Question 1

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 2

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 B)
G) All of the above

Question 3

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 4

The 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 5

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Accepted Answer

A)   $2.20
B)   $2.44
C)   $2.69
D)   $2.96
E)   $3.25F) D) and E)
G) All of the above B

Question 6

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) B) and C)
G) B) and E)

Question 7

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) A) and D)
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

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 E)
G) A) and B)

Question 10

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal)  rate of return?

Accepted Answer

A)   6.62%
B)   6.82%
C)   7.03%
D)   7.25%
E)   7.47%F) C) and D)
G) B) and D) E

Question 11

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  True

Question 12

Whited Inc.'s 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) D) and E)
G) C) and D)

Question 13

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year 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 14

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? A B
Price $25 $40
Expected growth 7% 9%
Expected return 10% 12%

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 D)

Question 15

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) B) and D)
G) B) and C)

Question 16

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)   Stock A must have a higher stock price than Stock B.
B)   Stock A must have a higher dividend yield than Stock B.
C)   Stock B's dividend yield equals its expected dividend growth rate.
D)   Stock B must have the higher required return.
E)   Stock B could have the higher expected return.F) A) and E)
G) C) and D)

Question 17

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 18

If D1 = $1.25, g (which is constant)  = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)   4.12%
B)   4.34%
C)   4.57%
D)   4.81%
E)   5.05%F) C) and D)
G) A) and E)

Question 19

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 20

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 $15.00 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.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 TV. 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 would be 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?

Accepted Answer

A)   11.84%
B)   12.21%
C)   12.58%
D)   12.97%
E)   13.36%F) C) and D)
G) C) and E)

Exam 7: Stocks, Stock Valuation, and Stock Market Equilibrium

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
verified

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
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

The 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

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Correct Answer
verified
B

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
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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
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

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Correct Answer
verified
E

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
verified
True

Whited Inc.'s 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 Answer
verified

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year 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
verified

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? A B Price $25 $40 Expected growth 7% 9% Expected return 10% 12%

Correct Answer
verified

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

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Correct Answer
verified

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
verified

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

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

Exam 7: Stocks, Stock Valuation, and Stock Market Equilibrium

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

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

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

The 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

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Correct AnswerverifiedB

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

Which of the following statements is CORRECT?

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

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

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Correct AnswerverifiedE

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 AnswerverifiedTrue

Whited Inc.'s 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

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year 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

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? A B Price $25 $40 Expected growth 7% 9% Expected return 10% 12%

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

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

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

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B

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E

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True

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