c.
$23.24
d.
$21.18
Bulldog Industries
An analyst seeks to determine the value of Bulldog Industries. After careful research, the analyst
believes that free cash flows for the firm will be $80 million in 2004 and will grow at 10% for 2005
and 2006. The free cash flows will grow at a rate of 5% after 2006.
NARREND
60. If Bulldog Industries has a weighted average cost of capital of 10%, find the market value of the firm.
(assume that we are at January 1, 2004)
a.
$2,085.26
b.
$1,946.52
c.
$1,745.45
d.
$1,665.45
61. The market value of Bulldog Industries debt and preferred stock is $934 million. If the firm has a
weighted average cost of capital of 10%, find the equity value of the firm’s stock. The firm has 50
million shares of stock outstanding. (assume that we are at January 1, 2004…)
a.
$14.63
b.
$16.23
c.
$17.03
d.
$22.63
62. A firm plans on paying a constant dividend of $2 per share into the foreseeable future. If investors seek
a 12% return to hold the firm’s stock, what is fair value for the company’s stock?
a.
$13.67
b.
$15.67
c.
$16.67
d.
$18.67
63. Which is NOT a feature of common stock?
a.
Voting rights
b.
Priority over debt holders for liquidation rights
c.
Rights to dividends and other distributions
d.
Majority voting system
64. After careful research, you find the present value of the free cash flows of a firm to be $100 million.
The market value of the firm’s preferred stock is $15 million, while the market value of the firm’s debt
is $40 million. If the firm has 2 million shares of stock outstanding, what is the equity value per share?
a.
$20.00
b.
$22.50
c.
$27.50
d.
$30.00
65. You estimate the following cash flows for Nick’s Incorporated: D1=$0.83, D2=$0.87, D3=$0.96, and
P3=$27.40. If the required return to hold Nick’s stock is 15.1%, what is the price today for Nick’s
stock?
a.
$18.31
b.
$18.85
c.
$19.98
d.
$20.35
66. What term refers to the number of shares issued by a firm multiplied by the current price of the shares
on the secondary market?
a.
Financial leverage
b.
Market capitalization
c.
Additional paid-in capital
d.
Liquidation value
67. What is the term applied to several investment banks joining together to bring an IPO to market to
limit risk exposure?
a.
Selling group
b.
Underwriting portfolio
c.
Investment bank portfolio
d.
Underwriting syndicate
68. What is the largest (trading volume) over-the-counter (OTC) market in the United States?
a.
AMEX
b.
NYSE
c.
Nasdaq
d.
Chicago Board of Trade
69. An investor bought a stock this morning for $50, and plans to sell the stock one year from today. The
investor believes the stock will pay a $1 dividend during the next year, and that the stock can be sold
for $53 in one year. Given the investor’s beliefs, what is the return from investing in this stock for the
next year?
a.
4%
b.
6%
c.
8%
d.
10%
70. A share of preferred stock pays a $2 annual dividend, but pays the dividend in four equal quarterly
installments. Investors seek a 12% annual percentage return on the investment. What price should the
preferred stock trade?
a.
$4.17
b.
$6.67
c.
$8.50
d.
$16.67
71. Stone Cold Incorporated reported net income of $10 million for 2003. In addition, shareholder equity
for the firm was $80 million at the end of 2003. The company was able to pay $3 million out as
dividends to the shareholders for 2003. After 2003, excess paid-in-capital was $60 million. Given this
information, what is the growth rate available for Stone Cold?
a.
3.75%
b.
5.00%
c.
7.50%
d.
8.75%
72. For a stock pricing model, an analyst selects 10% as the sustainable growth rate in dividends for a
firm. Given that the firm pays out 40% of net income as dividends each year, what is the return on
shareholder equity for this firm?
a.
2.50%
b.
4.00%
c.
10.00%
d.
16.67%
73. A stock is expected to pay a dividend of $3.00 in one year. To purchase the stock, investors seek a
15% annual return. If the stock is currently trading at $60, what is the implied constant growth rate in
dividends for the future?
a.
5%
b.
10%
c.
15%
d.
20%
Normaltown Corporation
An analyst has predicted the free cash flows for Normaltown Corporation for the next four years:
YEAR
FCF
2004
$10 million
2005
$15 million
2006
$22 million
2007
$29 million
NARREND
74. After 2007, the free cash flows are expected to grow at an annual rate of 5%. If the weighted average
cost of capital is 12% for Normaltown, find the enterprise value of the firm.
a.
$54.98 million
b.
$301.81 million
c.
$313.00 million
d.
$331.43 million
75. After 2007, the free cash flows are expected to grow at an annual rate of 5%. The weighted average
cost of capital for Normaltown is 12%. If the market value of the firm’s debt is $100 million, find the
value of the firm’s equity.
a.
$201.81 million
b.
$213.00 million
c.
$231.43 million
d.
