Question 1

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 1.70,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)   $13.44
B)   $12.93
C)   $17.01
D)   $14.80
E)   $18.03F) All of the above
G) C) and D)

Question 2

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 D)
G) B) and D)

Question 3

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

Question 4

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?  ​

Accepted Answer

A)   These two stocks should have the same price.
B)   These two stocks must have the same dividend yield.
C)   These two stocks should have the same expected return.
D)   These two stocks must have the same expected capital gains yield.
E)   These two stocks must have the same expected year-end dividend.F) A) and E)
G) D) and E)

Question 5

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

Accepted Answer

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

Question 6

Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

Accepted Answer

A)   $30.77
B)   $32.92
C)   $38.15
D)   $23.38
E)   $27.38F) B) and D)
G) A) and E)

Question 7

You have been assigned the task of using the corporate,or free cash flow,model to estimate Petry Corporation's intrinsic value.The firm's WACC is 10.00%,its end-of-year free cash flow (FCF1) is expected to be $70.0 million,the FCFs are expected to grow at a constant rate of 5.00% a year in the future,the company has $200 million of long-term debt and preferred stock,and it has 30 million shares of common stock outstanding.What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

A)   $48.80
B)   $34.40
C)   $36.80
D)   $49.60
E)   $40.00F) D) and E)
G) All of the above

Question 8

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

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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 11

If D1 = $1.50,g (which is constant) = 2.1%,and P0 = $56,what is the stock's expected capital gains yield for the coming year?

Accepted Answer

A)   2.50%
B)   2.39%
C)   2.08%
D)   2.10%
E)   1.66%F) A) and E)
G) B) and C)

Question 12

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 13

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 14

Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $250 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)   $3,500
B)   $2,695
C)   $3,255
D)   $4,130
E)   $3,850F) A) and D)
G) A) and E)

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?  ​

Accepted Answer

A)   Stock A's expected dividend at t = 1 is only half that of Stock B.
B)   Stock A has a higher dividend yield than Stock B.
C)   Currently the two stocks have the same price,but over time Stock B's price will pass that of A.
D)   Since Stock A's growth rate is twice that of Stock B,Stock A's future dividends will always be twice as high as Stock B's.
E)   The two stocks should not sell at the same price.If their prices are equal,then a disequilibrium must exist.F) A) and B)
G) C) and D)

Question 16

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 B)
G) A) and E)

Question 17

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 18

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 C)
G) D) and E)

Question 19

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 20

Rebello's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal) rate of return?

Accepted Answer

A)   6.95%
B)   5.61%
C)   7.17%
D)   7.70%
E)   7.47%F) D) and E)
G) A) and C)

Exam 9: Stocks and Their Valuation

Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

Correct Answer
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Which of the following statements is CORRECT?

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.

Correct Answer
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Correct Answer
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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
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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
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If D₁ = $1.50,g (which is constant) = 2.1%,and P₀ = $56,what is the stock's expected capital gains yield for the coming year?

Correct Answer
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Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $250 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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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
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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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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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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?

Correct Answer
verified

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

Rebello's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal) rate of return?

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

Correct Answer
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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.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT?

Correct Answer
verified

Exam 9: Stocks and Their Valuation

Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

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

If D1 = $1.50,g (which is constant) = 2.1%,and P0 = $56,what is the stock's expected capital gains yield for the coming year?

Correct AnswerverifiedShow Answer

Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $250 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 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

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

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

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? ​

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

Rebello's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal) rate of return?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? ​

Correct AnswerverifiedShow Answer

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If D₁ = $1.50,g (which is constant) = 2.1%,and P₀ = $56,what is the stock's expected capital gains yield for the coming year?

Correct Answer
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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?

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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?

Correct Answer
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