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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) 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) A) and C)

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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?


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) The stock's expected price 10 years from now is $100.00.

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

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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?


A) $40.17
B) $41.20
C) $42.26
D) $43.34
E) $44.46

F) A) and D)
G) A) and E)

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Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1 = -$10 million, but it expects positive numbers thereafter, with FCF2 = $25 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14.0%, what is the firm's total corporate value, in millions?


A) $200.00
B) $210.53
C) $221.05
D) $232.11
E) $243.71

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

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Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus 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?


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

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

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The corporate valuation model can be used only when a company doesn't pay dividends.

A) True
B) False

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Based on the corporate valuation model, Wang Inc.'s total corporate value is $750 million. Its balance sheet shows $100 million notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital) , and $160 million of retained earnings. What is the best estimate for the firm's value of equity, in millions?


A) $386
B) $406
C) $428
D) $450
E) $473

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

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Based on the corporate valuation model, the total corporate value of Chen Lin Inc. is $900 million. Its balance sheet shows $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of its stock price per share?


A) $22.03
B) $24.48
C) $27.20
D) $29.92
E) $32.91

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

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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?


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

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

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


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

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Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $65.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value (in millions) at t = 5?


A) $1,025
B) $1,079
C) $1,136
D) $1,196
E) $1,259

F) None of the above
G) B) and E)

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?


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) Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.

F) B) and C)
G) All of the above

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?


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

F) B) and D)
G) None of the above

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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?


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

Correct Answer

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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.

A) True
B) False

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A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.

A) True
B) False

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Which of the following statements is CORRECT?


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

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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.

A) True
B) False

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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?


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 E)
G) All of the above

Correct Answer

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Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?


A) All common stocks fall into one of three classes: A, B, and C.
B) All common stocks, regardless of class, must have the same voting rights.
C) All firms have several classes of common stock.
D) All common stock, regardless of class, must pay the same dividend.
E) Some class or classes of common stock are entitled to more votes per share than other classes.

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

Correct Answer

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