Question 1

An undervalued investment is so expensive that we will not receive a fair return if we bought it.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is NOT considered a basic economic force?

Accepted Answer

A)   fiscal policy
B)   monetary policy
C)   inflation
D)   P/E ratio
E)   All of these are basic economic forces.F) D) and E)
G) None of the above

Question 3

Using the constant growth model, an increase in the required rate of return from 14 to 18 percent combined with an increase in the growth rate from 8 to 12 percent would cause the price to

Accepted Answer

A)   fall more than 4%0
B)   fall less than 4%.
C)   rise more than 4%.
D)   rise less than 4%.
E)   remain constant.F) A) and C)
G) A) and B)

Question 4

The required rate of return is determined by (1) the real risk-free rate, (2) the expected rate of inflation, and (3) liquidity risk.

Accepted Answer

A) True 
 B)False

Question 5

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9 percent per year for the next three years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.4. The future price of the stock in year 3 is

Accepted Answer

A)   $81.75.
B)   $84.81.
C)   $92.56.
D)   $101.85.
E)   $111.16.F) B) and E)
G) None of the above

Question 6

If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

Accepted Answer

A) True 
 B)False

Question 7

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9 percent per year for the next three years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.4. The dividends for years 1, 2, and 3 are

Accepted Answer

A)   $1.5, $2.0, and $2.05.
B)   $1.64, $1.78, and $1.94.
C)   $1.64, $1.94, and $2.24.
D)   $1.5, $2.40, and $3.30.
E)   $2.07, $2.14, and $2.21.F) A) and B)
G) B) and E)

Question 8

Fundamentalists typically use the "Bottom-Up Approach", whereas technicians use the "Top-Down Approach" to the valuation process.

Accepted Answer

A) True 
 B)False

Question 9

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
Fast Grow Corporation is expecting dividends to grow at a 20 percent rate for the next two years. The corporation just paid a $2 dividend, and the next dividend will be paid one year from now. After two years of rapid growth, dividends are expected to grow at a constant rate of 9 percent forever.
-Refer to Exhibit 8.5. Assume that the annual dividend grows at a constant rate of 9 percent indefinitely instead of the supernormal growth. How much is the stock worth if dividends grow annually at 9 percent?

Accepted Answer

A)   $40.00
B)   $43.60
C)   $45.60
D)   $47.80
E)   $52.40F) C) and D)
G) A) and B)

Question 10

Many analysts recommend that you should read an annual report forwards, that is, you would read the footnotes last.

Accepted Answer

A) True 
 B)False

Question 11

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
Fast Grow Corporation is expecting dividends to grow at a 20 percent rate for the next two years. The corporation just paid a $2 dividend, and the next dividend will be paid one year from now. After two years of rapid growth, dividends are expected to grow at a constant rate of 9 percent forever.
-Refer to Exhibit 8.5. If the required return is 14 percent, what is the value of Fast Grow Corporation common stock today?

Accepted Answer

A)   $40.26
B)   $42.38
C)   $46.70
D)   $52.63
E)   $62.78F) A) and C)
G) B) and E)

Question 12

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9 percent per year for the next three years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.4. The price of the stock today (P0)  is

Accepted Answer

A)   $84.81.
B)   $87.81.
C)   $91.09.
D)   $94.32.
E)   $97.61.F) None of the above
G) A) and E)

Question 13

Which of the following statements regarding fundamental and relative valuation techniques is TRUE?

Accepted Answer

A)   Both techniques require an appropriate estimate of the required rate of return and the growth rate.
B)   Both techniques require an estimate of a discount rate.
C)   Both techniques require an estimate of future cash flows and a discount rate.
D)   Both techniques require an estimate of future cash flows and a growth rate.
E)   Both techniques require an estimate of future cash flows, the required rate of return, and a growth estimate.F) A) and E)
G) B) and D)

Question 14

In 2018, Smiths Corp. issued a $50 par value preferred stock that pays a 6 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 7 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Accepted Answer

A)   $42.86
B)   $30.00
C)   $31.54
D)   $33.38
E)   $38.37F) D) and E)
G) A) and B)

Question 15

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8 percent per year for the next five years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.3. The present value today of dividends for years 1 to 5 is

Accepted Answer

A)   $4.06.
B)   $10.28.
C)   $12.40.
D)   $14.52.
E)   $10.0.F) B) and E)
G) A) and B)

Question 16

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6 percent annual growth rate indefinitely. If the required rate of return on this investment is 12 percent, what is the current value of this common stock?

Accepted Answer

A)   $1.50
B)   $12.50
C)   $13.25
D)   $25.00
E)   $26.50F) D) and E)
G) A) and B)

Question 17

All of the following are ways in which a firm can increase its growth rate of equity earnings without any external financing EXCEPT

Accepted Answer

A)   decreasing its dividend payments.
B)   increasing its retention ratio.
C)   increasing its return on equity (RO
E)  .
D)   increasing its return on assets (RO
A)  .
E)   All of these are correct.F) B) and E)
G) C) and E)

Question 18

What is the value to you of a 10 percent coupon bond with semi-annual coupon payments and a par value of $10,000 that matures in 20 years if you require an 8 percent return?

Accepted Answer

A)   $9,652.89
B)   $10,356.65
C)   $11,359.03
D)   $11,979.28
E)   $12,385.62F) C) and D)
G) C) and E)

Question 19

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

Accepted Answer

A) True 
 B)False

Question 20

Using the constant growth model, an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

Accepted Answer

A)   rise more than 1%.
B)   rise less than 1%.
C)   remain constant.
D)   fall more than 1%.
E)   fall less than 1%.F) All of the above
G) D) and E)

Exam 8: Equity Valuation

Which of the following is NOT considered a basic economic force?

Correct Answer
verified

All of the following are ways in which a firm can increase its growth rate of equity earnings without any external financing EXCEPT

Correct Answer
verified

Correct Answer
verified

Many analysts recommend that you should read an annual report forwards, that is, you would read the footnotes last.

Correct Answer
verified

What is the value to you of a 10 percent coupon bond with semi-annual coupon payments and a par value of $10,000 that matures in 20 years if you require an 8 percent return?

Correct Answer
verified

Using the constant growth model, an increase in the required rate of return from 14 to 18 percent combined with an increase in the growth rate from 8 to 12 percent would cause the price to

Correct Answer
verified

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

Correct Answer
verified

If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

Correct Answer
verified

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6 percent annual growth rate indefinitely. If the required rate of return on this investment is 12 percent, what is the current value of this common stock?

Correct Answer
verified

Fundamentalists typically use the "Bottom-Up Approach", whereas technicians use the "Top-Down Approach" to the valuation process.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

An undervalued investment is so expensive that we will not receive a fair return if we bought it.

Correct Answer
verified

Correct Answer
verified

Which of the following statements regarding fundamental and relative valuation techniques is TRUE?

Correct Answer
verified

Correct Answer
verified

The required rate of return is determined by (1) the real risk-free rate, (2) the expected rate of inflation, and (3) liquidity risk.

Correct Answer
verified

Correct Answer
verified

Using the constant growth model, an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

Correct Answer
verified

Exam 8: Equity Valuation

Which of the following is NOT considered a basic economic force?

Correct AnswerverifiedShow Answer

All of the following are ways in which a firm can increase its growth rate of equity earnings without any external financing EXCEPT

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Many analysts recommend that you should read an annual report forwards, that is, you would read the footnotes last.

Correct AnswerverifiedShow Answer

What is the value to you of a 10 percent coupon bond with semi-annual coupon payments and a par value of $10,000 that matures in 20 years if you require an 8 percent return?

Correct AnswerverifiedShow Answer

Using the constant growth model, an increase in the required rate of return from 14 to 18 percent combined with an increase in the growth rate from 8 to 12 percent would cause the price to

Correct AnswerverifiedShow Answer

The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

Correct AnswerverifiedShow Answer

If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

Correct AnswerverifiedShow Answer

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6 percent annual growth rate indefinitely. If the required rate of return on this investment is 12 percent, what is the current value of this common stock?

Correct AnswerverifiedShow Answer

Fundamentalists typically use the "Bottom-Up Approach", whereas technicians use the "Top-Down Approach" to the valuation process.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An undervalued investment is so expensive that we will not receive a fair return if we bought it.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements regarding fundamental and relative valuation techniques is TRUE?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The required rate of return is determined by (1) the real risk-free rate, (2) the expected rate of inflation, and (3) liquidity risk.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Using the constant growth model, an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to

Correct AnswerverifiedShow Answer

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