$271.20 million
76. Debt holders:
a.
are the residual owners of a corporation.
b.
have little say in how the firm conducts its business.
c.
cannot force the firm into bankruptcy court if it fails to make the scheduled interest and
principal payments on time.
d.
are willing to accept more risk than the stockholders in the corporation.
77. Stockholder voting rights include:
a.
voting on the amount of dividends the firm will pay to current stockholders.
b.
voting as to whether or not the firm should file for bankruptcy.
c.
voting for members on the Board of Directors.
d.
voting on whether or not the firm will issue additional debt.
e.
all of the above
78. Which of the following statements is false?
a.
Dual-class stock is more prevalent in the United States than it is in other countries.
b.
When a corporation has dual-class stock, the corporate insiders generally concentrate their
holdings in the superior voting-share class, while ordinary investors tend to hold relatively
more of the inferior voting-class stock.
c.
One purpose of a dual-class structure is to allow insiders to raise the capital needed to
finance growth without losing voting control.
d.
All of the above statements are false.
e.
Only statements (a) and (b) are false.
79. The decision as to whether or not a firm will pay dividends is explicitly made by the:
a.
stockholders
b.
bondholders
c.
Board of Directors
d.
Chief Financial Officer
e.
Chief Executive Officer
80. Which of the following activities is not one of the three principal lines of business for U.S.-based
investment banks?
a.
Working capital management
b.
Corporate finance
c.
Trading
d.
Asset management
81. One of the most time-consuming aspects of preparing for an equity offering is:
a.
preparing the necessary documents for filing with regulators.
b.
putting on the road show so that managers can pitch their business plan to prospective
investors.
c.
oversubscribing the offering.
d.
none of the above
82. A Green Shoe option is:
a.
the option of the issuing firm to buy back stock from a select group of stockholders.
b.
the option to sell more shares than were originally planned.
c.
the option to use a selling group to distribute shares of stock.
d.
the option to sell fewer shares than were originally planned.
83. When evaluating the secondary market based upon how the securities are traded, we can divide the
market into two segments:
a.
a bull market and a bear market.
b.
a stock market and a bond market.
c.
a primary market and a secondary market.
d.
a broker market and a dealer market.
84. A “dealer market” is:
a.
when buyers and sellers contact each other directly to arrange an exchange of securities.
b.
a market in which the buyer and seller are not brought together directly but, rather, have
their orders executed by securities dealers.
c.
a market in which buyers and sellers are brought together on a securities exchange to trade
securities.
d.
none of the above
85. A “broker market” is:
a.
when buyers and sellers contact each other directly to arrange an exchange of securities.
b.
a market in which the buyer and seller are not brought together directly but, rather, have
their orders executed by securities dealers.
c.
a market in which buyers and sellers are brought together on a securities exchange to trade
securities.
d.
none of the above
86. Which of the following would NOT fall under the classification of a broker market?
a.
New York Stock Exchange
b.
American Stock Exchange
c.
NASDAQ
d.
All of the above are classified as broker markets
87. Pink Sheets refer to:
a.
the confirmation notice an investor receives notifying them that their transaction has
occurred.
b.
the unregulated section of the market where companies are not required to file with the
SEC.
c.
an electronic quotation system linking the market makers that trade the shares of small
companies that is regulated by the SEC.
d.
the biggest dealer market that uses an electronic trading system to facilitate dealer
transactions.
e.
none of the above
88. What is the term that represents the abbreviation used to identify a company when its stock price is
being quoted?
a.
CUSIP
b.
Ticker tape
c.
Ticker symbol
d.
none of the above
89. For the zero growth model:
a.
because the valuation formula reduces to the equation for the present value of a perpetuity
the process is essentially the same for valuing preferred stock.
b.
because the valuation formula reduces to the equation for the future value of a perpetuity
the process is essentially the same for valuing preferred stock
c.
because the valuation formula reduces to the equation for the present value of an ordinary
annuity, the process is essentially the same for valuing preferred stock.
d.
because the valuation formula reduces to the equation for the future value of an ordinary
annuity, the process is essentially the same for valuing preferred stock.
90. When determining the stock price if a firm never plans to pay a dividend:
a.
then it cannot have value
b.
then there must be an expectation that the firm will distribute cash to the investors at some
point in the future
c.
a very precise process is used that requires little in terms of future estimates of cash flows
d.
all of the above
e.
none of the above
91. ____ represents the amount of cash that would remain if a firm’s assets were sold and all liabilities
were paid.
a.
book value
b.
market value
c.
liquidation value
d.
present value
e.
none of the above
92. ____ represents the value of a firm’s equity shown on its balance sheet.
a.
book value
b.
market value
c.
liquidation value
d.
present value
e.
none of the above
93. Which of the following statements is false?
a.
P/E ratios are widely reported in the financial press and they are very easy to interpret.
b.
As the value of the dividend growth rate rises, the P/E ratio falls.
c.
A firm with a higher P/E ratio always has greater growth prospects than a firm with a
lower P/E ratio.
d.
All of the above statements are false.
e.
