Question 1

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

Accepted Answer

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

Question 2

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. ProblemsMost of these problems are straightforward and only moderately difficult. However, a few of the later ones are relatively difficult and should be used primarily on take-home exams for students with some experience with Excel. Problems with * in the topic line are nonalgorithmic.F) A) and D)
G) B) and E)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The constant growth model takes into consideration the capital gains investors expect to earn on a stock.
B)   Two firms with the same expected dividend and growth rates must also have the same stock price.
C)   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.
D)   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%.
E)   The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.F) C) and E)
G) C) and D)

Question 4

The expected return on Natter Corporation's stock is 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 7%.
B)   The stock's dividend yield is 8%.
C)   The current dividend per share is $4.00.
D)   The stock price is expected to be $54 a share one year from now.
E)   The stock price is expected to be $57 a share one year from now.F) C) and D)
G) None of the above

Question 5

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

Question 6

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 7

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 B)
G) A) and E)

Question 8

If markets are in equilibrium, which of the following conditions will exist?

Accepted Answer

A)   Each stock's expected return should equal its realized return as seen by the marginal investor.
B)   Each stock's expected return should equal its required return as seen by the marginal investor.
C)   All stocks should have the same expected return as seen by the marginal investor.
D)   The expected and required returns on stocks and bonds should be equal.
E)   All stocks should have the same realized return during the coming year.F) A) and B)
G) A) and C)

Question 9

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

Question 10

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)   Increase the dividend payout ratio for the upcoming year.
B)   Increase the percentage of debt in the target capital structure.
C)   Increase the proposed capital budget.
D)   Reduce the amount of short-term bank debt in order to increase the current ratio.E) None of the above
F) A) and C)

Question 11

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Accepted Answer

A)   the expected future return must be less than the most recent past realized return.
B)   The past realized return must be equal to the expected return during the same period.
C)   the required return must equal the realized return in all periods.
D)   the expected return must be equal to both the required future return and the past realized return.
E)   the expected future returns must be equal to the required return.F) A) and C)
G) A) and B)

Question 12

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 13

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

Question 14

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 15

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Accepted Answer

A)  	The two stocks must have the same dividend per share.
B)  	If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
C)  	If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
D)  	The two stocks must have the same dividend growth rate.
E)  	The two stocks must have the same dividend yield.F) A) and E)
G) D) and E)

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.
B)   The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
C)   Corporations cannot buy the preferred stocks of other corporations.
D)   Preferred dividends are not generally cumulative.
E)   A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.F) D) and E)
G) C) and E)

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

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

A) True 
 B)False

Question 19

If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Accepted Answer

A) True 
 B)False

Question 20

The preemptive right is important to shareholders because it

Accepted Answer

A)   allows managers to buy additional shares below the current market price.
B)   will result in higher dividends per share.
C)   is included in every corporate charter.
D)   protects the current shareholders against a dilution of their ownership interests.
E)   protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.F) A) and D)
G) A) and C)

Exam 7: Stocks and Their Valuation

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Correct Answer
verified

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
verified

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
verified

The preemptive right is important to shareholders because it

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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When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

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
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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
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If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

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

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

Correct Answer
verified

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
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

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

If markets are in equilibrium, which of the following conditions will exist?

Correct Answer
verified

The expected return on Natter Corporation's stock is 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

Correct Answer
verified

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Correct Answer
verified

Exam 7: Stocks and Their Valuation

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

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 AnswerverifiedShow Answer

The preemptive right is important to shareholders because it

Correct AnswerverifiedShow Answer

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 AnswerverifiedShow Answer

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

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

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

If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

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

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

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

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

If markets are in equilibrium, which of the following conditions will exist?

Correct AnswerverifiedShow Answer

The expected return on Natter Corporation's stock is 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

Correct AnswerverifiedShow Answer

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Correct AnswerverifiedShow Answer

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