Finance 3000 Chapter 7

Which one of the following is least likely to account for an excess of market value over book value of equity?

Inaccurate depreciation methods

Which statement is correct?

It is much easier to judge whether relative stock prices are correct than to judge whether their absolute level is correct.

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.

Which of the following values treats the firm as a going concern?

Market value

Which one of the following is more likely to be responsible for a firm having a low PVGO?

Market value of equity is close to book value.

Under which of the following forms of market efficiency would stock prices always reflect fair value?

Strong-form efficiency

Which statement is correct?

The momentum factor refers to the tendency for stock price changes to persist for a while and then revert.

Which one 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.

An excess of market value over the book value of equity can be attributed to going concern value.

True

If investors believe a company will have the opportunity to make very profitable investments in the future, they will pay more for the company's stock today.

True

If security prices follow a random walk, then on any particular day the odds are that an increase or decrease in price is about equally likely.

True

If the market is efficient, stock prices should be expected to react only to new information.

True

Market efficiency implies that security prices impound new information quickly.

True

Market value, unlike book value and liquidation value, treats the firm as a going concern.

True

Securities with the same expected risk should offer the same expected rate of return.

True

A negative free cash flow for a business is always sign that it is not performing well.

False

Evidence that stock prices follow a random walk does not imply that there aren't predictable cycles in prices.

False

If stock prices follow a random walk, their prices bear no relation to the company's real activities.

False

If the stock prices follow a random walk, successive stock prices are not related.

False

Many professional investors attempt to beat the market by buying index funds.

False

Market efficiency implies that one could earn above-average returns by examining the history of a firm's stock price.

False

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

False

The dividend discount model should not be used to value stocks if the dividend does not grow.

False

The liquidation value of a firm is equal to the book value of the firm.

False

Which of the following is inconsistent with a firm that sells for very near book value?

High future earning power

Which of the following is least likely to contribute to going concern value?

High liquidation value

Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?

A firm with investment opportunities yielding 15%.

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

At least one of the stocks becomes temporarily mispriced.

Which statement is correct?

Bubbles can result when prices rise rapidly and investors join the game on the assumption that prices will continue to rise.

The dividend discount model states that the value of a stock is the present value of the dividends it will pay over the investor's horizon, plus the present value of the expected stock price at the end of that horizon.

True

The dividend discount model states that today's stock price equals the present value of all expected future dividends.

True

The dividend yield of a stock is much like the current yield of a bond. Both ignore prospective capital gains or losses.

True

For corporate financial managers an important lesson of market efficiency is:

Trust market prices unless you have a clear advantage that ensures the odds are in your favor.

Which statement is correct?

When there are repurchases, it is simpler to value a business by discounting the free cash flow.

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

Zero

If markets are efficient, when new information about a stock becomes available, the price will:

accurately and rapidly adjust to include this new information.

An analyst who relies on past cycles of stock pricing to make investment decisions is:

assuming that the market is not even weak-form efficient.

If the price of a stock falls on 4 consecutive days of trading, then stock prices:

can still be following a random walk.

If the general sentiment of investors is pessimistic, stock prices are more apt to:

decline.

The required return on an equity security is comprised of a:

dividend yield and a capital gains yield.

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.

Based on the random walk theory, if a stock's price decreased last week, then this week the price:

has an equal chance of going either up or down.

It is possible to ignore cash dividends that occur very far into the future when using a dividend discount model because those dividends:

have an insignificant present value.

Firms with valuable intangible assets are more likely to show a(n):

high going-concern value.

Other things equal, a firm's sustainable growth rate could increase as a result of:

increasing the plowback ratio.

A positive value for PVGO suggests that the firm has:

investment opportunities with superior returns.

Psychologists have observed that:

investors tend to place too much faith in their ability to spot mispriced stocks.

Which of these statements is correct? Free cash flow

is available to be paid out to investors as interest or dividends, or to repay debt or buy back stock.

Evidence that newly issued stocks tend to underperform the market over the following years:

is inconsistent with the semi-strong form of the efficient market hypothesis.

The sustainable growth rate represents the ____ rate at which a firm can grow:

maximum; while maintaining a constant debt-equity ratio.

The sustainable rate of growth:

must be moderate over the long-term even if it is high in the short-term.

If it proves possible to make abnormal profits based on information regarding past stock prices, then the market is:

not weak-form efficient.

If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock:

paid $.25 per share per quarter for the past year.

With respect to the notion that stock prices follow a random walk, many researchers have concluded that:

past stock price changes provide little useful information about future stock price changes.

In a valuation of a nonconstant dividend growth stock, the terminal value represents the:

present value of future dividends from that point on.

The semi-strong form of the efficient market hypothesis states that:

prices reflect all publicly available information.

Research indicates that the correlation coefficient between successive days' stock price changes is:

quite close to zero.

A firm's liquidation value is the amount:

realized from selling all assets and paying off all creditors.

The terminal value of a share of stock:

refers to the share value at the end of an investor's holding period.

The growth of mature companies is primarily funded by:

reinvesting company earnings.

When valuing stock with the dividend discount model, the present value of future dividends will:

remain constant regardless of the time horizon selected.

The statement that there are no free lunches on Wall Street suggests that:

security prices reflect all available information.

If a firm unexpectedly raises its dividend permanently and by a substantial amount, the firm's stock price:

should rise, given dividend discount models.

When new information becomes available in the market, evidence generally suggests that:

stock prices will adjust to the information rapidly.

When investors are not capable of making superior investment decisions on a consistent basis based on past prices or public or private information, the market is said to be:

strong-form efficient.

Market efficiency implies

that consistently superior performance is very difficult even for professional investors.

The expected return on a common stock is equal to:

the capital appreciation rate + dividend yield.

The value of common stock will likely decrease if:

the discount rate increases.

Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20th of the month and selling them on the last day of the month. If this is true, then:

the market violates even weak-form efficiency.

If no price change occurs in a stock on the day that it announces its next dividend, it can be assumed that:

the market was expecting this information.

Reinvesting earnings into a firm will not increase the stock price unless:

the return on the new investments exceeds the firm's required return.

Investors are willing to purchase stocks having high P/E ratios because:

they expect these shares to have greater growth opportunities.