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)   The two stocks should have the same expected dividend.
B)   The two stocks could not be in equilibrium with the numbers given in the question.
C)   A's expected dividend is $0.50.
D)   B's expected dividend is $0.75.
E)   A's expected dividend is $0.75 and B's expected dividend is $1.20.F) All of the above
G) B) and C)

Question 2

Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1 = -$10 million, but it expects positive numbers thereafter, with FCF2 = $25 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)   $200.00
B)   $210.53
C)   $221.05
D)   $232.11
E)   $243.71F) C) and D)
G) None of the above

Question 3

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

Question 4

The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

Accepted Answer

A)   $28.90
B)   $29.62
C)   $30.36
D)   $31.12
E)   $31.90F) C) and D)
G) A) and E) A

Question 5

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

Accepted Answer

A) True 
 B)False

Question 6

(9A). For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor's required return.

Accepted Answer

A) True 
 B)False

Question 7

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) D) and E)
G) A) and B)

Question 8

If D1 = $1.25, g (which is constant)  = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Accepted Answer

A)   7.54%
B)   7.73%
C)   7.93%
D)   8.13%
E)   8.34%F) B) and E)
G) A) and E)

Question 9

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 25% 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)   $26.77
B)   $27.89
C)   $29.05
D)   $30.21
E)   $31.42F) A) and C)
G) All of the above

Question 10

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%, 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) None of the above
G) A) and B)

Question 11

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 D)
G) B) and C)

Question 12

(9A). If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Accepted Answer

A) True 
 B)False

Question 13

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Accepted Answer

A) True 
 B)False

Question 14

Reddick Enterprises' stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

Accepted Answer

A)   $37.86
B)   $38.83
C)   $39.83
D)   $40.85
E)   $41.69F) D) and E)
G) B) and D) E

Question 15

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 E)
G) B) and E) E

Question 16

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

Question 17

Based on the corporate valuation model, Wang Inc.'s total corporate value is $750 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)   $386
B)   $406
C)   $428
D)   $450
E)   $473F) None of the above
G) C) and E)

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.
B)   Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.
C)   The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis)  new issues of preferred stock.
D)   One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.
E)   One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.F) B) and D)
G) A) and E)

Question 19

Mooradian Corporation's free cash flow during the just-ended year (t = 0)  was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm's total corporate value, in millions?

Accepted Answer

A)   $1,895
B)   $1,995
C)   $2,100
D)   $2,205
E)   $2,315F) A) and E)
G) A) and B)

Question 20

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) B) and E)

Exam 9: Stocks

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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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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A

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

Correct Answer
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(9A). For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor's required return.

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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If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

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%, which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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(9A). If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Correct Answer
verified

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Correct Answer
verified

Reddick Enterprises' stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

Correct Answer
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E

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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E

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

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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Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm's total corporate value, in millions?

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
verified

Exam 9: Stocks

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 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 AnswerverifiedA

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

Correct AnswerverifiedShow Answer

(9A). For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor's required return.

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

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Correct AnswerverifiedShow Answer

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%, which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

(9A). If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Correct AnswerverifiedShow Answer

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Correct AnswerverifiedShow Answer

Reddick Enterprises' stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

Correct AnswerverifiedE

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 AnswerverifiedE

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm's total corporate value, in millions?

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

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A

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E

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E

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