Question 1

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 2

Wall Inc.forecasts that it will have the free cash flows (in millions) shown below.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions?  ​

Accepted Answer

A)   $535.20
B)   $553.65
C)   $572.11
D)   $549.04
E)   $461.38F) B) and E)
G) C) and D)

Question 3

Misra Inc.forecasts a free cash flow of $55 million in Year 3,i.e. ,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%,what is the horizon,or continuing,value in millions at t = 3?

Accepted Answer

A)   $1,289
B)   $1,148
C)   $1,212
D)   $1,186
E)   $1,083F) A) and B)
G) A) and C)

Question 4

The corporate valuation model can be used only when a company doesn't pay dividends.

Accepted Answer

A) True 
 B)False

Question 5

If in the opinion of a given investor a stock's expected return exceeds its required return,this suggests that the investor thinks

Accepted Answer

A)   the stock is experiencing supernormal growth.
B)   the stock should be sold.
C)   the stock is a good buy.
D)   management is probably not trying to maximize the price per share.
E)   dividends are not likely to be declared.F) D) and E)
G) B) and C)

Question 6

The corporate valuation model cannot be used unless a company pays dividends.

Accepted Answer

A) True 
 B)False

Question 7

Based on the corporate valuation model,the total corporate value of Chen Lin Inc.is $500 million.Its balance sheet shows $110 million in notes payable,$90 million in long-term debt,$20 million in preferred stock,$140 million in retained earnings,and $280 million in total common equity.If the company has 25 million shares of stock outstanding,what is the best estimate of its stock price per share?

Accepted Answer

A)   $11.20
B)   $9.74
C)   $9.18
D)   $11.54
E)   $11.98F) All of the above
G) A) and E)

Question 8

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 1.70,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)   $10.52
B)   $7.40
C)   $7.89
D)   $9.74
E)   $7.70F) A) and D)
G) A) and C)

Question 9

The required returns of Stocks X and Y are rX = 10% and rY = 12%.Which of the following statements is CORRECT?

Accepted Answer

A)   If the market is in equilibrium,and if Stock Y has the lower expected dividend yield,then it must have the higher expected growth rate.
B)   If Stock Y and Stock X have the same dividend yield,then Stock Y must have a lower expected capital gains yield than Stock X.
C)   If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate,then Stock Y must sell for a higher price.
D)   The stocks must sell for the same price.
E)   Stock Y must have a higher dividend yield than Stock X.F) A) and D)
G) A) and C)

Question 10

If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

A)   The expected return on the stock is 5% a year.
B)   The stock's dividend yield is 5%.
C)   The price of the stock is expected to decline in the future.
D)   The stock's required return must be equal to or less than 5%.
E)   The stock's price one year from now is expected to be 5% above the current price.F) A) and B)
G) C) and D)

Question 11

Agarwal Technologies was founded 10 years ago.It has been profitable for the last 5 years,but it has needed all of its earnings to support growth and thus 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?  ​

Accepted Answer

A)   $8.60
B)   $9.29
C)   $10.50
D)   $9.21
E)   $10.75F) C) and D)
G) A) and D)

Question 12

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 D)
G) B) and E)

Question 13

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 27.5% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs) is 11%,what is its current stock price?

Accepted Answer

A)   $41.08
B)   $40.63
C)   $36.11
D)   $45.14
E)   $52.36F) A) and D)
G) B) and D)

Question 14

Whited Inc.'s stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 5.25% 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)   $45.53
B)   $52.81
C)   $40.06
D)   $39.15
E)   $47.80F) B) and D)
G) A) and B)

Question 15

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 14.2%,what is the stock price?

Accepted Answer

A)   $12.70
B)   $11.98
C)   $14.61
D)   $10.66
E)   $12.10F) A) and B)
G) None of the above

Question 16

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

Accepted Answer

A)   The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
B)   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.
C)   A stock's dividend yield can never exceed its expected growth rate.
D)   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.
E)   Other things held constant,the higher a company's beta coefficient,the lower its required rate of return.F) A) and E)
G) A) and B)

Question 17

Kale Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,what is the firm's total corporate value,in millions?  ​

Accepted Answer

A)   $1,530
B)   $1,833
C)   $1,295
D)   $1,446
E)   $1,682F) B) and D)
G) D) and E)

Question 18

Francis Inc.'s stock has a required rate of return of 10.25%,and it sells for $87.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D1?

