Corporate Finance, 12e (Ross)
1) Which one of these applies to the dividend growth model of stock valuation?
A) The dividend must be for the same time period as the stock price.
B) The growth rate must be less than the discount rate.
C) The rate of growth must be positive.
D) The model cannot be applied if the growth rate is zero.
E) The dividend amount must be constant over time.
2) If a stock pays a constant annual dividend then the stock can be valued using the:
A) fixed coupon bond present value formula.
B) present value of an annuity due formula.
C) payout ratio formula.
D) present value of an ordinary annuity formula.
E) perpetuity present value formula.
3) In the formula, P3 = Dx/(R − g), the dividend is for period:
A) two.
B) five.
C) four.
D) three.
E) one.
4) The differential growth model of stock valuation:
A) makes allowance for one change in the discount rate.
B) uses DT + 1 as the dividend amount throughout the formula.
C) requires g2 to be less than the discount rate.
D) assumes the second growth rate will be zero.
E) assumes the first growth rate will be zero.
5) The constant dividend growth model:
A) is more complex than the differential growth model.
B) requires the growth period be limited to a set number of years.
C) is never used because firms rarely attempt to maintain steady dividend growth.
D) can be used to compute a stock price at any point in time.
E) most applies to stocks with differential growth rates.
6) The underlying assumption of the dividend growth model is that a stock is worth:
A) the same amount to every investor regardless of their desired rate of return.
B) the present value of the future income that the stock is expected to generate.
C) an amount computed as the next annual dividend divided by the market rate of return.
D) the same amount as any other stock that pays the same current dividend and has the same
required rate of return.
E) an amount computed as the next annual dividend divided by the required rate of return.
7) Assume you are using the dividend growth model to value stocks. If you expect the market
rate of return to increase across the board on all equity securities, then you should also expect
the:
A) market values of all stocks to increase.
B) market values of all stocks to remain constant as the dividend growth will offset the increase
in the market rate.
C) market values of all stocks to decrease.
D) stocks that do not pay dividends to decrease in price while the dividend-paying stocks
maintain a constant price.
E) dividend growth rates to increase to offset this change.
8) Latcher’s is a relatively new firm that is still in a period of rapid development. The company
plans on retaining all of its earnings for the next six years. Seven years from now, the company
projects paying an annual dividend of $.25 a share and then increasing that amount by 3 percent
annually thereafter. To value this stock as of today, you would most likely determine the value of
the stock ________ years from today before determining today’s value.
A) 4
B) 5
C) 6
D) 7
E) 8
9) Phillips Co. currently pays no dividend. The company is anticipating dividends of $.02, $.05,
$.10, $.20, and $.30 over the next 5 years, respectively. After that, the company anticipates
increasing the dividend by 3.5 percent annually. One common step in computing the value of this
stock today is to compute the value of:
A) P1.
B) P3.
C) P4.
D) P5.
E) P6.
10) Next year’s annual dividend divided by the current stock price is called the:
A) yield to maturity.
B) total yield.
C) dividend yield.
D) capital gains yield.
E) earnings yield.
11) The rate at which a stock’s price is expected to appreciate (or depreciate) is called the
________ yield.
A) current
B) total
C) dividend
D) capital gains
E) earnings
12) For a firm with a constant payout ratio, the dividend growth rate can be estimated as:
A) Payout ratio × Return on equity.
B) Return on assets × Retention ratio.
C) Return on equity × (1 + Retention ratio).
D) Payout ratio × Return on assets.
E) Return on retained earnings × Retention ratio.
13) The total return on a stock is equal to the:
A) dividend yield minus the capital gains yield.
B) dividend growth rate minus the dividend yield.
C) dividend yield plus the dividend growth rate.
D) growth rate of the dividends.
E) dividend divided by the sum of the dividend yield and capital gains yield.
14) A stock’s PE ratio is primarily affected by which three factors?
A) Accounting practices, opportunities, and the market rate of return
B) Dividend yield, capital gains yield, and opportunities
C) Market rate of return, risk, opportunities
D) Accounting practices, market rate of return, risk
E) Risk, opportunities, accounting practices
15) Which one of these factors generally has the greatest impact on a firm’s PE ratio?
A) Required rate of return
B) Current dividends
C) Future opportunities
D) The overall risk level of the current firm
E) Depreciation method used by the firm
16) The closing price of a stock is quoted at 32.08, with a PE of 21 and a net change of .36.
Based on this information, which one of the following statements is correct?
A) The closing price on the previous day was $.36 higher than today’s closing price.
B) A dealer will buy the stock at $32.08 and sell it at $32.44 a share.
C) The current earnings per share equal $32.08/21 + $.36.
