Corporate finance summer Ch. 8,13,14
Which of the following statements best describes the principle of diversification?
Spreading an investment across many diverse assets will eliminate some of the total risk.
A forward PE is based on:
estimated future earnings.
Which one of the following represents the capital gains yield as used in the dividend growth model?
g
Assume a firm has a debt-equity ratio of .36. The firm's cost of equity:
is affected by both a change in the firm's beta and the firm's projected rate of growth.
Given a well-diversified stock portfolio, the variance of the portfolio:
may be less than the variance of the least risky stock in the portfolio.
Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?
A decrease in the firm's beta
Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?
A decrease in the risk-free rate
Of the options listed below, which is the best measure of systematic risk?
Beta
Which one of the following statements is accurate?
Eliminating unsystematic risk is the responsibility of the individual investor.
Which one of the following applies to the dividend growth model?
Even if the dividend amount and growth rate remain constant, the value of a stock can vary.
Which of the following statements are accurate? I. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.
I and III only
Which of the following statements regarding the cost of preferred stock is accurate?
It equals the dividend yield.
Which of the following statements regarding a firm's pretax cost of debt is accurate?
It is based on the current yield to maturity of the company's outstanding bonds.
Which of the following statements regarding the weighted average cost of capital is accurate?
It is the return investors require on the total assets of the firm.
Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity?
The simplicity of the model.
Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:
a decrease in all stock values.
Read Corporation currently pays an annual dividend of $1.46 per share and plans on increasing that amount by 2.75 percent annually. Cho, Incorporated, currently pays an annual dividend of $1.42 per share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Cho has a higher ________ than the stock of Read.
capital gains yield
Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:
cost of equity
The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:
grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):
portfolio weight
The dividend growth model:
requires the growth rate to be less than the required return.
According to the ________, the expected return on a risky asset depends only on that asset's nondiversifiable risk.
systematic risk principle
The expected return of a stock, based on the likelihood of various economic outcomes, equals the:
weighted average of the returns for each economic state.
Supernormal growth is a growth rate that:
is unsustainable over the long term.
Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?
Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter
Assume a portfolio contains stocks of 25 different companies, and the weights of each are unequal. Also assume the various potential economic states have unequal likelihoods of occurring. Which one of the following statements is accurate?
Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.
Which of the following statements is true of a portfolio's standard deviation?
It can be less than the standard deviation of the least risky security in the portfolio.
When using economic probabilities to compute the expected return on a stock, the result is:
a mathematical expectation based on a weighted average and not a guaranteed outcome.
Of the options listed below, which are examples of diversifiable risk? I. Wildfires damage an entire town II. The federal government imposes a $1,000 fee on all business entities III. Payroll taxes are increased nationally IV. All software providers are required to improve their privacy standards
I and IV only
An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so?
Reducing the number of stocks held in her stock portfolio
A decrease in which of the following will increase the current value of a stock according to the dividend growth model?
discount rate
When using the two-stage dividend growth model,:
g1 can be greater than R.
While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:
expected return
The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.
next year's
The majority of the diversifiable risk in a portfolio can be eliminated by owning as few as ________ stocks.
10
Which one of following is the rate at which a stock's price is expected to appreciate?
Capital gains yield
What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?
Constant growth model
Assume a firm employs debt in its capital structure. Which of the following statements is accurate?
The WACC would most likely decrease if the firm replaced its preferred stock with debt.
Reyes has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?
The stock has a negative capital gains yield.
When utilizing the capital asset pricing model approach to value equity, the outcome:
assumes the reward-to-risk ratio is constant.
Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:
cost of debt
A firm's aftertax cost of debt will increase if there is a(n):
decrease in the company's tax rate.
Assume Barnes' Boots has a debt-equity ratio of .52. The firm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm's estimated cost of equity:
is dependent upon a reliable estimate of the market risk premium.
Assume a firm has a debt-equity ratio of .48. The firm's cost of equity is:
directly related to the risk level of the firm.
When determining a firm's weighted average cost of capital, the item with the least amount of impact is the:
standard deviation of the company's common stock.
