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Chapter 07 Test Bank, Exams of Corporate Finance

Bay College Corporate Finance

Suzi owns 100 shares of AB stock. She expects to receive a $238 in dividends next year. Investors expect the stock to sell for $46 a share one year from now. What is the intrinsic value of this stock if the dividend payout ratio is 40% and the discount rate is 13.5%

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Chapter 07 Test Bank - Static

Student: ___________________________________________________________________________

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.

True False

2. An excess of market value over the book value of equity can be attributed to going concern value.

True False

3. Securities with the same expected risk should offer the same expected rate of return.

True False

4. If investors believe a company will have the opportunity to make very profitable investments in the future, they will pay mor

e for

the company's stock today.

True False

5. The dividend discount model should not be used to value stocks if the dividend does not grow.

True False

6. If the stock prices follow a random walk, successive stock prices are not related.

True False

7. The liquidation value of a firm is equal to the book value of the firm.

True False

8. Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

True False

9. If the market is efficient, stock prices should be expected to react only to new information.

True False

10. If stock prices follow a random walk, their prices bear no relation to the company’s real activities.

True False

11. A negative free cash flow for a business is always sign that it is not performing well.

True False

Partial preview of the text

Download Chapter 07 Test Bank and more Exams Corporate Finance in PDF only on Docsity!

Chapter 07 Test Bank - Static

_Student: ____________________________________________________________________________

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. True False
An excess of market value over the book value of equity can be attributed to going concern value. True False
Securities with the same expected risk should offer the same expected rate of return. True False
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. True False
The dividend discount model should not be used to value stocks if the dividend does not grow. True False
If the stock prices follow a random walk, successive stock prices are not related. True False
The liquidation value of a firm is equal to the book value of the firm. True False
Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio. True False
If the market is efficient, stock prices should be expected to react only to new information. True False
If stock prices follow a random walk, their prices bear no relation to the company’s real activities. True False
A negative free cash flow for a business is always sign that it is not performing well. True False

Evidence that stock prices follow a random walk does not imply that there aren’t predictable cycles in prices. True False
Market efficiency implies that security prices impound new information quickly. True False
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. True False
Many professional investors attempt to beat the market by buying index funds. True False
Market efficiency implies that one could earn above-average returns by examining the history of a firm's stock price. True False
Market value, unlike book value and liquidation value, treats the firm as a going concern. True False
The dividend yield of a stock is much like the current yield of a bond. Both ignore prospective capital gains or losses. True False
The dividend discount model states that today's stock price equals the present value of all expected future dividends. True False
The growth of mature companies is primarily funded by: A. issuing new shares of stock. B. issuing new debt securities. C. reinvesting company earnings. D. increasing accounts payable.
The sustainable growth rate represents the ____ rate at which a firm can grow: A. maximum; while maintaining a constant debt-equity ratio. B. maximum; based solely on internal financing. C. minimum; while maintaining a constant debt-equity ratio. D. minimum; based solely on internal financing.

If markets are efficient, when new information about a stock becomes available, the price will: A. remain unchanged because it already reflects this information. B. accurately and rapidly adjust to include this new information. C. adjust to accurately reflect this new information over the course of the next few days. D. most likely increase because all new information has a positive effect on stock prices.
Which statement is correct? A. Stock repurchases invalidate the dividend discount model B. Stock repurchases do not add value to a business and can be ignored. C. When there are repurchases, it is simpler to value a business by discounting the free cash flow. D. Stock repurchases increase the number of shares and make it difficult to forecast dividends per share
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? A. 2.5% B. 4.0% C. 10.0% D. 5.0%
Which of the following values treats the firm as a going concern? A. Market value B. Book value C. Liquidation value D. Both market and book values
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? A. $24. B. $18. C. $22. D. $40.
With respect to the notion that stock prices follow a random walk, many researchers have concluded that: A. stock prices reflect a majority of available information about the firm. B. successive price changes are predictable. C. past stock price changes provide little useful information about future stock price changes. D. stock prices always rise excessively in January.

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? A. $2. B. $10. C. $20. D. $40.
A firm's liquidation value is the amount: A. necessary to repurchase all outstanding shares of common stock. B. realized from selling all assets and paying off all creditors. C. a purchaser would pay to acquire all of the firm's assets. D. shown on the balance sheet as total owners' equity.
Which one of the following is least likely to account for an excess of market value over book value of equity? A. Inaccurate depreciation methods B. High rate of return on assets C. The presence of growth opportunities D. Valuable off-balance sheet assets
Firms with valuable intangible assets are more likely to show a(n): A. excess of book value over market value of equity. B. high going-concern value. C. low liquidation value. D. low P/E ratio.
Which of the following is inconsistent with a firm that sells for very near book value? A. Low current earnings B. Few, if any, intangible assets C. High future earning power D. Low, unstable dividend payment
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? A. $82. B. $86. C. $87. D. $91.
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? A. $2. B. $2. C. $3. D. $3.

