Question 1

Atchley Corporation's last free cash flow was $1.55 million.The free cash flow growth rate is expected to be constant at 1.5% for 2 years, after which free cash flows are expected to grow at a rate of 8.0% forever.The firm's weighted average cost of capital (WACC)  is 12.0%.Atchley has $2 million in short-term debt and $14 million in debt and 1 million shares outstanding.What is the best estimate of the intrinsic stock price?

Accepted Answer

A)   $25.05
B)   $26.16
C)   $27.30
D)   $28.48
E)   $29.70F) A) and B)
G) C) and D)

Question 2

Reynolds Construction's value of operations is $750 million based on the free cash flow valuation model.Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital) , and $160 million of retained earnings.What is the best estimate for the firm's value of equity, in millions?

Accepted Answer

A)   $429
B)   $451
C)   $475
D)   $500
E)   $525F) A) and D)
G) B) and D)

Question 3

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Accepted Answer

A)   $17.39
B)   $17.84
C)   $18.29
D)   $18.75
E)   $19.22F) A) and D)
G) None of the above

Question 4

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?   A  B  Price $25$25 Expected growth (constant)  10%5% Required return 15%15%\begin{array} { l c c } & 	ext { A } & 	ext { B } \	ext { Price } & \$ 25 & \$ 25 \	ext { Expected growth (constant)  } & 10 \% & 5 \% \	ext { Required return } & 15 \% & 15 \%\end{array} Price  Expected growth (constant)   Required return ​ A $2510%15%​ B $255%15%​

Accepted Answer

A)   Stock A has a higher dividend yield than Stock B.
B)   Currently the two stocks have the same price, but over time Stock B's price will pass that of A.
C)   Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's.
D)   The two stocks should not sell at the same price.If their prices are equal, then a disequilibrium must exist.
E)   Stock A's expected dividend at t = 1 is only half that of Stock B. F) A) and C)
G) None of the above

Question 5

Barnette Inc.'s free cash flows are expected to be unstable during the next few years while the company undergoes restructuring.However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point.If the weighted average cost of capital is 12%, what is the horizon value (in millions)  at t = 5?

Accepted Answer

A)   $719
B)   $757
C)   $797
D)   $839
E)   $883F) None of the above
G) B) and E)

Question 6

Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend, D1?

Accepted Answer

A)   $2.20
B)   $2.44
C)   $2.69
D)   $2.96
E)   $3.25F) A) and D)
G) A) and E)

Question 7

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

Accepted Answer

A)   4.42%
B)   4.66%
C)   4.89%
D)   5.13%
E)   5.39%F) C) and D)
G) B) and C)

Question 8

If D1 = $1.25, g (which is constant)  = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)   4.12%
B)   4.34%
C)   4.57%
D)   4.81%
E)   5.05%F) C) and E)
G) All of the above

Question 9

If 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.

Accepted Answer

A) True 
 B)False

Question 10

You, in analyzing a stock, find that its expected return exceeds its required return.This suggests that you think

Accepted Answer

A)   the stock should be sold.
B)   the stock is a good buy.
C)   management is probably not trying to maximize the price per share.
D)   dividends are not likely to be declared.
E)   the stock is experiencing supernormal growth.F) A) and C)
G) A) and D)

Question 11

Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever.Its required return (rs)  is 12%.What is the best estimate of the current stock price?

Accepted Answer

A)   $41.58
B)   $42.64
C)   $43.71
D)   $44.80
E)   $45.92F) C) and D)
G) A) and C)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.
B)   The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis)  new issues of preferred stock.
C)   One of the disadvantages to a corporation of owning preferred stock instead of owning bonds is that 50% of the preferred dividends received represent taxable income to the corporate recipient, whereas none of the interest received from bonds is taxable income to the corporate recipient.
D)   One of the advantages for a firm financing with preferred stock is that 50% of the dividends the firm pays may be deducted from its taxable income.
E)   A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.F) C) and D)
G) A) and B)

Question 13

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Accepted Answer

A)   $104.27
B)   $106.95
C)   $109.69
D)   $112.50
E)   $115.38F) A) and E)
G) A) and D)

