Question 1

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is rs = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Accepted Answer

A)  $17.39
B)  $17.84
C)  $18.29
D)  $18.75
E)  $19.22F) None of the above
G) A) and B)

Question 2

Based on the corporate valuation model,Morgan Inc.'s total corporate value is $300 million.The balance sheet shows $90 million of notes payable,$30 million of long-term debt,$40 million of preferred stock,and $100 million of common equity.The company has 10 million shares of stock outstanding.What is the best estimate of the stock's price per share?

Accepted Answer

A)  $12.00
B)  $12.64
C)  $13.30
D)  $14.00
E)  $14.70F) C) and E)
G) B) and E)

Question 3

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) None of the above
G) B) and C)

Question 4

Gupta Corporation is undergoing a restructuring,and its free cash flows are expected to vary considerably during the next few years.However,the FCF is expected to be $65.00 million in Year 5,and the FCF growth rate is expected to be a constant 6.5% beyond that point.The weighted average cost of capital is 12.0%.What is the horizon (or continuing) value (in millions) at t = 5?

Accepted Answer

A)  $1,025
B)  $1,079
C)  $1,136
D)  $1,196
E)  $1,259F) A) and D)
G) C) and D)

Question 5

Your boss,Sally Maloney,treasurer of Fred Clark Enterprises (FCE) ,asked you to help her estimate the intrinsic value of the company's stock.FCE just paid a dividend of $1.00,and the stock now sells for $15.00 per share.Sally asked a number of security analysts what they believe FCE's future dividends will be,based on their analysis of the company.The consensus is that the dividend will be increased by 10% during Years 1 to 3,and it will be increased at a rate of 5% per year in Year 4 and thereafter.Sally asked you to use that information to estimate the required rate of return on the stock,rs,and she provided you with the following template for use in the analysis. ​​
​
s,and she provided you with the following template for use in the analysis. ​​ ​   Sally told you that the growth rates in the template were just put in as a trial,and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated HV.She also notes that the estimated value for rs, at the top of the template,is also just a guess,and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price.She suggests that,after you have put in the correct dividends,you can manually calculate the price,using a series of guesses as to the Estimated rs.The value of rs that causes the calculated price to equal the actual price is the correct one.She notes,though,that this trial-and-error process would be quite tedious,and that the correct rs could be found much faster with a simple Excel model,especially if you use Goal Seek.What is the value of rs? A) 11.84% B) 12.21% C) 12.58% D) 12.97% E) 13.36%" class="answers-bank-image d-inline" rel="preload" > Sally told you that the growth rates in the template were just put in as a trial,and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated HV.She also notes that the estimated value for rs, at the top of the template,is also just a guess,and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price.She suggests that,after you have put in the correct dividends,you can manually calculate the price,using a series of guesses as to the Estimated rs.The value of rs that causes the calculated price to equal the actual price is the correct one.She notes,though,that this trial-and-error process would be quite tedious,and that the correct rs could be found much faster with a simple Excel model,especially if you use Goal Seek.What is the value of rs?

Accepted Answer

A)  11.84%
B)  12.21%
C)  12.58%
D)  12.97%
E)  13.36%F) All of the above
G) A) and E)

Question 6

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

A) True 
 B)False

Question 7

The Ramirez Company's last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (rs) is 12%.What is the best estimate of the current stock price?

Accepted Answer

A)  $41.58
B)  $42.64
C)  $43.71
D)  $44.80
E)  $45.92F) C) and D)
G) A) and D)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  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.
B)  The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.
C)  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.
D)  The stock valuation model, P0 = D1/(rs − g) , cannot be used for firms that have negative growth rates.
E)  The stock valuation model, P0 = D1/(rs − g) , can be used only for firms whose growth rates exceed their required return.F) None of the above
G) A) and C)

Question 9

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firm's total corporate value.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  The constant growth model takes into consideration the capital gains investors expect to earn on a stock.
B)  Two firms with the same expected dividend and growth rate must also have the same stock price.
C)  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.
D)  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%.
E)  The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.F) B) and D)
G) A) and E)

Question 11

Nachman Industries just paid a dividend of D0 = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

Accepted Answer

A)  $41.59
B)  $42.65
C)  $43.75
D)  $44.87
E)  $45.99F) A) and E)
G) All of the above

Question 12

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 13

From an investor's perspective,a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds.However,from a corporate issuer's standpoint,these risk relationships are reversed:
 bonds are the most risky for the firm,preferred is next,and common is least risky.

Accepted Answer

A) True 
 B)False

Question 14

If markets are in equilibrium,which of the following conditions will exist?

Accepted Answer

A)  Each stock's expected return should equal its realized return as seen by the marginal investor.
B)  Each stock's expected return should equal its required return as seen by the marginal investor.
C)  All stocks should have the same expected return as seen by the marginal investor.
D)  The expected and required returns on stocks and bonds should be equal.
E)  All stocks should have the same realized return during the coming year.F) All of the above
G) C) and D)

Question 15

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? ​

Accepted Answer

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

Question 16

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.
B)  The corporate valuation model discounts free cash flows by the required return on equity.
C)  The corporate valuation model can be used to find the value of a division.
D)  An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.
E)  Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or continuing, value.F) A) and B)
G) C) and E)

Question 17

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 18

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? ​

Accepted Answer

A)  Stock X has a higher dividend yield than Stock Y.
B)  Stock Y has a higher dividend yield than Stock X.
C)  One year from now, Stock X's price is expected to be higher than Stock Y's price.
D)  Stock X has the higher expected year-end dividend.
E)  Stock Y has a higher capital gains yield.F) C) and E)
G) C) and D)

Question 19

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%F) A) and B)
G) C) and E)

Question 20

Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share,and that dividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.25,the required return on the market is 10.50%,and the risk-free rate is 4.50%.What is the company's current stock price?

Accepted Answer

A)  $14.52
B)  $14.89
C)  $15.26
D)  $15.64
E)  $16.03F) B) and E)
G) A) and B)

Exam 9: Stocks and Their Valuation

The Ramirez Company's last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (r_s) is 12%.What is the best estimate of the current stock price?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firm's total corporate value.

Correct Answer
verified

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT?

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

Correct Answer
verified

Which of the following statements is NOT CORRECT?

Correct Answer
verified

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Correct Answer
verified

Correct Answer
verified

If markets are in equilibrium,which of the following conditions will exist?

Correct Answer
verified

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?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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?

Correct Answer
verified

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 (r_s) is 12.0%.What is the best estimate of the current stock price?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Correct Answer
verified

Exam 9: Stocks and Their Valuation

The Ramirez Company's last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (rs) is 12%.What is the best estimate of the current stock price?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firm's total corporate value.

Correct AnswerverifiedShow Answer

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? ​

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

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

Correct AnswerverifiedShow Answer

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If markets are in equilibrium,which of the following conditions will exist?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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? ​

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is rs = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Correct AnswerverifiedShow Answer

The Ramirez Company's last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (r_s) is 12%.What is the best estimate of the current stock price?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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?

Correct Answer
verified

Correct Answer
verified

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?

Correct Answer
verified

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 (r_s) is 12.0%.What is the best estimate of the current stock price?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Correct Answer
verified