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? A. $31. B. $38. C. $41. D. $42.
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? A. $27. B. $30. C. $26. D. $31.
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%? A. 7.02% B. 6.59% C. 6.81% D. 7.38%
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? A. 15.03% B. 14.28% C. 14.09% D. 14.47%
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? A. $31. B. $33. C. $37. D. $47.
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? A. $67. B. $62. C. $68. D. $73.

A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant-growth rate of: A. 4%. B. 9%. C. 21%. D. 25%.
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? A. 28.20% B. 34.70% C. 66.67% D. 71.80%
A positive value for PVGO suggests that the firm has: A. a positive return on equity. B. a positive plowback ratio. C. investment opportunities with superior returns. D. a high rate of constant growth.
Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%? A. A firm with PVGO = $0. B. A firm with investment opportunities yielding 10%. C. A firm with investment opportunities yielding 15%. D. A firm with PVGO < $0.
Other things equal, a firm's sustainable growth rate could increase as a result of: A. increasing the plowback ratio. B. increasing the payout ratio. C. decreasing the return on equity. D. increasing total assets.
Under which of the following forms of market efficiency would stock prices always reflect fair value? A. Weak-form efficiency B. Semi-strong-form efficiency C. Strong-form efficiency D. Semi-weak-form efficiency
Investors are willing to purchase stocks having high P/E ratios because: A. they expect these shares to sell for a lower price. B. they expect these shares to offer higher dividend payments. C. these shares are accompanied by guaranteed earnings. D. they expect these shares to have greater growth opportunities.

What is the most likely value of the PVGO for a stock with a current price of $50, expected earnings of $6 per share, and a required return of 20%? A. $ B. $ C. $ D. $
What is the expected constant-growth rate of dividends for a stock with a current price of $87, an expected dividend payment of $5.40 per share, and a required return of 16%? A. 8.48% B. 6.25% C. 9.79% D. 5.23%
Which of the following is true for a firm having a stock price of $42, an expected dividend of $3, and a sustainable growth rate of 8%? A. It has a required return of 15.14%. B. It has a dividend yield of 7.35%. C. The stock price is expected to be $45 next year. D. It has a capital appreciation rate of 7.14%.
What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of $45, and a constant- growth rate of 12%? A. $1. B. $3. C. $4. D. $7.
What is the required return for a stock that has a constant-growth rate of 3.3%, a price of $25, an expected dividend of $2.10, and a P/E ratio of 14.4? A. 12.40% B. 10.92% C. 11.70% D. 11.26%
What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth, and has a required return of 12.5%? A. $ B. $4. C. $34. D. $30.

Psychologists have observed that: A. once investors have made a loss, they become much more willing to take risks. B. investors tend to place too much faith in their ability to spot mispriced stocks. C. when forecasting the future, people tend to place too little weight on recent events. D. investors like stocks of companies whose names begin with letters that occur early in the alphabet.
If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock: A. pays $1 per share per quarter. B. paid $.25 per share per quarter for the past year. C. paid $1 during the past quarter, with no future dividends forecast. D. is expected to pay a dividend of $1 per share at the end of next year.
Suzi owns 100 shares of AB stock. She expects to receive a $238 in dividends next year. Investors expect the stock to sell for $46 a share one year from now. What is the intrinsic value of this stock if the dividend payout ratio is 40% and the discount rate is 13.5%? A. $38. B. $42. C. $40. D. $45.
What is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation? A. Market value of equity B. Book value of equity C. Zero D. Shareholders may be required to pay to be liquidated.
If the price of a stock falls on 4 consecutive days of trading, then stock prices: A. cannot be following a random walk. B. can still be following a random walk. C. are almost certain to increase the following day. D. are almost certain to decrease the following day.
What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend growth rate of 7%? A. $37. B. $37. C. $40. D. $43.
The required return on an equity security is comprised of a: A. dividend yield and ROE. B. current yield and a terminal value. C. sustainable growth rate and a plowback yield. D. dividend yield and a capital gains yield.

