FIN 3100 Chapter 9 Quiz

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $40.00, what is the stock's expected total return for the coming year?

8.13%

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

1.05 Price - 25.00 Required - 11.50% Growth Rate- 7% (Price*(Required-Growth Rate))-Growth Rate (25*.045)-.07 = 1.055

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

17.57 Div*(1+Growth) = Year 1 1*1.054 = 1.054 Price = Div Year 1/(Required - Growth) =1.054/(11.4%-5.4%) = 17.57

If D1 = $1.50, g (which is constant) = 2.1%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

2.1%

You must estimate the intrinsic value of Noe Technologies' stock. The end-of-year free cash flow (FCF1) is expected to be $27.50 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The company's WACC is 10.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 15.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?

52.78 FCF/(WACC - Growth) = 27.5/(10-7) = 916.67 Less Debt: 125 Equity = 791.67 Intrinsic value per share = 791.67/15 = $52.78

The corporate valuation model can be used only when a company doesn't pay dividends.

F

The corporate valuation model cannot be used unless a company pays dividends.

F

From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.

T

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

T

Which of the following statements is CORRECT? a. If a stock has a required rate of return rs = 12%, and if 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 constant growth model takes into consideration the capital gains investors expect to earn on a stock. c. Two firms with the same expected dividend and growth rate must also have the same stock price. d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. e. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.

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

Which of the following statements is CORRECT? a. The stock valuation model, P0 = D1/(rs − g), can be used only for firms whose growth rates exceed their required return. b. The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. c. If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights. d. The stock valuation model, P0 = D1/(rs − g), cannot be used for firms that have negative growth rates. e. The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.

The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Beta 1.10 0.90 Constant growth rate 7.00% 7.00%

a. Stock A must have a higher dividend yield than Stock B.

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

the stock is a good buy