Finance: Final Exam - Chapter 9

Which of the following statements is NOT true about the general dividend valuation model? A. The model does not assume any specific pattern for future dividends, such as a constant growth rate B. The model calls for forecasting an infinite number of dividends for a stock C. The price of a share of stock is the present value of all expected future dividends D. It makes a specific assumption about when the share of stock is going to be sold in the future

D.

Which of the following steps is necessary when computing the value of a common stock? A. Multiplying each cash flow by the year in which it is expected to be received B. Dividing each cash flow by the year in which it is expected to be received C. Estimating the coupon payments D. Determining the required rate of return based on the riskiness of the cash flows

D.

Name the three dividend growth patterns

Supernormal, constant, zero

A method used to value no-dividend, rapid-growing stocks

Valuation multiples

What is the HPR formula including dividend yield?

(D1/P0) + ((P1-P0)/P0)

Growth stocks usually do not pay dividends. Therefore the stock value increases because the firms: A. Reinvests earnings to provide dividends in the future B. Increase market share C. Holds large amounts of cash D. Pay interest to bondholders

A.

Which of the following is a simplifying assumption that is made when applying the dividend discount model to common stock valuation? A. Dividend growth rate is not equal to the required rate of return B. Dividends rate grow lesser than 0 C. Dividends vary each year D. Dividends are constant till the tenure of the firm

A.

Which of the following is the most typical example of a zero-growth dividend stock? A. The preferred stock of a utility company B. The common stock of a firm in the health care industry C. The common stock of a firm in the biotechnology industry D. The common stock of a firm in the information technology industry

A.

Valuing a bond is ___ than valuing a common stock. A. Easier B. Harder

A. Easier

The constant growth dividend model would be useful to determine the value of all, but which of the following firms? A. A firm whose earnings and dividends are growing at a fairly steady rate B. A firm whose expected sales, profits, and dividends are flat C. A firm whose sales, profits, and dividends are growing at an annual average compound rate of 5 percent D. A firm whose earnings and dividends are declining at a fairly steady rate

B.

A preferred stock without maturity can be priced as a perpetuity. A. True B. False

A. True

Stock price can be estimated as the present value of all expected future dividends. A. True B. False

A. True

Stock prices should not depend on how long an investor decides to hold the stock. A. True B. False

A. True

HPR is an ___-fact measure

After

A preferred stock without maturity can't be priced as a perpetuity. A. True B. False

B. False

Stock price can be estimated as the present value of some expected future dividends. A. True B. False

B. False

Stock prices should depend on how long an investor decides to hold the stock. A. True B. False

B. False

Valuing a common stock is ___ than valuing a bond. A. Easier B. Harder

B. Harder

Which of the following are the three simplifying assumptions that cover most stock growth patterns? A. Dividends remain constant over time, dividends grow at a constant rate, and dividends are equal to zero B. Dividends have a zero-growth rate, dividends grow at a varying rate, and dividends are equal to zero C. Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern D. None of the above

C.

Which of the following statements about preferred stock is false? A. Preferred stock typically pays a fixed dividend B. Preferred stock has a lower-priority claim on the firm's assets than the firm's creditors in the event of default C. Failure to pay dividends on preferred stocks will result in a default D. Preferred stock has a higher-priority claim on the firm's assets than the common stock

C.

___ stocks are generally viewed as perpetual because they do not have maturity dates

Common

Name the stock being described... -Voting right -May be separated into classes with unequal voting rights -Residual claims -Often no par value -Pre-emptive rights

Common stock

This dividend growth pattern assumes cash dividends increase at the rate from one period to the next forever, which is a reasonable assumption for mature companies with a history of stable growth

Constant

What is the dividend yield formula?

D1/P0

___ stocks have maturity dates

Preferred

Name the stock being described... -No voting right -With par value and dividend yield as part of the par -May be cumulative -Par value -Some with callable or convertible provisions

Preferred stock

This dividend growth pattern assumes the divided is constant

Zero