Question 1

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 C)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.
B)   The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.
C)   The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis)  new issues of the firm's common stock.
D)   The stock valuation model, P0 = D1/(rs - g) , cannot be used for firms that have negative growth rates.
E)   The stock valuation model, P0 = D1/(rs - g) , can be used only for firms whose growth rates exceed their required returns.F) None of the above
G) D) and E)

Question 3

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 4

If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Accepted Answer

A) True 
 B)False

Question 5

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Accepted Answer

A)   the expected future return must be less than the most recent past realized return.
B)   The past realized return must be equal to the expected return during the same period.
C)   the required return must equal the realized return in all periods.
D)   the expected return must be equal to both the required future return and the past realized return.
E)   the expected future returns must be equal to the required return.F) C) and D)
G) B) and D)

Question 6

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 Y pays a higher dividend per share than Stock X.
B)   Stock X pays a higher dividend per share than Stock Y.
C)   One year from now, Stock X should have the higher price.
D)   Stock Y has a lower expected growth rate than Stock X.
E)   Stock Y has the higher expected capital gains yield.F) B) and D)
G) A) and B)

Question 7

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 B)
G) A) and C)

Question 8

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

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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

Question 11

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Accepted Answer

A)   $104.27
B)   $106.95
C)   $109.69
D)   $112.50
E)   $115.38F) D) and E)
G) B) and C)

Question 12

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 C)
G) A) and B)

Question 13

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

Question 14

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Accepted Answer

A) True 
 B)False

Question 15

Huang Company's last dividend 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) All of the above
G) A) and C)

Question 16

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

Question 17

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

Question 18

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

Question 19

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?

Accepted Answer

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

Question 20

If D0 = $2.25, g (which is constant)  = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)   4.42%
B)   4.66%
C)   4.89%
D)   5.13%
E)   5.39%F) A) and B)
G) B) and C)

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

Which of the following statements is CORRECT?

Correct Answer
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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.

Correct Answer
verified

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Correct Answer
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If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Correct Answer
verified

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

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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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
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

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

Correct Answer
verified

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Correct Answer
verified

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
verified

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

Correct Answer
verified

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
verified

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

Correct Answer
verified

If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Correct Answer
verified

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
verified

Huang Company's last dividend 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 Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Correct AnswerverifiedShow Answer

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Correct AnswerverifiedShow Answer

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

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

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

Correct AnswerverifiedShow Answer

Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

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 required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

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

Huang Company's last dividend 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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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