Only (b) and (c) are false
94. Zeb Corporation just paid a dividend of 3.11 and has an expected growth rate of 12% for the
foreseeable future, if the discount rate is 18% what is the appropriate stock price today?
a.
$58.05
b.
$51.83
c.
$57.87
d.
$55.06
95. Monte Corporation just paid a dividend of $4.25 and has an expected growth rate of 15% for the
foreseeable future, if the discount rate is 18% what is the appropriate stock price today?
a.
$141.67
b.
$162.92
c.
$162.74
d.
$146.07
96. Zuma Corporation just paid a dividend of $5.23 and has an expected growth rate of 5% for the
foreseeable future, if the discount rate is 17% what is the appropriate stock price today?
a.
$43.58
b.
$45.59
c.
$45.76
d.
$48.86
97. Ajax Corporation just paid a dividend of $5.23 and has an expected growth rate of 5% for the
foreseeable future, if the discount rate is 17% what is the appropriate stock price today?
a.
$49.20
b.
$51.34
c.
$50.48
d.
Cannot be determined with the available information
98. Declining Corporation just paid a dividend of $1.23 and has an expected growth rate of -5% for the
foreseeable future, if the discount rate is 7% what is the appropriate stock price today?
a.
$ 9.74
b.
$ 10.25
c.
$ 9.67
d.
$ 11.43
99. Fading Away Corporation just paid a dividend of $1.23 and has an expected growth rate of -5% for the
foreseeable future, if the discount rate is 7% what is the appropriate stock price today?
a.
$ 58.86
b.
$ 47.72
c.
$ 50.35
d.
$ 47.84
100. Beta Corp has an ROE of 15%; has just paid a dividend of $1.50; a pays 10% of its earnings out in
dividends, and the appropriate discount rate is 20%; what is the current stock price?
a.
$ 7.50
b.
$ 26.19
c.
$ 11.35
d.
$ 31.43
101. Omega Corp has an ROE of 15%; has just paid a dividend of $1.55; a pays 0% of its earnings out in
dividends, and the appropriate discount rate is 20%; what is the current stock price?
a.
$ 7.75
b.
$ 11.88
c.
$ 35.65
d.
$ 42.78
102. Zeta Corp has an ROE of 15%; has just paid a dividend of $1.55; a pays 110% of its earnings out in
dividends, and the appropriate discount rate is 20%; what is the current stock price?
a.
$ 8.80
b.
$ 10.51
c.
$ 8.00
d.
$ 7.10
103. DDP Enterprises currently does not pay a dividend but plans to makes its first dividend payment of $1
in 3 years, if the expected growth rate is 10% per year once dividends commence, and the appropriate
is discount rate is 18%, what is the current stock price today?
a.
$ 8.98
b.
$ 8.37
c.
$ 13.75
d.
$ 14.75
104. DDP Enterprises currently does not pay a dividend but plans to makes its first dividend payment of $1
in 3 years, if the expected growth rate is 10% per year once dividends commence, and the appropriate
is discount rate is 18%, what is the current stock price today?
a.
$ 8.98
b.
$ 8.37
c.
$ 13.75
d.
$ 14.75
105. DK Corporation currently does not pay a dividend but plans to makes its first dividend payment of $2
in 3 years, DK then plans to pay 40% of its ROE in dividends once they commence. If the
appropriate is discount rate is 20% and DK expects and ROE of 22%, what is the current stock price
today?
a.
$ 19.27
b.
$ 20.42
c.
$ 33.29
d.
$ 35.29
106. Roxy Incorporated expects non-normal dividend growth over the next three years; that is a 20%
growth rate for three years followed by growth of 10% thereafter. If the last dividend paid was $3.00
and the appropriate discount rate is 16%; what is the price of the stock today?
a.
$ 73.24
b.
$ 95.04
c.
$ 70.10
d.
$ 60.89
107. Emma Incorporated expects non-normal dividend growth over the next three years; that is a 0%
growth rate in the first year, then 25%, and then 12% followed by growth of 8% thereafter. If the last
dividend paid was $2.50 and the appropriate discount rate is 12%; what is the price of the stock today?
a.
$67.26
b.
$94.50
c.
$76.64
d.
$74.24
108. Louis Incorporated expects non-normal dividend growth over the next three years; that is a 10%
growth rate in the first year, then 20%, and then 25% followed by growth of 5% thereafter. If the last
dividend paid was $0.25 and the appropriate discount rate is 12%; what is the price of the stock today?
a.
$5.18
b.
$5.46
c.
$6.19
d.
$4.40
109. Easy Points One has just paid a dividend of $2.50, has a growth rate of 11% and a current stock price
of $52.65. What is the required return for the security?
a.
15.75%
b.
16.27%
c.
15.75%
d.
27.27%
110. Harder Points One has just paid a dividend of $1.50, has a required return of 17% and a current stock
price of $50.65. What is the expected growth rate?
a.
13.63%
b.
14.04%
c.
14.44%
d.
cannot be determined