Question 1

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 2

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) All of the above
F) C) and D)

Question 3

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 E)
G) A) and D)

Question 4

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

Question 5

If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Accepted Answer

A) True 
 B)False

Question 6

Most 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.
-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) C) and E)
G) D) and E)

Question 7

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

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) B) and E)

Question 9

Most 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.
-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) B) and D)
G) A) and C)

Question 10

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

Question 11

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

Question 12

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?

Accepted Answer

A)   Stock X has a higher dividend yield than Stock Y.
B)   Stock Y has a higher dividend yield than Stock X.
C)   One year from now, Stock X's price is expected to be higher than Stock Y's price.
D)   Stock X has the higher expected year-end dividend.
E)   Stock Y has a higher capital gains yield.F) C) and D)
G) A) and E)

Question 13

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 E)
G) B) and E)

Question 14

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

Question 16

The constant growth DCF 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 17

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

Question 18

Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends 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 C)
G) C) and E)

Question 19

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)   The stock's required return is 10%.
B)   The stock's expected dividend yield and growth rate are equal.
C)   The stock's expected dividend yield is 5%.
D)   The stock's expected capital gains yield is 5%.E) A) and D)
F) B) and D)

Question 20

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

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

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

Correct Answer
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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
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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 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

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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Correct Answer
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Which of the following statements is CORRECT?

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
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The constant growth DCF 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

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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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
verified

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

Correct Answer
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Correct Answer
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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?

Correct Answer
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Correct Answer
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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
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If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Correct Answer
verified

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

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

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

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 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

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The constant growth DCF 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

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

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

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 AnswerverifiedShow Answer

If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Correct AnswerverifiedShow Answer

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