Question 14

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?   Expected dividend, D1 $3.00 Current Frice, Fo $50 Expected constant growth rate 6.0%\begin{array}{lr}	ext { Expected dividend, D1 } & \$ 3.00 \	ext { Current Frice, Fo } & \$ 50 \	ext { Expected constant growth rate } & 6.0 \%\end{array} Expected dividend, D1  Current Frice, Fo  Expected constant growth rate ​$3.00$506.0%​

Accepted Answer

A)   The stock's expected dividend yield and growth rate are equal.
B)   The stock's expected dividend yield is 5%.
C)   The stock's expected capital gains yield is 5%.
D)   The stock's expected price 10 years from now is $100.00.
E)   The stock's required return is 10%. F) B) and D)
G) None of the above

Question 15

The preemptive right is important to shareholders because it

Accepted Answer

A)   will result in higher dividends per share.
B)   is included in every corporate charter.
C)   protects the current shareholders against a dilution of their ownership interests.
D)   protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
E)   allows managers to buy additional shares below the current market price.F) None of the above
G) A) and C)

Question 16

Stocks A and B have the following data.The market risk premium is 6.0% and the risk-free rate is 6.4%.Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?  AB Beta 1.100.90 Constant growth rate 7.00%7.00%\begin{array} { l c c } & \mathrm { A } & \mathrm { B } \	ext { Beta } & 1.10 & 0.90 \	ext { Constant growth rate } & 7.00 \% & 7.00 \%\end{array} Beta  Constant growth rate ​A1.107.00%​B0.907.00%​

Accepted Answer

A)   Stock A must have a higher dividend yield than Stock B.
B)   Stock B's dividend yield equals its expected dividend growth rate.
C)   Stock B must have the higher required return.
D)   Stock B could have the higher expected return.
E)   Stock A must have a higher stock price than Stock B. F) A) and B)
G) A) and C)

Question 17

National Advertising just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%.What is the company's current stock price?

Accepted Answer

A)   $14.52
B)   $14.89
C)   $15.26
D)   $15.64
E)   $16.03F) B) and D)
G) D) and E)

Question 18

McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0.The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%.What is the current price of the common stock?

Accepted Answer

A)   $26.77
B)   $27.89
C)   $29.05
D)   $30.21
E)   $31.42F) B) and C)
G) A) and E)

Question 19

Preferred stock is a hybrid⎯a sort of cross between a common stock and a bond⎯in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Accepted Answer

A) True 
 B)False

Question 20

The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

A) True 
 B)False

Exam 7: Corporate Valuation and Stock Valuation

You, in analyzing a stock, find that its expected return exceeds its required return.This suggests that you think

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend, D₁?

Correct Answer
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A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%, and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Correct Answer
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If D₁ = $1.25, g (which is constant) = 4.7%, and P₀ = $26.00, what is the stock's expected dividend yield for the coming year?

Correct Answer
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Correct Answer
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Preferred stock is a hybrid⎯a sort of cross between a common stock and a bond⎯in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Correct Answer
verified

If 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.

Correct Answer
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Correct Answer
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Correct Answer
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Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever.Its required return (r_s) is 12%.What is the best estimate of the current stock price?

Correct Answer
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The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Correct Answer
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Correct Answer
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Correct Answer
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The preemptive right is important to shareholders because it

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

Correct Answer
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Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Correct Answer
verified

Exam 7: Corporate Valuation and Stock Valuation

You, in analyzing a stock, find that its expected return exceeds its required return.This suggests that you think

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend, D1?

Correct AnswerverifiedShow Answer

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Correct AnswerverifiedShow Answer

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Preferred stock is a hybrid⎯a sort of cross between a common stock and a bond⎯in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

Correct AnswerverifiedShow Answer

If 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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever.Its required return (rs) is 12%.What is the best estimate of the current stock price?

Correct AnswerverifiedShow Answer

The expected total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The preemptive right is important to shareholders because it

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend, D₁?

Correct Answer
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A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%, and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Correct Answer
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If D₁ = $1.25, g (which is constant) = 4.7%, and P₀ = $26.00, what is the stock's expected dividend yield for the coming year?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
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Correct Answer
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Orwell Building Supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever.Its required return (r_s) is 12%.What is the best estimate of the current stock price?

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

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Correct Answer
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