Prin of Finance Test 3

An investor holds a stock for one year. She then receives a dividend of $10 and sells the stock for $120. If her return was 16%, at what price did she buy the stock?

$112.07

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $80.00 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

$3.40

ABC common stock is expected to have extraordinary growth in earnings and dividends of 20% per year for 2 years, after which the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the approximate current share price?

$37.39

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return id rs= 10.5%, and the expected constant growth rate is g= 8.6%. What is the stock's current price?

$39.47

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate 3.50% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected preice 5 years from now?

$41.87

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $250,000, and FCF is expected to grow at a constant rate of 6.5%. Assume the firm has zero non-operating assets. If the company's weighted average cost of capital is 11.5%, then what is the firm's total corporate value?

$5,000,000

A firm has 120,000 shares per stock outstanding, a sustainable rate of growth of 3.8%, and $648,200 in next year's free cash flow. What value would you place on a share of this firm's stock if you require a 14% rate of return?

$52.96

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 stock sell?

$61.54

Bae Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation?

0.42

Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a −18% return. What is the firm's expected rate of return?

10.50%

If D0= $2.25, g (which is constant)= 3.5%, and P0= $36, then what is the stock's expected total return for the coming year?

4.48%

What constant-growth rate in dividends is expected for a stock valued at $32.40 if next year's dividend is forecast at $2.20 and the appropriate discount rate us 13.6%?

6.81%

If D1= $1.25, g (which is constant)= 5.5%, and P0= $36, then what is the stock's expected total return for the coming year?

8.97%

The benefits of portfolio diversification are highest when the individual securities within the portfolio have returns that:

Are largely uncorrelated with the rest of the portfolio

One common reason for reporting standard deviations rather than variances is that standard deviations:

Are stated in understandable percentages

Which one of the following security classes has the highest standard deviation of returns?

Common stocks

Investment risk can be described as the:

Dispersion of possible returns

The required return on an equity security is comprised of a

Dividend yield and a capital gains yield

Individual stocks are:

Exposed to differing amounts of market risk

If the liquidation value of a corporation exceeds the market value of the equity, then the

Firm has no value as a going concern

For a firm that repurchases its stock, firm value is most easily estimated by discounting _______________

Free cash flows

It is possible to ignore cash dividends that occur very far into the future because those dividends:

Have an insignificant present value

A good way to reduce macro risk in a stock portfolio is to invest in stocks that:

Have low exposure to business cycles

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?

If one stock has a higher dividend yield, then it must also have a lower dividend growth rate

Stock X has a beta of .6, while Stock Y has a beta of 1.4. Which of the following statements is CORRECT?

If the market risk premium declines but expected inflation is unchanged, the required return on both stocks will decrease, but the decrease will be greater for Stock Y

Which of the following is true for a firm having a stock price of $42. an expected dividend of $3, and a sustainable growth rate of 8%?

It has a required return of 15.14%

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

Its stock price will remain constant

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

Possibly increase, possibly decrease, or possibly remain canstant

Which of the following statements is CORRECT?

Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock. As a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock

Which of the following statements is CORRECT?

The constant growth model takes into consideration the capital gains investors expect to earn on a stock

Which of the following statements is NOT CORRECT?

The corporate valuation model discounts free cash flows by the required return on equity

What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?

The individual stock's standard deviation will be higher

Which of the following situations is most likely to occur today for a stock that went down in price yesterday?

The stock has no predictable price-change pattern

The idea that investors on average have earned a higher return from common stocks than from Treasury bills supports the view that:

There is a relationship between risk and return

What is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation?

Zero

Market efficiency implies:

that consistently superior performance is very difficult even for professional investors