Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 7 Stock Valuation
7.1 Stock Basics
1) The ownership in a corporation is divided into shares of stock, which carry rights to a
share in the proits of the irm through future dividend payments.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2) What are dividend payments?
A) payments made to a company by investors for a share of the ownership of that company
B) incremental increases in the value of the stock held by an investor due to rises in share
price
C) the diference between the original cost price of a share and the price an investor
receives when that share is sold
D) a share of the proits paid to each shareholder on the basis of the number of shares they
hold
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
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3)
The above screen shot from Google Finance shows basic stock information for PepsiCo. If
you owned of PepsiCo for the period shown, how much would you have earned in
dividend payments?
A) $480.00
B) $658.44
C) $584.80
D) $688.00
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2
Use the igure for the question(s) below.
4) The above screen shot from Google Finance shows the basic stock information for
Logitech International SA (USA). What is Logitech International SA (USA)’s ticker symbol?
A) LIS
B) LOGITECH
C) LOG
D) LOGI
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
5) The above screen shot from Google Finance shows the basic stock information for
Logitech International SA (USA) after the close of business on August 22, 2008. What is the
diference between the opening and closing price of the stock on this date?
A) $0.49
B) $0.27
C) $0.24
D) $0.03
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4
Use the igure for the question(s) below.
6) The above screen shot from Google Finance shows the basic stock information for Kraft
Foods Inc. after the close of the stock market on May 30, 2008. What is the highest that the
stock has traded at in the last 12 months?
A) $32.44
B) $32.48
C) $32.99
D) $35.29
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5
Use the igure for the question(s) below.
7) The above screen shot above from Google Finance shows the price history of Progenics,
a pharmaceutical company. In the time period shown, Progenics released information that
an intravenously-administered formulation of their leading product had failed in a Phase III
clinical trial. In which of the months shown in the price history is this most likely to have
occurred?
A) February 2008
B) March 2008
C) April 2008
D) May 2008
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
8) What role do dividends play in stock investing?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised
6
7.2 The Mechanics of Stock Trades
1) A loor broker is a person at the NASDAQ with a trading license who represents orders
on the loor.
AACSB Objective: Analytic Skills
Author: WC
Question Status: Revised
2) You placed an order to purchase stock where you speciied the maximum price you were
willing to pay. This type of order is known as a ________.
A) maximum order
B) limit order
C) loor order
D) market order
AACSB Objective: Analytic Skills
Author: WC
Question Status: Revised
3) A “round lot” consists of how many shares?
A) 1
B) 10
C) 100
D) 1,000
AACSB Objective: Analytic Skills
Author: WC
Question Status: Revised
7.3 The Dividend-Discount Model
1) The Valuation Principle states that the value of a stock is equal to the present value (PV)
of both the dividends and future sale price of that stock which the investor will receive.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
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2) Owen Inc. has a current stock price of $15.00 and is expected to pay a $0.80 dividend in
one year. If Owen’s equity cost of capital is 12%, what price would its stock be expected to
sell for immediately after it pays the dividend?
A) $11.20
B) $12.80
C) $16.80
D) $16.00
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Which of the following will be a source of cash lows for a shareholder of a certain stock?
I. Sale of the shares at a future date
II. The irm in which the shares are held paying out cash to shareholders in the form of
dividends
III. The irm in which the shares are held increasing the total number of shares outstanding
through a stock split
A) I only
B) II only
C) I and II
D) II and III
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) Coolibah Holdings is expected to pay dividends of $1.20 every six months for the next
three years. If the current price of Coolibah stock is $22.60, and Coolibah’s equity cost of
capital is 18%, what price would you expect Coolibah’s stock to sell for at the end of three
years?
A) $28.87
B) $31.76
C) $33.20
D) $34.64
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
5) Matilda Industries pays a dividend of $2.10 per share and is expected to pay this amount
indeinitely. If Matilda’s equity cost of capital is 9%, which of the following would be closest
to Matilda’s stock price?
A) $14.00
B) $18.66
C) $23.33
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D) $29.16
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
6) Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15
in one year’s time, immediately after it pays a dividend of $0.28. Which of the following is
closest to Jumbuck Exploration’s equity cost of capital?
A) 7.17%
B) 8.60%
C) 14.33%
D) 17.91%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has
paid a dividend of $1.50. What is the capital gain rate for this transaction?
A) 3.48%
B) 8.70%
C) 13.91%
D) 17.39%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
9
8) Credenza Industries is expected to pay a dividend of $1.70 at the end of the coming year.
It is expected to sell for $62 at the end of the year. If its equity cost of capital is 9%, what is
the expected capital gain from the sale of this stock at the end of the coming year?
A) $3.56
B) $56.88
C) $5.12
D) $58.44
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
9) The Busby Corporation had a share price at the start of the year of $26.10, paid a
dividend of $0.59 at the end of the year, and had a share price of $29.50 at the end of the
year. Which of the following is closest to the rate of return of investments in companies
with equal risk to The Busby Corporation for this period?
A) 14%
B) 13%
C) 12%
D) 15%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
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