Chapter 07 Test Bank – Static Key
1.
The dividend discount model states that the value of a stock is the present value of the dividends it will pay over the
investor’s horizon, plus the present value of the expected stock price at the end of that horizon.
2.
An excess of market value over the book value of equity can be attributed to going concern value.
3.
Securities with the same expected risk should offer the same expected rate of return.
4.
If investors believe a company will have the opportunity to make very profitable investments in the future, they will pay
more for the company’s stock today.
5.
The dividend discount model should not be used to value stocks if the dividend does not grow.
6.
If the stock prices follow a random walk, successive stock prices are not related.
7.
The liquidation value of a firm is equal to the book value of the firm.
8.
Sustainable growth rates can be estimated by multiplying a firm’s ROE by its dividend payout ratio.
9.
If the market is efficient, stock prices should be expected to react only to new information.
10.
If stock prices follow a random walk, their prices bear no relation to the company’s real activities.
11.
A negative free cash flow for a business is always sign that it is not performing well.
12.
Evidence that stock prices follow a random walk does not imply that there aren’t predictable cycles in prices.
13.
Market efficiency implies that security prices impound new information quickly.
14.
If security prices follow a random walk, then on any particular day the odds are that an increase or decrease in price is about
equally likely.
15.
Many professional investors attempt to beat the market by buying index funds.
16.
Market efficiency implies that one could earn above-average returns by examining the history of a firm’s stock price.
17.
Market value, unlike book value and liquidation value, treats the firm as a going concern.
18.
The dividend yield of a stock is much like the current yield of a bond. Both ignore prospective capital gains or losses.
19.
The dividend discount model states that today’s stock price equals the present value of all expected future dividends.
20.
The growth of mature companies is primarily funded by:
21.
The sustainable growth rate represents the ____ rate at which a firm can grow:
22.
Wilt’s has earnings per share of $2.98 and dividends per share of $0.35. What is the firm’s sustainable rate of growth if its
return on assets is 14.6% and its return on equity is 18.2%?
23.
The sustainable rate of growth:
24.
For a firm that repurchases its stock, firm value is most easily estimated by discounting _______________
25.
A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8%, and $648,200 in next year’s free cash
flow. What value would you place on a share of this firm’s stock if you require a 14% rate of return?
26.
The semi-strong form of the efficient market hypothesis states that:
27.
If the general sentiment of investors is pessimistic, stock prices are more apt to:
28.
Which of these statements is correct? Free cash flow
29.
If markets are efficient, when new information about a stock becomes available, the price will:
30.
Which statement is correct?
31.
What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the
most recent stock price was $40?
32.
Which of the following values treats the firm as a going concern?
33.
If a stock’s P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%, what is the stock’s
current price?
34.
With respect to the notion that stock prices follow a random walk, many researchers have concluded that:
35.
What is the current price of a share of stock for a firm with $5 million in balance-sheet equity, 500,000 shares of stock
outstanding, and a price/book value ratio of 4?
36.
A firm’s liquidation value is the amount:
37.
Which one of the following is least likely to account for an excess of market value over book value of equity?
38.
Firms with valuable intangible assets are more likely to show a(n):
39.
Which of the following is inconsistent with a firm that sells for very near book value?
40.
A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%. What might investors
expect to pay for the stock one year from now after the next dividend has been paid?
41.
A stock currently sells for $50 per share, has an expected return of 15%, and an expected capital appreciation rate of 10%.
What is the amount of the expected dividend?
42.
The expected return on a common stock is equal to:
43.
It is possible to ignore cash dividends that occur very far into the future when using a dividend discount model because those
dividends:
44.
If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividend be if
dividends grow annually at a constant rate of 6%?
45.
Dani’s just paid an annual dividend of $6 per share. What is the dividend expected to be in five years if the growth rate is
4.2%?
46.
The value of common stock will likely decrease if:
47.
When valuing stock with the dividend discount model, the present value of future dividends will:
48.
What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount
rate is 8%?
49.
What should you pay for a stock if next year’s annual dividend is forecast to be $5.25, the constant-growth rate is 2.85%, and
you require a 15.5% rate of return?
50.
What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the
firm recently paid an annual dividend of $2.50?
51.
What constant-growth rate in dividends is expected for a stock valued at $32.40 if next year’s dividend is forecast at $2.20
and the appropriate discount rate is 13.6%?
52.
What rate of return is expected from a stock that sells for $30 per share, pays $1.54 annually in dividends, and is expected to
sell for $32.80 per share in one year?
53.
ABC common stock is expected to have extraordinary growth in earnings and dividends of 20% per year for 2 years, after
which the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what
should be the approximate current share price?
54.
What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate in each of
years 2 and 3, and then grow at a constant rate of 5% if the stock’s required return is 13% and next year’s dividend will be
$4.00?
55.
A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant-growth rate of:
56.
What is the plowback ratio for a firm that has earnings per share of $2.68 and pays out $1.75 per share in dividends?
57.
A positive value for PVGO suggests that the firm has:
58.
Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of
12%?
59.
Other things equal, a firm’s sustainable growth rate could increase as a result of: