Question 1

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?  AB Required return 10%12% Market price $25$40 Expected growth 7%9%\begin{array} { l c c } & A & B \	ext { Required return } & 10 \% & 12 \% \	ext { Market price } & \$ 25 & \$ 40 \	ext { Expected growth } & 7 \% & 9 \%\end{array} Required return  Market price  Expected growth ​A10%$257%​B12%$409%​

Accepted Answer

A)  These two stocks must have the same dividend yield.
B)  These two stocks should have the same expected return.
C)  These two stocks must have the same expected capital gains yield.
D)  These two stocks must have the same expected year-end dividend.
E)  These two stocks should have the same price. F) A) and B)
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?   A‾B‾ Beta 1.100.90Constant growth rate 7.00%7.00%\begin{array}{llcc}  	ext {  } & \underline{ 	ext {A} }& \underline{ 	ext {B} }  \ 	ext { Beta } &1.10&0.90\ 	ext {Constant growth rate  } &7.00\%&7.00\%\\end{array}  Beta Constant growth rate ​A​1.107.00%​B​0.907.00%​

Accepted Answer

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

Question 3

Sawchuck Consulting has been profitable for the last 5 years,but it has never paid a dividend.Management has indicated that it plans to pay a $0.25 dividend 3 years from today,then to increase it at a relatively rapid rate for 2 years,and then to increase it at a constant rate of 8.00% thereafter.Management's forecast of the future dividend stream,along with the forecasted growth rates,is shown below.Assuming a required return of 11.00%,what is your estimate of the stock's current value?

Accepted Answer

A)  $9.94
B)  $10.19
C)  $10.45
D)  $10.72
E)  $10.99F) C) and D)
G) A) and B)

Question 4

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

Question 5

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 6

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) B) and C)

Question 7

Connolly Co.'s expected year-end dividend is D1 = $1.60,its required return is rs = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years,i.e.,what is  P~7	ilde{\mathrm{P}}_{7}P~7​  ?

Accepted Answer

A)  $37.52
B)  $39.40
C)  $41.37
D)  $43.44
E)  $45.61 F) All of the above
G) A) and B)

Question 8

Based on the free cash flow valuation model,the value of Weidner Co.'s operations is $1,200 million.The company's balance sheet shows $80 million in accounts receivable,$60 million in inventory,and $100 million in short-term investments that are unrelated to operations.The balance sheet also shows $90 million in accounts payable,$120 million in notes payable,$300 million in long-term debt,$50 million in preferred stock,$180 million in retained earnings,and $800 million in total common equity.If Weidner has 30 million shares of stock outstanding,what is the best estimate of the stock's price per share?

Accepted Answer

A)  $24.90
B)  $27.67
C)  $30.43
D)  $33.48
E)  $36.82F) A) and C)
G) All of the above

Question 9

Burke Tires just paid a dividend of D0 = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

Accepted Answer

A)  $41.59
B)  $42.65
C)  $43.75
D)  $44.87
E)  $45.99F) B) and E)
G) A) and C)

Question 10

A company's free cash flow was just FCF0 = $1.50 million.The weighted average cost of capital is WACC = 10.1%,and the constant growth rate is g = 4.0%.What is the current value of operations?

Accepted Answer

A)  $23.11 million
B)  $23.70 million
C)  $24.31 million
D)  $24.93 million
E)  $25.57 millionF) A) and E)
G) C) and D)

Question 11

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 12

The preemptive right is important to shareholders because it

Accepted Answer

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

Question 13

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

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

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?  AB Price $25$40 Expected growth 7%9% Expected return 10%12%\begin{array} { l c c } &	ext {A}&	ext {B}\	ext { Price } & \$ 25 & \$ 40 \	ext { Expected growth } & 7 \% & 9 \% \	ext { Expected return } & 10 \% & 12 \%\end{array} Price  Expected growth  Expected return ​A$257%10%​B$409%12%​

Accepted Answer

A)  The two stocks could not be in equilibrium with the numbers given in the question.
B)  A's expected dividend is $0.50.
C)  B's expected dividend is $0.75.
D)  A's expected dividend is $0.75 and B's expected dividend is $1.20.
E)  The two stocks should have the same expected dividend. F) A) and C)
G) C) and D)

Question 16

$35.50 per share is the current price for Foster Farms' stock.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,rs,is 9.00%.What is the stock's expected price 3 years from today?

Accepted Answer

A)  $37.86
B)  $38.83
C)  $39.83
D)  $40.85
E)  $41.69F) B) and C)
G) A) and E)

Question 17

The free cash flows (in millions) shown below are forecast by Parker & Sons.If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2,what is the Year 0 value of operations,in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments) .

Accepted Answer

A)  $1,456
B)  $1,529
C)  $1,606
D)  $1,686
E)  $1,770F) C) and D)
G) A) and B)

Question 18

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs) is 11%,what is its current stock price?

Accepted Answer

A)  $30.57
B)  $31.52
C)  $32.49
D)  $33.50
E)  $34.50F) B) and E)
G) A) and D)

Question 19

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

Question 20

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

Exam 8: Basic Stock Valuation

Correct Answer
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A company's free cash flow was just FCF₀ = $1.50 million.The weighted average cost of capital is WACC = 10.1%,and the constant growth rate is g = 4.0%.What is the current value of operations?

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

Correct Answer
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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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Correct Answer
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$35.50 per share is the current price for Foster Farms' stock.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,r_s,is 9.00%.What is the stock's expected price 3 years from today?

Correct Answer
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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
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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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
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Connolly Co.'s expected year-end dividend is D₁ = $1.60,its required return is r_s = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years,i.e.,what is $\tilde{\mathrm{P}}_{7}$ ?

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
verified

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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Correct Answer
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Burke Tires just paid a dividend of D₀ = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

Correct Answer
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The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s) is 11%,what is its current stock price?

Correct Answer
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The preemptive right is important to shareholders because it

Correct Answer
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Exam 8: Basic Stock Valuation

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A company's free cash flow was just FCF0 = $1.50 million.The weighted average cost of capital is WACC = 10.1%,and the constant growth rate is g = 4.0%.What is the current value of operations?

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

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Correct AnswerverifiedShow Answer

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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Correct AnswerverifiedShow Answer

$35.50 per share is the current price for Foster Farms' stock.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,rs,is 9.00%.What is the stock's expected price 3 years from today?

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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.

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Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

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Connolly Co.'s expected year-end dividend is D1 = $1.60,its required return is rs = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years,i.e.,what is P~7\tilde{\mathrm{P}}_{7}P~7​ ?

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

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

Correct AnswerverifiedShow Answer

Burke Tires just paid a dividend of D0 = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

Correct AnswerverifiedShow Answer

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs) is 11%,what is its current stock price?

Correct AnswerverifiedShow Answer

The preemptive right is important to shareholders because it

Correct AnswerverifiedShow Answer

Correct Answer
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A company's free cash flow was just FCF₀ = $1.50 million.The weighted average cost of capital is WACC = 10.1%,and the constant growth rate is g = 4.0%.What is the current value of operations?

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Correct Answer
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$35.50 per share is the current price for Foster Farms' stock.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,r_s,is 9.00%.What is the stock's expected price 3 years from today?

Correct Answer
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Correct Answer
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Connolly Co.'s expected year-end dividend is D₁ = $1.60,its required return is r_s = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years,i.e.,what is $\tilde{\mathrm{P}}_{7}$ ?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Burke Tires just paid a dividend of D₀ = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

Correct Answer
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The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s) is 11%,what is its current stock price?

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Correct Answer
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