Deck 9: Stocks and Stock Markets

Question 1

Which of the following statements is most correct?

A) An American Depository Receipt (ADR) is a negotiable certificate, issued by a bank and denominated in dollars, that is traded on an exchange like the NYSE and represents underlying shares of a foreign corporation that are held in trust at a depository institution.
B) In most cases, if a foreign company wants to have its shares traded on the NYSE or other U.S. exchanges, the mechanism through which this is accomplished is an American Depository Receipt (ADR).
C) In most cases, before a company's shares can be traded as ADRs on an exchange in the U.S., its financial results must be recast in accordance with U.S. GAAP and it must meet all SEC registration requirements.
D) All of the statements above are correct.
E) Only statements a and c are correct.

Answer 1

All of the statements above are correct.

Question 2

For companies that desire to list their shares on multiple exchanges, but who do not like the strict regulations imposed on ADRs by the U.S. SEC, a new instrument called a Global Registered Share (GRS) is available. Characteristics of a GRS include all of the following except

A) GRS trade electronically on a number of exchanges and are denominated in the local host currency.
B) Companies that desire to trade GRS must meet full registration requirements for electronic trading.
C) Unlike ADRs which must be registered, GRS usually trade in bearer form.
D) GRS often trade "after hours" in different locations around the world in response to information that breaks while the company's regular exchange is closed.
E) All of the statements above are correct.

Answer 2

Unlike ADRs which must be registered, GRS usually trade in bearer form.

Question 3

For an investor contemplating adding foreign stocks to her portfolio there are several issues to consider. Which of the following is not one of them?

A) International diversification provides superior risk reduction than one could obtain with only domestic shares because national economies are not highly correlated.
B) If one adds a foreign stock to a portfolio, two bets are being made: (1) the share price will increase in its local market, and (2) the currency in which the share offers returns will rise or at least hold steady against the home currency.
C) If an investor is concerned about foreign exchange risk associated with investments in foreign shares, it is always possible to hedge those risks in the currency futures market.
D) All of the statements above are legitimate issues to consider when investing in foreign shares.
E) Only statement a is a legitimate issue.

Answer 3

All of the statements above are legitimate issues to consider when investing in foreign shares.

Question 4

Carsten Motors has just paid a dividend of $1.50. If the expected long-run constant growth rate for this stock is 7 percent, and if investors require an 11 percent rate of return, what is the price of the stock?

A) $37.50
B) $40.13
C) $42.59
D) $44.81
E) $46.50

Question 5

Thomas Furniture is expected to pay a dividend of $1.75 next year. If the expected long-run constant growth rate for this stock is 5 percent, and if the current market price is $43.75, what rate of return do investors require for the stock?

A) 8%
B) 9%
C) 10%
D) 11%
E) 12%

Question 6

Hooper Lithography has just paid a dividend of $2.00. The stock currently sells for $53.00 and investors require a 10 percent rate of return. At what long-run constant growth rate is the stock expected to grow?

A) 4%
B) 5%
C) 6%
D) 7%
E) 8%

Question 7

Maguire Manufacturing has preferred stock that pays a $7.50 annual dividend. If investors require an 8 percent rate of return, what is the price of the preferred stock?

A) $93.75
B) $95.00
C) $97.50
D) $99.25
E) $101.75

Question 8

Jane Co. has preferred stock that pays a $6.00 annual dividend and has a price of $96.00. What is the rate of return that investor's require for this preferred stock?

A) 5.75%
B) 6.00%
C) 6.25%
D) 6.50%
E) 6.75%

Question 9

Frans Schijf invested in 100 shares of an American MNE at a price of $92.50 per share. The company does not pay a cash dividend, but he expects to be able to sell the stock in one year for $101.75 per share. The exchange rate at the time he bought the shares was $1.2155/€ and he forecasts that the dollar will strengthen against the euro by 7.5 percent. What is his expected euro return?

A) 18.25%
B) 17.50%
C) 9.25%
D) 2.50%
E) 1.75%

Question 10

The Kessner Company just paid a $1.00 dividend. Kessner's growth rate is expected to be 20 percent for 2 years, after which dividends are expected to grow at a rate of 7 percent forever. Kessner's required rate of return on equity (rs) is 11 percent. What is the current price of Kessner's common stock?

A) $29.64
B) $30.28
C) $31.72
D) $32.95
E) $33.51

Question 11

An analyst is estimating the intrinsic value of Bishop Technologies' stock. The analyst has estimated Bishop's free cash flow for the next year as $15 million. The analyst also estimates that the company's free cash flow will increase at a constant rate of 7 percent a year and that the company's WACC is 10 percent. Bishop has $50 million of long-term debt and preferred stock, and 30 million common shares outstanding. What is the estimated per-share price of Bishop Technologies' common stock?

