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Exam 5: Stocks

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Question 31

Multiple Choice

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Which of the following statements is CORRECT, assuming stocks are in equilibrium?

A) Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.
B) A stock's dividend yield can never exceed its expected growth rate.
C) A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return.
D) Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.
E) The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.

F) D) and E)
G) B) and C)

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Question 32

Multiple Choice

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Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00% What is Jameson's current stock price, P0?

A) $18.62
B) $19.08
C) $19.56
D) $20.05
E) $20.55

F) A) and E)
G) A) and B)

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Question 33

True/False

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a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock Proxies can be important tools relating to control of firms.

Alcott's preferred stock pays a dividend of $1.00 per quarter If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

stock just paid a dividend of D0 = $1.50 The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0% What is the current stock price?

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25) The stock sells for $32.50 per share, and its required rate of return is 10.5% The dividend is expected to grow at some constant rate, g, forever What is the equilibrium expected growth rate?

50 per share is the current price for Foster Farms' stockThe dividend is projected to increase at a constant rate of 5.50% per year The required rate of return on the stock, rs, is 9.00% What is the stock's expected price 3 years from today?

D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor's required return.

Which of the following statements is CORRECT?

Merrell Enterprises's stock has an expected return of 14% The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share Which of the following statements is CORRECT?

a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

conditions are used to determine whether or not a stock is in equilibrium: (1) Does the stock's market price equal its intrinsic value as seen by the marginal investor, and (2) does the expected return on the stock as seen by the marginal investor equal this investor's required return? If either of these conditions, but not necessarily both, holds, then the stock is said to be in equilibrium.

stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00 The dividend is expected to decline at a rate of 5% a year forever (g = -5%) If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Companies can issue different classes of common stock Which of the following statements concerning stock classes is CORRECT?