Business policy

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

The company's expected stock price at the beginning of next year is $9.50.

Which of the following statements is CORRECT? a. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. b. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. c. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. d. The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period. e. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.

b. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.

Which of the following statements is CORRECT, assuming stocks are in equilibrium? a. Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well. b. The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield. 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. A stock's dividend yield can never exceed its expected growth rate.

b. The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.

Which of the following statements is CORRECT? a. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. b. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. c. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. d. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

b. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

Which of the following statements is CORRECT? a. The use of debt financing will tend to lower the basic earning power ratio, other things held constant. b. If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE. c. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure. d. All else equal, increasing the debt ratio will increase the ROA. e. The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm's ability to pay current interest is affected by taxes.

c. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? a. Company HD has more net income. b. Company HD has a higher ROA. c. Company HD pays less in taxes. d. Company HD has a lower equity multiplier. e. Company HD has a higher times-interest-earned (TIE) ratio.

c. Company HD pays less in taxes.

Which of the following is generally regarded by academics as being the best single method for evaluating capital budgeting projects? a. Payback method b. Modified internal rate of return (MIRR) method c. Net present value (NPV) method d. Discounted payback method e. Internal rate of return (IRR) method

c. Net present value (NPV) method

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Stock A Market price $25Required return 10%Expected growth 7% Stock B Market price $40Required return 12%Expected growth 9%

c. These two stocks must have the same dividend yield.

Which of the following statements is CORRECT? a. To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital. b. To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital. c. To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital. d. To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital. e. The corporate valuation model requires the assumption of a constant growth rate in all years.

c. To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.