Question 1

Gary Wells Inc. plans to issue perpetual preferred stock with an annual dividend of $6.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

Accepted Answer

A)   $92.69
B)   $95.06
C)   $97.50
D)   $100.00E) C) and D)
F) A) and B)

Question 2

The expected return on Northeast 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 1 year from now.E) All of the above
F) B) and C)

Question 3

Stocks X and Y sell at the same price. Stock X has a required return of 12% while Stock Y's required return is 10%. Stock X's dividend is expected to grow at a constant rate of 6% a year, while Stock Y's dividend is expected to grow at a constant rate of 4%. If the market is in equilibrium so that expected returns equal required returns, 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 Y has a higher capital gains yield.E) A) and B)
F) All of the above

Question 4

Assuming that markets are semistrong efficient, which of the following statements is correct?

Accepted Answer

A)   All stocks should have the same expected return.
B)   Past stock prices can be successfully used to forecast future stock returns.
C)   Investors' most likely returns are those predicted by the SML, but one should not expect to do any better unless he or she has either good luck or access to information that is not publicly available.
D)   Investors should expect to earn more than the returns that are predicted by the SML, because if they do not, they should not invest in the stock market.E) B) and D)
F) A) and B)

Question 5

If a firm's shareholders are given the preemptive right, this means that they have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident shareholders would have to seek a change in management through a proxy fight.

Accepted Answer

A) True 
 B)False

Question 6

The constant growth DCF model used to evaluate the prices of common shares is essentially the same as the model used to find the price of perpetual preferred stock or any other perpetuity.

Accepted Answer

A) True 
 B)False

Question 7

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00% per year. What was Goode's last dividend, D0?

Accepted Answer

A)   $0.95
B)   $1.05
C)   $1.16
D)   $1.27E) B) and C)
F) A) and B)

Question 8

Companies can issue different classes of common share. Which of the following statements concerning share classes is correct?

Accepted Answer

A)   All common shares, regardless of class, must have the same voting rights.
B)   All firms have several classes of common share.
C)   All common shares, regardless of class, must pay the same dividend.
D)   Some class or classes of common share may be entitled to more votes per share than other classes.E) B) and D)
F) A) and C)

Question 9

Which of the following statements is correct?

Accepted Answer

A)   The dividend yield on a constant growth stock must be equal to the stock's expected total return less its expected capital gains return.
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) None of the above
F) C) and D)

Question 10

The Isberg Company just paid a dividend of $0.80 per share, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.25, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price?

Accepted Answer

A)   $19.95
B)   $20.45
C)   $20.96
D)   $21.49E) C) and D)
F) A) and B)

Question 11

Why is the preemptive right important to shareholders?

Accepted Answer

A)   It allows managers to buy additional shares below the current market price.
B)   It results in higher dividends per share.
C)   It is included in every article of incorporation.
D)   It protects the current shareholders against a dilution of their ownership interests.E) B) and C)
F) None of the above

Question 12

The Wei Company's last dividend was $1.75. The dividend growth rate is expected to be constant at 1.50% for 2 years, after which dividends are expected to grow at a rate of 8.00% forever. Wei's required return (rs)  is 12.00%. What is Wei's current share price?

Accepted Answer

A)   $41.83
B)   $43.08
C)   $44.38
D)   $45.71E) A) and B)
F) A) and C)

Question 13

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is correct?

Accepted Answer

A)   The expected return on the stock is 5% a year.
B)   The stock's dividend yield is 5%.
C)   The stock's required return must be equal to or less than 5%.
D)   The stock's price 1 year from now is expected to be 5% above the current price.E) All of the above
F) A) and D)

Question 14

Assume that markets are semistrong efficient, but not strong-form efficient. Which of the following statements is correct?

Accepted Answer

A)   Each common stock has an expected return equal to that of the overall market.
B)   Investors may be able to earn returns above those predicted by the SML if they have access to information that has not been publicly revealed.
C)   Investors can expect to earn returns above those predicted by the SML if they have access to public information.
D)   Investors should expect to earn more than the returns that are predicted by the SML, because if they do not, they should not invest in the stock market.E) B) and C)
F) A) and D)

Question 15

According to the nonconstant growth model, 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 16

If D1 = $1.25, g (which is constant)  = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Accepted Answer

A)   7.73%
B)   7.93%
C)   8.13%
D)   8.34%E) B) and C)
F) A) and B)

Question 17

Stocks A and B have the same required return and the same price, $25. Stock A's dividend is expected to grow at a constant rate of 10% per year, while Stock B's dividend is expected to grow at a constant rate of 5% per year. 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 passes that of Stock 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) A) and B)
F) A) and C)

Question 18

Schnusenberg Corporation just paid a dividend of $0.65 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future. The company's beta is 0.95, the required return on the market is 10.50%, and the risk-free rate is 5.00%. What is the company's current stock price?

Accepted Answer

A)   $21.57
B)   $22.11
C)   $22.66
D)   $23.22E) A) and D)
F) All of the above

Question 19

What would a firm's required rate of return do as a result of an increase in a firm's expected growth rate?

Accepted Answer

A)   Increase
B)   Decrease
C)   remain constant
D)   possibly increase, possibly decrease, or possibly have no effectE) A) and B)
F) B) and C)

Question 20

Which statement regarding the efficient markets hypothesis is true?

Accepted Answer

A)   If the stock market is weak-form efficient, then one cannot outperform the market even if he or she has private information.
B)   If the stock market is semistrong-form efficient, then the expected return on stocks and bonds must be the same.
C)   If the stock market is strong-form efficient, then high beta stocks must have the same expected return as low beta stocks.
D)   Even though the Efficient Markets Hypothesis (EMH)  assumes that markets behave as if all investors were rational, under the EMH it is still possible to have some irrational investors in a rational market.E) C) and D)
F) A) and C)

Exam 8: Stocks, Stock Valuation, and Stock Market Equilibrium

Which statement regarding the efficient markets hypothesis is true?

Correct Answer
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If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is correct?

Correct Answer
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Correct Answer
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Gary Wells Inc. plans to issue perpetual preferred stock with an annual dividend of $6.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

Correct Answer
verified

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00% per year. What was Goode's last dividend, D₀?

Correct Answer
verified

If D₁ = $1.25, g (which is constant) = 5.5%, and P₀ = $44, what is the stock's expected total return for the coming year?

Correct Answer
verified

The expected return on Northeast 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
verified

Companies can issue different classes of common share. Which of the following statements concerning share classes is correct?

Correct Answer
verified

Correct Answer
verified

Assuming that markets are semistrong efficient, which of the following statements is correct?

Correct Answer
verified

Stocks A and B have the same required return and the same price, $25. Stock A's dividend is expected to grow at a constant rate of 10% per year, while Stock B's dividend is expected to grow at a constant rate of 5% per year. Which of the following statements is correct?

Correct Answer
verified

Assume that markets are semistrong efficient, but not strong-form efficient. Which of the following statements is correct?

Correct Answer
verified

If a firm's shareholders are given the preemptive right, this means that they have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident shareholders would have to seek a change in management through a proxy fight.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

The Wei Company's last dividend was $1.75. The dividend growth rate is expected to be constant at 1.50% for 2 years, after which dividends are expected to grow at a rate of 8.00% forever. Wei's required return (r_s) is 12.00%. What is Wei's current share price?

Correct Answer
verified

According to the nonconstant growth model, 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
verified

Why is the preemptive right important to shareholders?

Correct Answer
verified

What would a firm's required rate of return do as a result of an increase in a firm's expected growth rate?

Correct Answer
verified

The constant growth DCF model used to evaluate the prices of common shares is essentially the same as the model used to find the price of perpetual preferred stock or any other perpetuity.

Correct Answer
verified

The Isberg Company just paid a dividend of $0.80 per share, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.25, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price?

Correct Answer
verified

Exam 8: Stocks, Stock Valuation, and Stock Market Equilibrium

Which statement regarding the efficient markets hypothesis is true?

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Gary Wells Inc. plans to issue perpetual preferred stock with an annual dividend of $6.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

Correct AnswerverifiedShow Answer

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00% per year. What was Goode's last dividend, D0?

Correct AnswerverifiedShow Answer

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Correct AnswerverifiedShow Answer

The expected return on Northeast 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

Companies can issue different classes of common share. Which of the following statements concerning share classes is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assuming that markets are semistrong efficient, which of the following statements is correct?

Correct AnswerverifiedShow Answer

Stocks A and B have the same required return and the same price, $25. Stock A's dividend is expected to grow at a constant rate of 10% per year, while Stock B's dividend is expected to grow at a constant rate of 5% per year. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Assume that markets are semistrong efficient, but not strong-form efficient. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

If a firm's shareholders are given the preemptive right, this means that they have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident shareholders would have to seek a change in management through a proxy fight.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

The Wei Company's last dividend was $1.75. The dividend growth rate is expected to be constant at 1.50% for 2 years, after which dividends are expected to grow at a rate of 8.00% forever. Wei's required return (rs) is 12.00%. What is Wei's current share price?

Correct AnswerverifiedShow Answer

According to the nonconstant growth model, 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

Why is the preemptive right important to shareholders?

Correct AnswerverifiedShow Answer

What would a firm's required rate of return do as a result of an increase in a firm's expected growth rate?

Correct AnswerverifiedShow Answer

The constant growth DCF model used to evaluate the prices of common shares is essentially the same as the model used to find the price of perpetual preferred stock or any other perpetuity.

Correct AnswerverifiedShow Answer

The Isberg Company just paid a dividend of $0.80 per share, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.25, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00% per year. What was Goode's last dividend, D₀?

Correct Answer
verified

If D₁ = $1.25, g (which is constant) = 5.5%, and P₀ = $44, what is the stock's expected total return for the coming year?

Correct Answer
verified

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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Correct Answer
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Correct Answer
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Correct Answer
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The Wei Company's last dividend was $1.75. The dividend growth rate is expected to be constant at 1.50% for 2 years, after which dividends are expected to grow at a rate of 8.00% forever. Wei's required return (r_s) is 12.00%. What is Wei's current share price?

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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Correct Answer
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