Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
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 difference between the original cost price of a share and the price an investor receives when that
share is sold
D) a part share of the profits or earnings of a company paid to each shareholder on the basis of the number
of shares they hold
3) The above screen shot from Google Finance shows basic stock information for PepsiCo. If you owned 2000
shares of PepsiCo for the period shown, how much would you have earned in dividend payments?
A) $108.33
B) $120.00
C) $760.00
D) $860.00
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
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 difference between the opening and closing
price of the stock on this date?
A) $0.49
B) $0.27
C) $0.24
D) $0.03
Use the figure 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
Use the figure 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 20008
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
8) What role do dividends play in stock investing?
9) A floor broker is a person at the NASDAQ with a trading license who represents orders on the floor.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
10) You placed an order to purchase stock where you specified the maximum price you were willing to pay.
This type of order is known as a:
A) maximum order.
B) limit order.
C) floor order.
D) market order.
11) A “round lot” consists of how many shares?
A) 1
B) 10
C) 100
D) 1000
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
12) 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.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
13) OwenInc has a current stock price of $14.50 and is expected to pay a $0.85 dividend in one year. If OwenInc’s
equity cost of capital is 12%, what price would OwenInc’s stock be expected to sell for immediately after it
pays the dividend?
A) $12.18
B) $13.65
C) $15.29
14) Which of the following situations is a potential source of cash flows for a shareholder of a certain stock?
I. The investor may be able to sell the shares at a future date.
II. The firm in which the shares are held might pay out cash to shareholders in the form of dividends.
III. The firm in which the shares are held might increase the value of its shares by reducing the total number
of shares outstanding.
A) I only
B) II only
C) I and II
D) II and III
15) 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 $22.40, and Coolibah’s equity cost of capital is 16%, what price would you
expect Coolibah’s stock to sell for at the end of three years?
A) $26.74
B) $28.82
C) $29.34
D) $31.36
16) Matilda Industries pays a dividend of $2.25 per share and is expected to pay this amount indefinitely. If
Matilda’s equity cost of capital is 12%, which of the following would be expected to be closest to Matilda’s
stock price?
A) $12.25
B) $14.65
C) $18.75
D) $21.98
17) Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year’s time,
immediately after it pays a dividend of $0.26. Which of the following is closest to Jumbuck Exploration’s
equity cost of capital?
A) 9%
B) 12%
C) 18%
D) 22%
18) A stock is bought for $22.00 and sold for $26.00 one year later, immediately after it has paid a dividend of
$1.50. What is the capital gain rate for this transaction?
A) 0.27%
B) 4.00%
C) 15.00%
D) 18.18%
19) Credenza Industries is expected to pay a dividend of $1.20 at the end of the coming year. It is expected to sell
for $62.00 at the end of the year. If its equity cost of capital is 8%, what is the expected capital gain from the
sale of this stock at the end of the coming year?
A) $3.48
B) $4.86
C) $14.28
D) $58.52
20) The Busby Corporation had a share price at the start of the year of $26.20, paid a dividend of $0.56 at the end
of the year, and had a share price of $29.00 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) 5%
B) 7%
C) 9%
D) 13%
21) Valorous Corporation will pay a dividend of $1.80 per share at this year’s end and a dividend of $2.40 per
share at the end of next year. It is expected that the price of Valorous’ stock will be $44 per share after two
years. If Valorous has an equity cost of capital of 8%, what is the maximum price that a prudent investor
would be willing to pay for a share of Valorous stock today?
A) $39.27
B) $40.22
C) $41.45
D) $42.40
22) A stock is expected to pay $0.80 per share every year indefinitely. If the current price of the stock is $18.90,
and the equity cost of capital for the company that released the shares is 6.4%, what price would an investor
be expected to pay per share five years into the future?
A) $12.50
B) $20.43
C) $21.23
D) $22.65
23) A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the
company is 7.5%. What price would an investor be expected to pay per share ten years in the future?
A) $16.67
B) $25.01
C) $33.34
D) $41.68
24) Rylan Industries is expected to pay a dividend of $5.20 year for the next four years. If the current price of
Rylan stock is $32.63, and Rylan’s equity cost of capital is 14%, what price would you expect Rylan’s stock to
sell for at the end of the four years?
A) $29.52
B) $55.11
C) $25.58
D) $80.70
25) A stock is expected to pay $3.20 per share every year indefinitely and the equity cost of capital for the
company is 10%. What price would an investor be expected to pay per share next year?
A) $8.00
B) $16.00
C) $24.00
D) $32.00
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
27) Which of the following is NOT a way that a firm can increase its dividend?
A) by increasing its retention rate
B) by decreasing its shares outstanding
C) by increasing its earnings (net income)
D) by increasing its dividend payout rate
28) Which of the following statements is FALSE regarding profitable and unprofitable growth?
A) If a firm wants to increase its share price, it must cut its dividend and invest more.
B) If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the
firm will have to reduce its dividend.
C) A firm can increase its growth rate by retaining more of its earnings.
D) Cutting the firm’s dividend to increase investment will raise the stock price if, and only if, the new
investments have a positive net present value (NPV).
29) Which of the following statements is FALSE?
A) Estimating dividends, especially for the distant future, is difficult.
B) A firm can only pay out its earnings to investors or reinvest their earnings.
C) Successful young firms often have high initial earnings growth rates.
D) According to the constant dividend growth model, the value of the firm depends on the current
dividend level, divided by the equity cost of capital plus the grow rate.
30) Which of the following statements is FALSE?
A) We cannot use the general dividend–discount model to value the stock of a firm with rapid or changing
growth.
B) As firms mature, their growth slows to rates more typical of established companies.
C) The dividend–discount model values the stock based on a forecast of the future dividends paid to
shareholders.
D) The simplest forecast for the firm’s future dividends states that they will grow at a constant rate, i.e.,
forever.
31) Which of the following statements is FALSE?
A) A common approximation is to assume that in the long run, dividends will grow at a constant rate.
B) The dividend each year is the firm’s earnings per share (EPS) multiplied by its dividend payout rate.
C) There is a tremendous amount of uncertainty associated with any forecast of a firm’s future dividends.
D) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to
shareholders in the form of dividends.
32) Which of the following statements is FALSE?
A) As firms mature, their earnings exceed their investment needs and they begin to pay dividends.
B) Total return equals earnings multiplied by the dividend payout rate.
C) Cutting the firm’s dividend to increase investment will raise the stock price if, and only if, the new
investments have a positive net present value (NPV).
D) We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing
growth.
33) Which of the following formulas is INCORRECT?
A) g = retention rate × return on new investment
B)
Divt = EPSt × Dividend Payout Rate
C)
P0 =
D)
rE = + g
34) Which of the following formulas is INCORRECT?
A)
Divt = × Dividend Payout Rate
B)
PN =
C) earnings growth rate = retention rate x return on new investment
D)