Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   Two firms with the same expected free cash flows and growth rates must also have the same value of operations.
B)   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.
C)   If a company has a weighted average cost of capital WACC = 12%, and if its free cash flows are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
D)   The value of operations is the present value of all expected future free cash flows, discounted at the free cash flow growth rate.
E)   The constant growth model takes into consideration the capital gains investors expect to earn on a stock.F) A) and B)
G) A) and C)

Question 2

Huxley Building Supplies' last free cash flow was $1.75 million.Its free cash flow growth rate is expected to be constant at 25% for 2 years, after which free cash flows are expected to grow at a rate of 6% forever.Its weighted average cost of capital WACC is 12%.Huxley has $5 million in short-term investments and $7 million in debt and has 1 million shares outstanding.What is the best estimate of the current intrinsic stock price?

Accepted Answer

A)   $39.58
B)   $40.64
C)   $41.71
D)   $42.80
E)   $44.92F) D) and E)
G) A) and B)

Question 3

Merrell Enterprises' stock has an expected return of 14%.The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share.Which of the following statements is CORRECT?

Accepted Answer

A)   The stock's dividend yield is 8%.
B)   The current dividend per share is $4.00.
C)   The stock price is expected to be $54 a share one year from now.
D)   The stock price is expected to be $57 a share one year from now.
E)   The stock's dividend yield is 7%.F) C) and D)
G) A) and D)

Question 4

Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

Accepted Answer

A)   All common stocks, regardless of class, must have the same voting rights.
B)   All firms have several classes of common stock.
C)   All common stock, regardless of class, must pay the same dividend.
D)   Some class or classes of common stock are entitled to more votes per share than other classes.
E)   All common stocks fall into one of three classes: A, B, and C.F) A) and D)
G) B) and C) D

Question 5

If a company's free cash flows are 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 company's stock's dividend yield is 5%.
B)   The value of operations is expected to decline in the future.
C)   The company's WACC must be equal to or less than 5%.
D)   The company's value of operations one year from now is expected to be 5% above the current price.
E)   The expected return on the company's stock is 5% a year.F) D) and E)
G) B) and E)

Question 6

Lance Inc.'s free cash flow was just $1.00 million.If the expected long-run growth rate for this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in short-term investments and $3 million in debt, and 1 million shares outstanding, what is the intrinsic stock price?

Accepted Answer

A)   $17.28
B)   $17.70
C)   $18.13
D)   $18.57
E)   $19.01F) A) and D)
G) B) and D) D

Question 7

If a firm's expected growth rate increased then its required rate of return would

Accepted Answer

A)   decrease.
B)   fluctuate less than before.
C)   fluctuate more than before.
D)   possibly increase, possibly decrease, or possibly remain constant.
E)   increase.F) A) and B)
G) All of the above

Question 8

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% 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)   $30.57
B)   $31.52
C)   $32.49
D)   $33.50
E)   $34.50F) A) and B)
G) D) and E)

Question 11

The last dividend paid by Wilden Corporation 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) C) and D)
G) A) and C)

Question 12

Classified stock differentiates various 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 13

Dyer Furniture 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 Dyer's current stock price?

Accepted Answer

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

Question 14

Judd Corporation has a weighted average cost of capital of 10.25%, and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow, FCF1 in millions?

Accepted Answer

A)   $2.20
B)   $2.44
C)   $2.69
D)   $2.96
E)   $3.25F) B) and C)
G) A) and B)

Question 15

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Accepted Answer

A) True 
 B)False

Question 16

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?  XY Price $25$25 Expected dividend yield 5%3% Required return 12%10%\begin{array} { l c c } & \mathrm { X } & \mathrm { Y } \	ext { Price } & \$ 25 & \$ 25 \	ext { Expected dividend yield } & 5 \% & 3 \% \	ext { Required return } & 12 \% & 10 \%\end{array} Price  Expected dividend yield  Required return ​X$255%12%​Y$253%10%​

Accepted Answer

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

Question 17

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?  AB Price $25$40 Expected growth 7%9% Expected return 10%12%\begin{array} { l c c } & \mathrm { A } & \mathrm { B } \	ext { Price } & \$ 25 & \$ 40 \	ext { Expected growth } & 7 \% & 9 \% \	ext { Expected return } & 10 \% & 12 \%\end{array} Price  Expected growth  Expected return ​A$257%10%​B$409%12%​

Accepted Answer

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

Question 18

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)   Stock B must have a higher dividend yield than Stock A.
B)   Stock A must have a higher dividend yield than Stock B.
C)   If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's.
D)   Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.
E)   If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.F) A) and D)
G) All of the above

Question 19

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 Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.
B)   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.
C)   The stocks must sell for the same price.
D)   Stock Y must have a higher dividend yield than Stock X.
E)   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.F) B) and E)
G) D) and E)

Question 20

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

Exam 7: Corporate Valuation and Stock Valuation

Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Merrell Enterprises' stock has an expected return of 14%.The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share.Which of the following statements is CORRECT?

Correct Answer
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Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

Correct Answer
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D

If a company's free cash flows are 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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D

If a firm's expected growth rate increased then its required rate of return would

Correct Answer
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A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Correct Answer
verified

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

Correct Answer
verified

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% 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

The last dividend paid by Wilden Corporation 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

Classified stock differentiates various 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
verified

Correct Answer
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Judd Corporation has a weighted average cost of capital of 10.25%, and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow, FCF₁ in millions?

Correct Answer
verified

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Correct Answer
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Correct Answer
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Correct Answer
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D

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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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
verified

Correct Answer
verified

Exam 7: Corporate Valuation and Stock Valuation

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Merrell Enterprises' stock has an expected return of 14%.The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Companies can issue different classes of common stock.Which of the following statements concerning stock classes is CORRECT?

Correct AnswerverifiedD

If a company's free cash flows are 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 AnswerverifiedD

If a firm's expected growth rate increased then its required rate of return would

Correct AnswerverifiedShow Answer

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock.Proxies can be important tools relating to control of firms.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% 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

The last dividend paid by Wilden Corporation 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

Classified stock differentiates various 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

Judd Corporation has a weighted average cost of capital of 10.25%, and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow, FCF1 in millions?

Correct AnswerverifiedShow Answer

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedD

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 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

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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D

Correct Answer
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Correct Answer
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D

Correct Answer
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Correct Answer
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Correct Answer
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The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% 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

The last dividend paid by Wilden Corporation 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

Judd Corporation has a weighted average cost of capital of 10.25%, and its value of operations is $57.50 million.Free cash flow is expected to grow at a constant rate of 6.00% per year.What is the expected year-end free cash flow, FCF₁ in millions?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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D

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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