Accepted Answer

A)   $3.72
B)   $2.79
C)   $4.65
D)   $3.16
E)   $3.90F) A) and B)
G) All of the above

Question 19

Church Inc.is presently enjoying relatively high growth because of a surge in the demand for its new product.Management expects earnings and dividends to grow at a rate of 22% for the next 4 years,after which competition will probably reduce the growth rate in earnings and dividends to zero,i.e. ,g = 0.The company's last dividend,D0,was $1.25,its beta is 1.20,the market risk premium is 5.50%,and the risk-free rate is 3.00%.What is the current price of the common stock?

Accepted Answer

A)   $26.57
B)   $32.69
C)   $28.97
D)   $23.39
E)   $27.37F) B) and D)
G) C) and D)

Question 20

Kedia Inc.forecasts a negative free cash flow for the coming year,FCF1 = -$10 million,but it expects positive numbers thereafter,with FCF2 = $34 million.After Year 2,FCF is expected to grow at a constant rate of 4% forever.If the weighted average cost of capital is 14.0%,what is the firm's total corporate value,in millions?

Accepted Answer

A)   $335.10
B)   $275.00
C)   $319.14
D)   $289.47
E)   $303.95F) C) and E)
G) B) and E)

Exam 9: Stocks and Their Valuation

The corporate valuation model cannot be used unless a company pays dividends.

Correct Answer
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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
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The required returns of Stocks X and Y are r_X = 10% and r_Y = 12%.Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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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 14.2%,what is the stock price?

Correct Answer
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The corporate valuation model can be used only when a company doesn't pay dividends.

Correct Answer
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If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.

Correct Answer
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Correct Answer
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Correct Answer
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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
verified

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

Correct Answer
verified

Francis Inc.'s stock has a required rate of return of 10.25%,and it sells for $87.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

Correct Answer
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Correct Answer
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Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 27.5% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s) is 11%,what is its current stock price?

Correct Answer
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Misra Inc.forecasts a free cash flow of $55 million in Year 3,i.e. ,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%,what is the horizon,or continuing,value in millions at t = 3?

Correct Answer
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Kale Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,what is the firm's total corporate value,in millions?

Correct Answer
verified

Whited Inc.'s stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 5.25% per year.The required rate of return on the stock,r_s,is 11.50%.What is the stock's expected price 5 years from now?

Correct Answer
verified

Wall Inc.forecasts that it will have the free cash flows (in millions) shown below.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions?

Correct Answer
verified

Correct Answer
verified

If in the opinion of a given investor a stock's expected return exceeds its required return,this suggests that the investor thinks

Correct Answer
verified

Exam 9: Stocks and Their Valuation

The corporate valuation model cannot be used unless a company pays dividends.

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

The required returns of Stocks X and Y are rX = 10% and rY = 12%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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 14.2%,what is the stock price?

Correct AnswerverifiedShow Answer

The corporate valuation model can be used only when a company doesn't pay dividends.

Correct AnswerverifiedShow Answer

If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

Francis Inc.'s stock has a required rate of return of 10.25%,and it sells for $87.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D1?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 27.5% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs) is 11%,what is its current stock price?

Correct AnswerverifiedShow Answer

Misra Inc.forecasts a free cash flow of $55 million in Year 3,i.e. ,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%,what is the horizon,or continuing,value in millions at t = 3?

Correct AnswerverifiedShow Answer

Kale Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,what is the firm's total corporate value,in millions? ​

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 5.25% 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

Wall Inc.forecasts that it will have the free cash flows (in millions) shown below.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions? ​

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If in the opinion of a given investor a stock's expected return exceeds its required return,this suggests that the investor thinks

Correct AnswerverifiedShow Answer

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

The required returns of Stocks X and Y are r_X = 10% and r_Y = 12%.Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Francis Inc.'s stock has a required rate of return of 10.25%,and it sells for $87.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

Correct Answer
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Correct Answer
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Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 27.5% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s) is 11%,what is its current stock price?

Correct Answer
verified

Correct Answer
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Kale Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,what is the firm's total corporate value,in millions?

Correct Answer
verified

Whited Inc.'s stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 5.25% per year.The required rate of return on the stock,r_s,is 11.50%.What is the stock's expected price 5 years from now?

Correct Answer
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Wall Inc.forecasts that it will have the free cash flows (in millions) shown below.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions?

Correct Answer
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Correct Answer
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Correct Answer
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