Question 1

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

Question 2

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

Accepted Answer

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

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   Two firms with the same expected dividend and growth rates must also have the same stock price.
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 stock has a required rate of return rs = 12%,and if its dividend is expected to grow at a constant rate of 5%,this implies that the stock's dividend yield is also 5%.
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 takes into consideration the capital gains investors expect to earn on a stock.F) C) and E)
G) B) and E)

Question 4

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

Question 5

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 E)

Question 6

If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.

Accepted Answer

A) True 
 B)False

Question 7

Kinkead Inc.forecasts that its free cash flow in the coming year,i.e. ,at t = 1,will be −$10 million,but its FCF at t = 2 will be $20 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%,what is the firm's value of operations,in millions?

Accepted Answer

A)   $158
B)   $167
C)   $175
D)   $184
E)   $193F) B) and D)
G) C) and E)

Question 8

You,in analyzing a stock,find that its expected return exceeds its required return.This suggests that you think

Accepted Answer

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

Question 9

Justus Motor Co.has a WACC of 11.50%,and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow,FCF0 in millions?

Accepted Answer

A)   $0.95
B)   $1.05
C)   $1.16
D)   $1.27
E)   $1.40F) A) and B)
G) D) and E)

Question 10

McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years,after the growth rate in earnings and dividends will fall 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 E)
G) B) and E)

Question 11

A share of Lash Inc.'s 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 11.4%,what is the stock price?

Accepted Answer

A)   $16.28
B)   $16.70
C)   $17.13
D)   $17.57
E)   $18.01F) B) and C)
G) B) and D)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.
B)   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.
C)   The free cash flow valuation model,Vops =FCF1/(WACC − g) ,cannot be used for firms that have negative growth rates.
D)   The free cash flow valuation model,Vops = FCF1/(WACC − g) ,can be used only for firms whose growth rates exceed their WACC.
E)   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.F) A) and E)
G) D) and E)

Question 13

The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?

Accepted Answer

A)   $1,714,750
B)   $1,805,000
C)   $1,900,000
D)   $2,000,000
E)   $2,100,000F) B) and E)
G) A) and B)

Question 14

If D1 = $1.50,g (which is constant) = 6.5%,and P0 = $56,what is the stock's expected capital gains yield for the coming year?

Accepted Answer

A)   6.50%
B)   6.83%
C)   7.17%
D)   7.52%
E)   7.90%F) A) and C)
G) C) and D)

Question 15

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) C) and E)

Question 16

The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

A) True 
 B)False

Question 17

The constant growth dividend 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 18

Young & Liu Inc.'s free cash flow during the just-ended year (t = 0) was $100 million,and FCF is expected to grow at a constant rate of 5% in the future.If the weighted average cost of capital is 15%,what is the firm's value of operations,in millions?

Accepted Answer

A)   $948
B)   $998
C)   $1,050
D)   $1,103
E)   $1,158F) A) and B)
G) A) and C)

Question 19

Alcott's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $45.00,what is its nominal (not effective) annual rate of return?

Accepted Answer

A)   8.03%
B)   8.24%
C)   8.45%
D)   8.67%
E)   8.89%F) A) and B)
G) A) and C)

Question 20

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% 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)   $40.17
B)   $41.20
C)   $42.26
D)   $43.34
E)   $44.46F) A) and B)
G) None of the above

Exam 7: Corporate Valuation and Stock Valuation

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

Correct Answer
verified

Correct Answer
verified

Young & Liu Inc.'s free cash flow during the just-ended year (t = 0) was $100 million,and FCF is expected to grow at a constant rate of 5% in the future.If the weighted average cost of capital is 15%,what is the firm's value of operations,in millions?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

You,in analyzing a stock,find that its expected return exceeds its required return.This suggests that you think

Correct Answer
verified

The constant growth dividend 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
verified

If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.

Correct Answer
verified

Correct Answer
verified

If D₁ = $1.50,g (which is constant) = 6.5%,and P₀ = $56,what is the stock's expected capital gains yield for the coming year?

Correct Answer
verified

Correct Answer
verified

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% 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

The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Correct Answer
verified

Correct Answer
verified

Alcott's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $45.00,what is its nominal (not effective) annual rate of return?

Correct Answer
verified

A share of Lash Inc.'s 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 11.4%,what is the stock price?

Correct Answer
verified

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
verified

Justus Motor Co.has a WACC of 11.50%,and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow,FCF₀ in millions?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Exam 7: Corporate Valuation and Stock Valuation

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Young & Liu Inc.'s free cash flow during the just-ended year (t = 0) was $100 million,and FCF is expected to grow at a constant rate of 5% in the future.If the weighted average cost of capital is 15%,what is the firm's value of operations,in millions?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

You,in analyzing a stock,find that its expected return exceeds its required return.This suggests that you think

Correct AnswerverifiedShow Answer

The constant growth dividend 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

If a firm's stockholders are given the preemptive right,this means that stockholders have the right to call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders would have to seek a change in management through a proxy fight.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If D1 = $1.50,g (which is constant) = 6.5%,and P0 = $56,what is the stock's expected capital gains yield for the coming year?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% 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

The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Alcott's preferred stock pays a dividend of $1.00 per quarter.If the price of the stock is $45.00,what is its nominal (not effective) annual rate of return?

Correct AnswerverifiedShow Answer

A share of Lash Inc.'s 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 11.4%,what is the stock price?

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

Justus Motor Co.has a WACC of 11.50%,and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow,FCF0 in millions?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

If D₁ = $1.50,g (which is constant) = 6.5%,and P₀ = $56,what is the stock's expected capital gains yield for the coming year?

Correct Answer
verified

Correct Answer
verified

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% 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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Justus Motor Co.has a WACC of 11.50%,and its value of operations is $25.00 million.Justus's free cash flow is expected to grow at a constant rate of 7.00%.What was the last free cash flow,FCF₀ in millions?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified