Chapter 11 & 12: Equity Related Questions

If you expect dividends or FFF stock to grow at 4% per year and the next dividend is expected to be $3.00 and you require a 15% return on a stock that exhibits the same risk characteristics as this stock, what are you willing to pay for a share?

$27.27

Limit Order

Buy or sell at a specific price. The price triggers the order and it becomes a market order so if you submit a limit order to sell at $20 and the price drops to that limit, the broker tries to sell immediately. There is no guarantee that the price will be achieved, especially if the price is dropping fast.

Market Order

Buy or sell at the market price

If we hold a well-diversified portfolio and we accept the CAPM, the only risk that is relevant is A. Firm specific risk B. Market portfolio risk C. Total risk D. Diversifiable risk E. Non-diversifiable risk F. Alpha risk G. Portfolio Beta risk

G. Portfolio Beta risk

Fill or Kill

If you can't fill the order immediately, kill it

True or False: Systematic Risk represents the "contribution" to portfolio risk and, assuming that the typical investor is well diversified, is the only risk that is relevant to the investor.

True

True or False? The CAPM is essentially a utility based valuation model that posits a linear relationship between the returns of an asset and the market risk premium.

True

The market risk premium is the return on the market portfolio -the risk-free return. True or False?

True

If the expected return is 12% and the standard deviation of returns is 6%, what is the coefficient of variation?

0.5=standard deviation/expected value

What are the characteristics of the Arbitrage Pricing Model (APM)?

1. Arbitrage activities are prevalent in the financial markets 2. Multiple economic factors drive stock returns 3. There are multiple economic factors driving asset returns 4. The existence of arbitrage forces the pricing relationship 5. The multiple economic factors are not specified in the model 6. The model has "sensitivities" that relates the changes in economic factors to the asset returns.

What are the limitations of the Dividend Growth Model for stock valuation?

1. Dividend forecasts may differ 2. Assumed growth rate may be incorrect 3. Different investors may have different required rates of return 4. Some firms pay no dividends

What are the characteristics of CAPM?

1. Investors have a particular utility function 2. There is a linear relationship between a stock's returns and the market risk premium 3. Systematic risk is only relevant risk 4. Investors are well diversified 5. Markets are perfect 6. CAPM Beta is the best measure of total risk 7. A single economic factor determines the risk premium for asset returns. 8. Markets are efficient 9. It is a single factor model 10. The model has "sensitivities" that relate the movement of the economic factors to the returns on the assets

What are the advantages of the Arbitrage Pricing Model (APM)?

1. More general pricing model than the CAPM 2. It does not require a utility assumption 3. It only requires the existence of arbitrage activities for it to hold 4. The model can reflect the importance of industry effects on asset returns

What are the advantages of the Dividend Growth Model for stock valuation?

1. The valuation is based on an infinite stream of future dividends 2. The valuation is based on the cash flows to the investor 3. The 'k' can reflect the risk preferences of investors

You own 100,000 shares of a firm that has 1,000,000 shares outstanding. What is your pro rate share of ownership?

10%

What is the equity value of the firm? (formula)

= # of common shares outstanding* equity share price

The P/E approach is sometimes need to value a share of stock. Which of the following problems is associated with this approach? ( more than one may be true ) A. Different investors may have different forecasts of future earnings B. Not all firms fir neatly into a single industry category C. Few firms, if any, actually should have the industry average P/E ratio D. The approach ignores an intrinsic approach to valuation based on discounted cash flows

A. Different investors may have different forecasts of future earnings B. Not all firms fir neatly into a single industry category

Unsystematic risk is also known as ______. (more than one may be true A. Firm specific risk B. Total risk C. Beta risk D. Diversifiable risk E. Non-Diversifiable risk F. Systematic risk G. Alpha risk H. Portfolio risk

A. Firm specific risk D. Diversifiable risk

Total Risk can be measured by _______. A. Standard Deviation of returns on a firm's stock. B. Variance of returns on a firm's stock. C. Coefficient of Variation (CV) of the returns on a firm's stock D. Correlation coefficient of the returns on a firm's stock E. CAPM Beta of the firm's stock returns

A. Standard Deviation of returns on a firm's stock. B. Variance of returns on a firm's stock. C. Coefficient of Variation (CV) of the returns on a firm's stock

If the stock is trading at $40.00 and you require a return of 15% and the next dividend is expected to be $6, what is the annual growth rate in dividends?

About 15%

If the stock is trading at $41.67 and the next dividend is expected to be $5.00 and you require a 15% annual return, what is the expected annual growth rate of dividends into the future?

