Question 1

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) C) and D)

Question 2

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

Question 3

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

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
B)  If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
C)  The stock valuation model, P0 = D1/(rs − g) , can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
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 cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.F) A) and B)
G) C) and D)

Question 5

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

Question 6

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000,and FCF is expected to grow at a constant rate of 6.5%.If the company's weighted average cost of capital is 11.5%,what is the firm's total corporate value?

Accepted Answer

A)  $2,572,125
B)  $2,707,500
C)  $2,850,000
D)  $3,000,000
E)  $3,150,000F) A) and B)
G) B) and E)

Question 7

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 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 D)
G) A) and E)

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

Question 10

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

Question 11

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) B) and C)

Question 12

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) D) and E)
G) None of the above

Question 13

Based on the corporate valuation model,Gay Entertainment's total corporate value is $1,200 million.The company's balance sheet shows $120 million of notes payable,$300 million of long-term debt,$50 million of preferred stock,$180 million of retained earnings,and $800 million of total common equity.If the company has 30 million shares of stock outstanding,what is the best estimate of its price per share?

Accepted Answer

A)  $21.90
B)  $24.33
C)  $26.77
D)  $29.44
E)  $32.39F) A) and C)
G) A) and D)

Question 14

Savickas Petroleum's stock has a required return of 12%,and the stock sells for $40 per share.The firm just paid a dividend of $1.00,and the dividend is expected to grow by 30% per year for the next 4 years,so D4 = $1.00(1.30) 4 = $2.8561.After t = 4,the dividend is expected to grow at a constant rate of X% per year forever.What is the stock's expected constant growth rate after t = 4,i.e.,what is X?

Accepted Answer

A)  5.17%
B)  5.44%
C)  5.72%
D)  6.02%
E)  6.34%F) A) and E)
G) A) and B)

Question 15

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

Question 16

The Isberg Company just paid a dividend of $0.75 per share,and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.15,the market risk premium is 5.00%,and the risk-free rate is 4.00%.What is the company's current stock price,P0?

Accepted Answer

A)  $18.62
B)  $19.08
C)  $19.56
D)  $20.05
E)  $20.55F) All of the above
G) A) and E)

Question 17

A share of 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) A) and B)
G) C) and D)

Question 18

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

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) B) and E)

Question 20

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

Exam 9: Stocks and Their Valuation

A share of 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
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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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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
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Which of the following statements is CORRECT?

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

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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Which of the following statements is CORRECT?

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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The Isberg Company just paid a dividend of $0.75 per share,and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.15,the market risk premium is 5.00%,and the risk-free rate is 4.00%.What is the company's current stock price,P₀?

Correct Answer
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Suppose Boyson Corporation's projected free cash flow for next year is FCF₁ = $150,000,and FCF is expected to grow at a constant rate of 6.5%.If the company's weighted average cost of capital is 11.5%,what is the firm's total corporate value?

Correct Answer
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Correct Answer
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Exam 9: Stocks and Their Valuation

A share of 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?

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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?

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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?

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Which of the following statements is CORRECT?

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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?

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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 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

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

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?

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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 AnswerverifiedShow Answer

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

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

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?

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Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The Isberg Company just paid a dividend of $0.75 per share,and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.15,the market risk premium is 5.00%,and the risk-free rate is 4.00%.What is the company's current stock price,P0?

Correct AnswerverifiedShow Answer

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000,and FCF is expected to grow at a constant rate of 6.5%.If the company's weighted average cost of capital is 11.5%,what is the firm's total corporate value?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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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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?

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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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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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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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The Isberg Company just paid a dividend of $0.75 per share,and that dividend is expected to grow at a constant rate of 5.50% per year in the future.The company's beta is 1.15,the market risk premium is 5.00%,and the risk-free rate is 4.00%.What is the company's current stock price,P₀?

Correct Answer
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Suppose Boyson Corporation's projected free cash flow for next year is FCF₁ = $150,000,and FCF is expected to grow at a constant rate of 6.5%.If the company's weighted average cost of capital is 11.5%,what is the firm's total corporate value?

Correct Answer
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