Question 1

Stocks A and B 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)   These two stocks should have the same price.
B)   These two stocks must have the same dividend yield.
C)   These two stocks should have the same expected return.
D)   These two stocks must have the same expected capital gains yield.
E)   These two stocks must have the same expected year-end dividend.F) D) and E)
G) B) and D)

Question 2

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

Accepted Answer

A)   If Stock A has a lower dividend yield than Stock B,then its expected capital gains yield must be higher than Stock B's.
B)   Stock B must have a higher dividend yield than Stock A.
C)   Stock A must have a higher dividend yield than Stock B.
D)   If Stock A has a higher dividend yield than Stock B,then its expected capital gains yield must be lower than Stock B's.
E)   Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.F) None of the above
G) C) and E)

Question 3

Based on the corporate valuation model,Gray Entertainment's total corporate value is $1,175 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)   $24.44
B)   $27.97
C)   $23.50
D)   $28.20
E)   $29.38F) C) and D)
G) A) and C)

Question 4

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 5

If D1 = $1.25,g (which is constant) = 4.7%,and P0 = $30.00,then what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)   4.13%
B)   3.17%
C)   4.17%
D)   3.25%
E)   3.38%F) All of the above
G) None of the above

Question 6

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 D)
G) D) and E)

Question 7

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 8

Two conditions are used to determine whether 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 his or her 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 9

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 $13.00 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 is 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)  15.47% B)  10.64% C)  16.46% D)  12.20% E)  14.19%" 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 is 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?
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 is 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)  15.47% B)  10.64% C)  16.46% D)  12.20% E)  14.19%" class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)   15.47%
B)   10.64%
C)   16.46%
D)   12.20%
E)   14.19%F) All of the above
G) A) and B)

Question 10

Based on the corporate valuation model,the total corporate value of Chen Lin Inc.is $725 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)   $20.20
B)   $18.18
C)   $21.21
D)   $22.83
E)   $24.44F) A) and B)
G) C) and E)

Question 11

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? ​

Accepted Answer

A)   The stock's required return is 10%.
B)   The stock's expected dividend yield and growth rate are equal.
C)   The stock's expected dividend yield is 5%.
D)   The stock's expected capital gains yield is 5%.
E)   The stock's expected price 10 years from now is $100.00.F) A) and D)
G) D) and E)

Question 12

A stock is expected to pay a year-end dividend of $2.00,i.e. ,D1 = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = -5%) .If the company is in equilibrium and its expected and required rate of return is 15%,then which of the following statements is CORRECT?

Accepted Answer

A)   The company's current stock price is $20.
B)   The company's dividend yield 5 years from now is expected to be 10%.
C)   The constant growth model cannot be used because the growth rate is negative.
D)   The company's expected capital gains yield is 5%.
E)   The company's expected stock price at the beginning of next year is $9.50.F) All of the above
G) B) and C)

Question 13

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 = 8.6%.What is the stock's current price?

Accepted Answer

A)   $36.32
B)   $37.11
C)   $39.47
D)   $43.03
E)   $47.76F) A) and E)
G) C) and D)

Question 14

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%,then 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,wherein the dividend is expected to remain constant over time.F) All of the above
G) B) and E)

Question 15

Whited Inc.'s stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 3.50% 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)   $41.87
B)   $52.33
C)   $46.89
D)   $40.61
E)   $36.42F) B) and C)
G) B) and E)

Question 16

Nachman Industries just paid a dividend of D0 = $2.50.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? Do not round intermediate calculations.

Accepted Answer

A)   $102.82
B)   $73.08
C)   $84.98
D)   $65.43
E)   $93.47F) B) and E)
G) C) and E)

Question 17

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $33.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D0?

Accepted Answer

A)   $1.64
B)   $1.50
C)   $1.29
D)   $1.39
E)   $1.42F) B) and E)
G) A) and B)

Question 18

If D1 = $1.25,g (which is constant) = 5.5%,and P0 = $36,then what is the stock's expected total return for the coming year?

Accepted Answer

A)   7.99%
B)   7.00%
C)   7.54%
D)   8.88%
E)   8.97%F) B) and D)
G) B) and E)

Question 19

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 20

Based on the corporate valuation model,Wang Inc.'s total corporate value is $800 million.Its balance sheet shows $100 million notes payable,$200 million of long-term debt,$40 million of common stock (par plus paid-in-capital) ,and $160 million of retained earnings.What is the best estimate for the firm's value of equity (in millions) ?

Accepted Answer

A)   $520
B)   $500
C)   $380
D)   $400
E)   $415F) D) and E)
G) None of the above

Exam 10: Stocks and Their Valuation

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $33.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D₀?

Correct Answer
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Correct Answer
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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 = 8.6%.What is the stock's current price?

Correct Answer
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If D₁ = $1.25,g (which is constant) = 4.7%,and P₀ = $30.00,then what is the stock's expected dividend yield for the coming year?

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 3.50% 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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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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Stocks A and B 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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Correct Answer
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Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

Correct Answer
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Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT?

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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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.

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

Correct Answer
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A stock is expected to pay a year-end dividend of $2.00,i.e. ,D₁ = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = -5%) .If the company is in equilibrium and its expected and required rate of return is 15%,then which of the following statements is CORRECT?

Correct Answer
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If D₁ = $1.25,g (which is constant) = 5.5%,and P₀ = $36,then what is the stock's expected total return for the coming year?

Correct Answer
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Exam 10: Stocks and Their Valuation

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $33.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D0?

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 = 8.6%.What is the stock's current price?

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If D1 = $1.25,g (which is constant) = 4.7%,and P0 = $30.00,then what is the stock's expected dividend yield for the coming year?

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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 3.50% 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

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? ​

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

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Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

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Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? ​

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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 AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A stock is expected to pay a year-end dividend of $2.00,i.e. ,D1 = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = -5%) .If the company is in equilibrium and its expected and required rate of return is 15%,then which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If D1 = $1.25,g (which is constant) = 5.5%,and P0 = $36,then what is the stock's expected total return for the coming year?

Correct AnswerverifiedShow Answer

Goode Inc.'s stock has a required rate of return of 11.50%,and it sells for $33.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%.What was the last dividend,D₀?

Correct Answer
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Correct Answer
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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 = 8.6%.What is the stock's current price?

Correct Answer
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If D₁ = $1.25,g (which is constant) = 4.7%,and P₀ = $30.00,then what is the stock's expected dividend yield for the coming year?

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 3.50% 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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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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Stocks A and B 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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Correct Answer
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Correct Answer
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Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,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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A stock is expected to pay a year-end dividend of $2.00,i.e. ,D₁ = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = -5%) .If the company is in equilibrium and its expected and required rate of return is 15%,then which of the following statements is CORRECT?

Correct Answer
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If D₁ = $1.25,g (which is constant) = 5.5%,and P₀ = $36,then what is the stock's expected total return for the coming year?

Correct Answer
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