Question 1

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) A) and E)
G) C) and D)

Question 2

Misra Inc. forecasts a free cash flow of $35 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 terminal, value in millions at t = 3?

Accepted Answer

A)   $821
B)   $862
C)   $905
D)   $950
E)   $997F) A) and E)
G) A) and C)

Question 3

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) A) and B)
G) A) and C)

Question 4

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25) . The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Accepted Answer

A)   6.01%
B)   6.17%
C)   6.33%
D)   6.49%
E)   6.65%F) A) and B)
G) C) and D)

Question 5

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) A) and C)
G) C) and E)

Question 6

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)   $25.57F) A) and E)
G) A) and D)

Question 7

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 B)
G) A) and C)

Question 8

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 9

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 10

Based on the corporate valuation model, Gay Entertainment's value of operations is $1,200 million. The company's balance sheet shows $120 million of notes payable, $300 million of long-term debt, $50 million of preferred stock, $180 million of retained earnings, and $800 million of total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of its price per share?

Accepted Answer

A)   $21.90
B)   $24.33
C)   $26.77
D)   $29.44
E)   $32.39F) A) and E)
G) A) and D)

Question 11

The preemptive right is important to shareholders because it

Accepted Answer

A)   allows managers to buy additional shares below the current market price.
B)   will result in higher dividends per share.
C)   is included in ecorporate charter.
D)   protects the current shareholders against a dilution of their ownership interests.
E)   protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.F) A) and D)
G) All of the above

Question 12

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

A) True 
 B)False

Question 13

You must estimate the intrinsic value of Noe Technologies' stock. The end-of-year free cash flow (FCF1)  is expected to be $27.50 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The company's WACC is 10.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 15.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

A)   $48.64
B)   $50.67
C)   $52.78
D)   $54.89
E)   $57.08F) All of the above
G) B) and C)

Question 14

An increase in a firm's expected growth rate would cause its required rate of return to

Accepted Answer

A)   increase.
B)   decrease.
C)   fluctuate less than before.
D)   fluctuate more than before.
E)   possibly increase, possibly decrease, or possibly remain constant.F) None of the above
G) A) and D)

Question 15

Classified stock differentiates different 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 16

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) A) and E)
G) All of the above

Question 17

If D0 = $1.75, g (which is constant)  = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

Accepted Answer

A)   8.37%
B)   8.59%
C)   8.81%
D)   9.03%
E)   9.27%F) A) and C)
G) A) and B)

Question 18

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 B)
G) None of the above

Question 19

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 Y pays a higher dividend per share than Stock X.
B)   Stock X pays a higher dividend per share than Stock Y.
C)   One year from now, Stock X should have the higher price.
D)   Stock Y has a lower expected growth rate than Stock X.
E)   Stock Y has the higher expected capital gains yield.F) B) and E)
G) A) and B)

Question 20

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the value of its operations?

Accepted Answer

A)   $2,572,125
B)   $2,707,500
C)   $2,850,000
D)   $3,000,000
E)   $3,150,000F) A) and E)
G) B) and C)

Exam 9: Stocks and Their Valuation

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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Correct Answer
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Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25) . The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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An increase in a firm's expected growth rate would cause its required rate of return to

Correct Answer
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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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If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return 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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Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the value of its operations?

Correct Answer
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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
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Misra Inc. forecasts a free cash flow of $35 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 terminal, value in millions at t = 3?

Correct Answer
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When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Correct Answer
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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?

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

Correct Answer
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Classified stock differentiates different 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
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Correct Answer
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The preemptive right is important to shareholders because it

Correct Answer
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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
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Exam 9: Stocks and Their Valuation

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

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25) . The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

An increase in a firm's expected growth rate would cause its required rate of return to

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

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return 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

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the value of its operations?

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

Misra Inc. forecasts a free cash flow of $35 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 terminal, value in millions at t = 3?

Correct AnswerverifiedShow Answer

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Correct AnswerverifiedShow Answer

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?

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

Classified stock differentiates different 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

Correct AnswerverifiedShow Answer

The preemptive right is important to shareholders because it

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

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