D) The current stock price is equivalent to 21 years of the firm’s current earnings per share.
E) The earnings per share have increased by $.36 this year.
17) A forward PE is generally based on the projected:
A) average earnings for the next five years.
B) average earnings for the next three years.
C) earnings for the upcoming quarter.
D) earnings for the next year.
E) stock price in one year.
18) A stock that is considered to be low risk is most apt to have:
A) a low PE ratio.
B) unlimited growth.
C) a dividend yield of zero.
D) a high PE ratio.
E) a growth rate of zero.
19) Enterprise value equals the:
A) combined market value of debt and equity minus excess cash.
B) market value of equity minus the market value of debt plus excess cash.
C) market value of debt plus the book value of equity minus excess cash.
D) combined market value of debt and equity.
E) combined book value of debt and equity minus excess cash.
20) One advantage of the EV/EBITDA ratio over the PE ratio is the:
A) inclusion of depreciation charges.
B) increased reliance on leverage.
C) averaging of annual sales.
D) inclusion of all the firm’s cash reserves.
E) lessened impact of leverage on the ratio.
21) What amount of a firm’s cash should be included in the enterprise value?
A) Only the amount needed to run the business
B) None of the cash should be included
C) Somewhere between 25 and 50 percent at the user’s discretion
D) Only the amount necessary to maintain a constant EV/EBITDA ratio
E) The average cash balance over the past three years
22) The free cash flow model is most helpful for firms:
A) that have similar investment opportunities as other firms in their industry.
B) that pay steady dividends and have excess cash.
C) that are financially sound and thus pay constant, high dividends.
D) with external financing needs that are not paying dividends.
E) that are projected to grow at a constant, steady pace while increasing their dividends.
23) If the issuer of a stock receives the proceeds from a sale of that issuer’s stock, then the sale:
A) had to have occurred on the floor of an exchange.
B) was a secondary market transaction.
C) was transacted on the NYSE.
D) was conducted in the primary market.
E) had to have been a limit order.
24) Which one of these statements is correct?
A) Investors earn a return called a spread.
B) Dealers pay a fee, called the spread, to brokers.
C) Investors sell at the ask price.
D) Dealers buy at the bid price.
E) Brokers maintain an inventory of securities.
25) Supplemental liquidity providers (SLPs):
A) act as floor brokers.
B) only represent stock purchasers.
C) seek the best price for their customers.
D) do not operate on the floor of a stock exchange.
E) have been replaced by designated market makers.
26) A stop order to sell at $46 will be executed:
A) at a price of $46 at the end of the day on which the order was placed.
B) at $46 following the first trade with a price below $46.
C) as a market order once a trade occurs at a price of $46 or less.
D) immediately at a price of $46.
E) as a market order once a trade occurs at a price of $46 or higher.
27) A limit order to buy:
A) guarantees the quantity purchased but not the price.
B) guarantees both the purchase price and the order fulfillment.
C) is executed only if the purchase price is less than the limit amount.
D) guarantees the purchase price but not the order execution.
E) will be executed either at the limit price or at the end-of-day price.
28) A day order to sell at a limit of $32 will be:
A) executed at the next available price once a trade occurs at the limit price.
B) cancelled at the end of the day if not executed.
C) executed only if the purchase price is less than the limit amount.
D) executed at the end-of-day price if $32 has not been obtained.
E) transferred to a market order on the following day if not executed at the limit price.
29) NASDAQ:
A) has a single trading floor located in Chicago, Illinois.
B) has multiple trading floors.
C) is a designated market maker system.
D) has a multiple market maker system.
E) is closed to all electronic communications networks (ECNs).
30) You recently contacted a brokerage firm and purchased 100 shares of stock. The brokerage
firm acquired the shares for you by making a deal with a floor broker who represented one of the
stock issuer’s shareholders. Given this, you know your purchase:
A) was conducted in the secondary market.
B) occurred over-the-counter.
C) was for shares of a stock listed on NASDAQ.
D) occurred on an ECN.
E) involved the issuance of new shares.
31) Inside quotes on a stock are:
A) the prices available only to corporate insiders.
B) prices obtained only on the actual floor of an exchange.
C) prices available only to stock market employees.
D) the lowest asked quote and the highest bid quote.
E) prices paid that lie between yesterday’s closing price and today’s closing price.
32) Rosita’s announced that its next annual dividend will be $1.65 a share and all future
dividends will increase by 2.5 percent annually. What is the maximum amount you should pay to
purchase a share of this stock if you require a rate of return of 12 percent?
A) $13.75
B) $17.80
C) $15.46
D) $16.94
E) $17.37
33) How much are you willing to pay for one share of stock if the company just paid an annual
dividend of $1.03, the dividends increase by 3 percent annually, and you require a rate of return
of 15 percent?