A) $7.75
B) $10.00
C) $12.75
D) $15.00
E) $17.75

Question 12

Simmering Corporation's stock is currently selling at an equilibrium price of $30 per share. The firm has been experiencing a 6 percent annual growth rate. Last year's earnings per share, EPS0, were $4.00 and the dividend payout ratio is 40 percent. The risk-free rate is 8 percent, and the market risk premium is 5 percent. If market risk (beta) increases by 50 percent, and all other factors remain constant, what will be the new stock price? (Use 4 decimal places in your calculations.)

A) $19.18
B) $20.47
C) $21.12
D) $21.85
E) $22.69

Question 13

Corcoran Corporation's stock is currently selling at an equilibrium price of $25 per share. The firm has been experiencing a 7 percent annual growth rate. Last year's earnings per share, EPS0, were $4.00 and the dividend payout ratio is 50 percent. The risk-free rate is 5 percent, and the market risk premium is 5 percent. If market risk (beta) increases by 20 percent, and all other factors remain constant, what will be the new stock price? (Use 4 decimal places in your calculations.)

A) $19.50
B) $20.05
C) $22.75
D) $24.50
E) $27.00

Question 14

Levine Properties' stock has a required return of 10 percent. The stock currently trades at $50 per share. The year-end dividend, D1, is expected to be $1.00 per share. After this payment, the dividend is expected to grow by 25 percent per year for the next three years. That is, D4 = $1.00(1.25)3 = $1.953125. After t = 4, the dividend is expected to grow at a constant rate of X percent per year forever. What is the stock's expected constant growth rate after t = 4? In other words, what is X?

A) 6.87%
B) 7.02%
C) 7.15%
D) 7.24%
E) 7.39%

Question 15

What rights and privileges does common stock give shareholders?

Question 16

What is the difference between closely held and publicly owned corporations

Question 17

What are American Depository Receipts and Global Registered Shares?

Question 18

Identify some different types, or classes, of common stock.

Question 19

What kinds of transactions occur in stock markets?

Question 20

How is the value of a stock determined?

Question 21

What conditions must hold for the constant growth model to be used?

Question 22

Can you use the constant growth model to value a stock with nonconstant growth? Explain.

Question 23

What is the efficient market hypothesis, and what are the various levels of market efficiency?

Question 24

If a stock is overvalued, does that mean the market is inefficient, and how would you expect the stock to perform?

Question 25

Is market multiple analysis a reliable way to value a company's stock? Explain.

Question 26

Parker Industries has just paid a dividend of $1.25. If the expected long-run constant growth rate for this stock is 5 percent, and if investors require an 8 percent rate of return, what is the price of the stock?

Question 27

The Genco Olive Oil Co. is expected to pay a dividend of $1.90 next year. If the expected long-run constant growth rate for this stock is 6 percent, and if the current market price is $65.52, what rate of return do investors require for the stock?

Question 28

Morgan Music has just paid a dividend of $2.20. The stock currently sells for $94.16 and investors require a 9.5 percent rate of return. At what long-run constant growth rate is the stock expected to grow?

Question 29

Minter Mining has preferred stock that pays a $7.25 annual dividend. If investors require an 8.5 percent rate of return, what is the price of the preferred stock?

Question 30

Jordan Inc. has preferred stock that pays a $6.75 annual dividend and has a price of $95.07. What is the rate of return that investor's require for this preferred stock?

Question 31

Corleone Crafts just paid a $1.25 dividend. Corleone's growth rate is expected to be 30 percent for 2 years, after which dividends are expected to grow at a rate of 6 percent forever. Corleone's required rate of return on equity (rs) is 10 percent. What is the current price of Corleone's common stock?

Question 32

An analyst is estimating the intrinsic value of Carter Technologies' stock. The analyst has estimated Carter's free cash flow for the next year as $25 million. The analyst also estimates that the company's free cash flow will increase at a constant rate of 8 percent a year and that the company's WACC is 10 percent. Carter has $450 million of long-term debt and preferred stock, and 25 million common shares outstanding. What is the estimated per-share price of Carter Technologies' common stock?

Question 33

Levine Properties' stock has a required return of 10 percent. The stock currently trades at $64.10 per share. The year-end dividend, D1, is expected to be $1.10 per share. After this payment, the dividend is expected to grow by 30 percent per year for the next three years. That is, D4 = $1.10(1.3)3 = $2.4167. After t = 4, the dividend is expected to grow at a constant rate of X percent per year forever. What is the stock's expected constant growth rate after t = 4? In other words, what is X?