About 3%

What is the best and most general definition of risk? A. Possibility that returns will be greater than expected B. Possibility that returns will be different than expected C. Possibility that returns will be less than expected D. The CAPM Beta

B. Possibility that returns will be different than expected

If prices in the market reflect all historical price info, all public info, and all private info, the markets are said to be _____. A. Extra strong-form efficient B. Strong-form efficient C. Semi-strong efficient D. Weak-form efficient E. Not-efficient at all

B. Strong-form efficient

If the stock of BBB corp. has a beta of 1.2 and the stock of CCC corp. has a beta of 1.6 and we combine the two stocks into a portfolio with 50% invested in BBB and 50% invested in CCC, the beta of the portfolio will be ______? A. 1.2 B. 1.4 C. 1.6 D. 1.8

B. 1.4

Beta risk is also known as ______. (more than one may be true) A. Firm specific risk B. Market risk C. Total risk D. Diversifiable risk E. Non-Diversifiable risk F. Alpha risk G. Portfolio risk H. Systematic risk

B. Market risk E. Non-Diversifiable risk H. Systematic risk

Systematic risk is also known as _____. (more than one may be true) A. Firm specific risk B. Total risk C. Beta risk D. Diversifiable risk E. Non-Diversifiable risk F. Alpha risk G. Portfolio risk H. Unsystematic risk I. Market risk

C. Beta risk E. Non-Diversifiable risk I. Market risk

If we accept the CAPM and we assume that the investors are fully diversified, the only relevant risk is the ______. A. Firm specific risk B. Total risk C. Beta risk D. Diversifiable risk E. Non-diverifiable risk F. Alpha risk G. Diversifiable risk H. Unsystematic risk

C. Beta risk E. Non-diverifiable risk

Relative Total Risk can be measured by _______. A. Standard Deviation of returns on a firm's stock. B. Variance of returns on a firm's stock. C. Coefficient of Variation (CV) of the returns on a firm's stock D. Correlation coefficient of the returns on a firm's stock E. CAPM Beta of the firm's stock returns

C. Coefficient of Variation (CV) of the returns on a firm's stock

If prices in the market reflect all historical price info and all public info but not any private info, the markets are said to be _____. A. Extra strong-form efficient B. Strong-form efficient C. Semi-strong efficient D. Weak-form efficient E. Not-efficient at all

C. Semi-strong efficient

If prices in the market reflect all historical price info, but not all public o private info, the markets are said to be _______. A. Extra strong-form efficient B. Strong-form efficient C. Semi-strong efficient D. Weak-form efficient E. Not-efficient at all

D. Weak-form efficient

In the Gordon Model, "g" is defined as the ______. A. Steady state growth rate in dividends B. Constant dividend growth rate C. Growth rate in earnings D. Growth rate in the stock price E. A and B are both correct

E. A and B are both correct

Systematic Risk can be measured by ______. A. Standard Deviation of returns on a firm's stock. B. Variance of returns on a firm's stock. C. Coefficient of Variation (CV) of the returns on a firm's stock D. Correlation coefficient of the returns on a firm's stock E. CAPM Beta of the firm's stock returns

E. CAPM Beta of the firm's stock returns

If prices in the market DO NOT reflect all historical price info, all public info, and all private info, the markets are said to be _____. A. Extra strong-form efficient B. Strong-form efficient C. Semi-strong efficient D. Weak-form efficient E. Not-efficient at all

E. Not-efficient at all

If we are examining a private firm what is our measure of total risk? A. Standard Deviation of returns on a firm's stock. B. Variance of returns on a firm's stock. C. Coefficient of Variation (CV) of the returns on a firm's stock D. Correlation coefficient of the returns on a firm's stock E. CAPM Beta of the firm's stock returns F. Variability of the cash flows generated by the firm's operations

F. Variability of the cash flows generated by the firm's operations

The APM (arbitrage pricing model) is essentially a utility based valuation model that posits a linear relationship between the returns of an asset and the market risk premiums. True or False?

False

The constant dividend growth model is the same thing as the P/E valuation model True or False?

False

Good till cancelled order

OTC order (over the counter order)- order remains in effect until it is filled or broker is informed to cancel it

We have insider trading laws in this country, what does this suggest about the markets being strong form efficient?

Tests of strong-form efficiency are difficult because the insider info used is not publicly available and cannot be properly tested. Nevertheless, many forms of Insider Trading could easily result in abnormally high returns. Insiders are discouraged from using the info because it is illegal, not because markets are strong-form efficient.

If a stock's CAPM Beta=1, the stock is as risky as the market portfolio. True or False?

True

If you believe in technical analysis, then you think you can profit from historical price information (because you are looking for price patterns) True or False?

True

If you believe in technical analysis, then you think you can profit from historical price information (because you are looking for price patterns) and you believe that markets are not even weak-form. True or False?

True

If you think that markets are semi-strong efficient form, then you cannot make excess profits by using historical price info or public info. True or false?

True

If you think that markets are strong-form efficient, then you cannot make excess profits by using historical price info, public info, or private info. True or False?

True

If you think that markets are weak-form efficient, then you cannot make excess profits by using historical price info. True or false?

True

The APM (arbitrage pricing model) is essentially an arbitrage based valuation model that posits a relationship between the returns of an asset and the returns of a set of unknown economic factors. True or False?

True

The constant dividend growth model is the same thing as the Gordon Model. True or False?

True

What is the stock price formula?

Value of firm/ # of shares outstanding

"Pro Rata"

defined as "in proportion"

Day order

try to fill the order today, if you can't fill it by the end of the day, kill it.