A) $8.58
B) $9.49
C) $10.40
D) $8.84
E) $6.87
34) Upland Motors recently paid a per share dividend of $1.48. Dividends are expected to
increase by 2.5 percent annually. What is one share of this stock worth today if the appropriate
discount rate is 14 percent?
A) $12.87
B) $13.04
C) $14.16
D) $13.19
E) $12.25
35) MJ Enterprises stock traditionally provides an average rate of return of 11.6 percent. The
firm’s next annual dividend is projected at $2.40 with future increases of 3 percent per year.
What price should you pay for this stock if you are satisfied with the firm’s average rate of
return?
A) $28.74
B) $22.50
C) $27.91
D) $28.89
E) $21.31
36) Unique Stores common stock pays a constant annual dividend of $1.75 a share. What is the
value of this stock at a discount rate of 13.25 percent?
A) $12.50
B) $13.33
C) $13.21
D) $12.88
E) $14.18
37) Martin’s Yachts is expected to pay annual dividends of $1.40, $1.75, and $2.00 a share over
the next three years, respectively. After that, the dividend is expected to remain constant. What is
the current value per share at a discount rate of 14 percent?
A) $12.22
B) $13.57
C) $13.08
D) $12.82
E) $13.39
38) Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that
increases by 5 percent each year. The rate of return on this stock is 9 percent. What is the amount
of the last dividend paid?
A) $.77
B) $.80
C) $.84
D) $.87
E) $.88
39) The common stock of Energy Saver pays an annual dividend that is expected to increase by 4
percent annually. The stock commands a market rate of return of 12 percent and sells for $58.25
a share. What is the expected amount of the next dividend to be paid?
A) $4.87
B) $5.02
C) $5.10
D) $4.66
E) $4.33
40) The Reading Co. has adopted a policy of increasing the annual dividend on its common stock
at a constant rate of 3 percent annually. The last dividend it paid (T = 0) was $.90 a share. What
will be the company’s dividend six years from now?
A) $.90
B) $.93
C) $1.04
D) $1.07
E) $1.11
41) You have decided to purchase shares of GHC but need an expected 12 percent rate of return
to compensate for the perceived risk of such ownership. What is the maximum price you should
pay per share if the company pays a constant $2.70 annual dividend per share?
A) $23.04
B) $22.50
C) $32.67
D) $34.29
E) $21.59
42) T&P common stock sells for $23.43 a share at a market rate of return of 11.65 percent. The
company just paid its annual dividend of $1.20. What is the dividend growth rate?
A) 5.87 percent
B) 6.43 percent
C) 5.91 percent
D) 6.07 percent
E) 6.21 percent
43) S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next year.
The firm just paid a dividend of $2.00 a share and adheres to a constant rate of growth dividend
policy. What will one share of S&P common stock be worth ten years from now if the applicable
discount rate is 8 percent?
A) $71.16
B) $74.01
C) $76.97
D) $80.05
E) $83.25
44) The Merriweather Co. just announced that it will pay a dividend next year of $1.60. The
company will then increase its dividend by 10 percent per year for two years after which it will
maintain a constant 2 percent dividend growth rate. What is one share worth today at a required
rate of return of 14 percent?
A) $21.60
B) $15.17
C) $23.14
D) $23.95
E) $24.79
45) The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning
on increasing its annual dividend by 20 percent next year and then decreasing the growth rate to
a constant 5 percent per year. The company just paid its annual dividend in the amount of $1 per
share. What is the current value of a share if the required rate of return is 14 percent?
A) $13.28
B) $13.42
C) $13.33
D) $13.19
E) $13.24
46) New Corp. just paid a per share annual dividend of $1.50. The company is planning on
paying $1.62, $1.68, $1.75, and $1.80 a share over the next four years, respectively. After that
the dividend will be a constant $2.00 per share per year. What is the market price of this stock if
the market rate of return is 15 percent?
A) $6.00
B) $8.49
C) $12.48
D) $11.57
E) $9.09
47) Alpha Industries is going to pay annual dividends of $.35, $.50, and $.80 a share over the
next three years, respectively. After that, the dividend will be $1.25 per share indefinitely. What
is this stock worth today at a discount rate of 13.45 percent?
A) $6.20
B) $9.48
C) $10.88
D) $7.61
E) $5.06
48) City Movers announced its next annual dividend will be $.40 a share. The following
dividends will be $.60, and $.75 a share annually for the following two years, respectively. After
that, dividends are projected to increase by 3.5 percent per year. How much is one share of this
stock worth at a rate of return of 12 percent?
A) $8.45
B) $6.84
C) $7.87
D) $8.06
E) $7.03