According to random-walk theory, what are the (approximate) odds that a stock will increase in price after having increased on two consecutive days of trading? A. 0% B. 25% C. 50% D. 100%
If the liquidation value of a corporation exceeds the market value of the equity, then the: A. firm has no value as a going concern. B. firm's stock will sell for book value. C. firm is not taking advantage of available growth opportunities. D. dividend payout ratio has been too high.
In a valuation of a nonconstant dividend growth stock, the terminal value represents the: A. point at which the present value of future dividends equals zero. B. maturity date of the stock. C. present value of future dividends from that point on. D. highest value that the stock will attain.
Which one of the following situations is most likely to occur today for a stock that went down in price yesterday? A. The stock will increase in price. B. The stock will decrease in price. C. The stock has a 30% chance of decreasing in price. D. The stock has no predictable price-change pattern.
Based on the random walk theory, if a stock's price decreased last week, then this week the price: A. will reverse last week's loss and go up. B. will continue last week's decline. C. will stand still until new information is released. D. has an equal chance of going either up or down.
Research indicates that the correlation coefficient between successive days' stock price changes is: A. quite close to +1. B. quite close to C. quite close to zero. D. directly related to the stock's beta.
An analyst who relies on past cycles of stock pricing to make investment decisions is: A. performing fundamental analysis. B. relying on strong-form market efficiency. C. assuming that the market is not even weak-form efficient. D. relying on the random walk of stock prices.

Which statement is correct? A. When stock prices barely change for a while, they are said to be stuck in a "bubble." B. Bubbles can result when prices rise rapidly and investors join the game on the assumption that prices will continue to rise. C. Most bubbles with hindsight can be justified by the improved fundamentals. D. "Bubbles" is another term for stocks in high-tech industries.
If it proves possible to make abnormal profits based on information regarding past stock prices, then the market is: A. weak-form efficient. B. not weak-form efficient. C. semi strong-form efficient. D. strong-form efficient.
Which statement is correct? A. The momentum factor refers to the tendency for stock price changes to reverse. B. The momentum factor refers to the tendency for stock price changes to persist for a while and then revert. C. The momentum factor implies that stock prices are rather like a pendulum. D. The momentum factor is inconsistent with the strong form of the efficient market hypothesis.
Which statement is correct? A. It is much easier to judge whether the absolute level of stock prices is correct rather than whether their relative levels are correct. B. It is much easier to judge whether relative stock prices are correct than to judge whether their absolute level is correct. C. Most tests of market efficiency are concerned with the absolute level of stock prices. D. If relative prices are correct, then absolute prices must be correct also.
Market efficiency implies A. that investors are irrational. B. that there is no point to buying common stocks. C. that consistently superior performance is very difficult even for professional investors. D. that there are no taxes.
If no price change occurs in a stock on the day that it announces its next dividend, it can be assumed that: A. the stock market is inefficient. B. the dividend was reduced. C. the market was expecting this information. D. technical analysts are not following this stock.
When investors are not capable of making superior investment decisions on a consistent basis based on past prices or public or private information, the market is said to be: A. weak-form efficient. B. semi strong-form efficient. C. strong-form efficient. D. fundamentally efficient.

Chapter 07 Test Bank - Static Key

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. TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Dividend discount model
An excess of market value over the book value of equity can be attributed to going concern value. TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Market and book values
Securities with the same expected risk should offer the same expected rate of return. TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Risk and return relationship
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. TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Dividend discount model

The dividend discount model should not be used to value stocks if the dividend does not grow. FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Dividend discount model
If the stock prices follow a random walk, successive stock prices are not related. FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. Topic: Random walk
The liquidation value of a firm is equal to the book value of the firm. FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Market and book values
Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio. FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Internal and sustainable growth rates
If the market is efficient, stock prices should be expected to react only to new information. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. Topic: Market efficiency-foundations and types

Many professional investors attempt to beat the market by buying index funds. FALSE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. Topic: Market efficiency-studies and challenges
Market efficiency implies that one could earn above-average returns by examining the history of a firm's stock price. FALSE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. Topic: Market efficiency-foundations and types
Market value, unlike book value and liquidation value, treats the firm as a going concern. TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Market and book values
The dividend yield of a stock is much like the current yield of a bond. Both ignore prospective capital gains or losses. TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Stock returns and yields
The dividend discount model states that today's stock price equals the present value of all expected future dividends. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios.

The growth of mature companies is primarily funded by: A. issuing new shares of stock. B. issuing new debt securities. C. reinvesting company earnings. D. increasing accounts payable. AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Dividend discount model
The sustainable growth rate represents the ____ rate at which a firm can grow: A. maximum; while maintaining a constant debt-equity ratio. B. maximum; based solely on internal financing. C. minimum; while maintaining a constant debt-equity ratio. D. minimum; based solely on internal financing. AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Dividend discount model
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%? A. 2.14% B. 1.71% C. 12.89% D. 16.06% Sustainable growth rate = ROE × plowback ratio Sustainable growth rate = 0.182 × [($2.98 − 0.35)/$2.98] Sustainable growth rate = 0.1606, or 16.06% AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. Topic: Dividend discount model

Chapter 07 Test Bank, Exams of Corporate Finance

Related documents

Partial preview of the text

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Chapter 07 Test Bank - Static

Chapter 07 Test Bank - Static Key