
E)   the expected future return must be equal to the required return.F) A) and D)
G) A) and E)

Question 13

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Accepted Answer

A)   The two stocks must have the same dividend per share.
B)   If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
C)   If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
D)   The two stocks must have the same dividend growth rate.
E)   The two stocks must have the same dividend yield.F) All of the above
G) B) and D)

Question 14

(9A). Two conditions are used to determine whether or not a stock is in equilibrium: (1) Does the stock's market price equal its intrinsic value as seen by the marginal investor, and (2) does the expected return on the stock as seen by the marginal investor equal this investor's required return? If either of these conditions, but not necessarily both, holds, then the stock is said to be in equilibrium.

Accepted Answer

A) True 
 B)False

Question 15

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Accepted Answer

A) True 
 B)False

Question 16

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Accepted Answer

A) True 
 B)False

Question 17

If D1 = $1.25, g (which is constant)  = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)   4.12%
B)   4.34%
C)   4.57%
D)   4.81%
E)   5.05%F) C) and E)
G) All of the above

Question 18

A share of 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)   $18.01F) None of the above
G) C) and E)

Exam 9: Stocks

Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Correct Answer
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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.

Correct Answer
verified

Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Correct Answer
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According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Correct Answer
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Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
verified

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Correct Answer
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Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Correct Answer
verified

Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A share of 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?

Correct Answer
verified

Correct Answer
verified

(9A) . For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Correct Answer
verified

Exam 9: Stocks

Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Correct AnswerverifiedShow Answer

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Correct AnswerverifiedShow Answer

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Correct AnswerverifiedShow Answer

Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A share of 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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

(9A) . For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Correct AnswerverifiedShow Answer

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