Deck 4: The Value of Common Stocks

Question 1

The dividend yield reported on finance.yahoo.com is calculated as follows:

A)(dividend/year-high stock price).
B)(dividend/year-low stock price).
C)(dividend/closing stock price).
D)(dividends/earnings).

Answer 1

(dividend/closing stock price).

Question 2

The following are auction markets EXCEPT:

A)New York Stock Exchange.
B)London Stock Exchange.
C)Tokyo Stock Exchange.
D)Nasdaq.

Answer 2

Nasdaq.

Question 3

The following are foreign companies that are traded on the New York Stock Exchange:
i.Toyota; II)Brazil Telecom; III)Canadian Pacific; IV)Tata Motors; V)General Electric

A)I,II,and III only
B)I,II,III,and IV only
C)I,II,III,and V only
D)all of the given companies

Answer 3

I,II,III,and IV only

Question 4

World-Tour Co.has just now paid a dividend of $2.83 per share (D₀); its dividends are expected to grow at a constant rate of 6% per year forever.If the required rate of return on the stock is 16%,what is the current value of the stock,after paying the dividend?

A)$70
B)$56
C)$30
D)$48

Question 5

A Wall Street Journal quotation for a company has the following values: Div: $1.12,PE: 18.3,Close: $37.22.Calculate the approximate dividend payout ratio for the company.

A)18%
B)35%
C)45%
D)55%

Question 6

In which of the following stock exchanges are there specialists who act as auctioneers?

A)New York Stock Exchange
B)London Stock Exchange
C)Tokyo Stock Exchange
D)Frankfurt Stock Exchange

Question 7

CK Company stockholders expect to receive a year-end dividend of $5 per share and then immediately sell their shares for $115 dollars per share.If the required rate of return for the stock is 20%,what is the current value of the stock?

A)$132
B)$122
C)$100
D)$110

Question 8

The following is an example of a dealer market:

A)New York Stock Exchange.
B)London Stock Exchange.
C)Tokyo Stock Exchange.
D)Nasdaq.

Question 9

The major secondary market for GE shares is:

A)London Stock Exchange.
B)New York Stock Exchange.
C)Nasdaq.
D)Tokyo Stock Exchange.

Question 10

If a Wall Street Journal quotation for a company has the following values: close,55.14; net change: = +1.04; then the closing price for the stock for the previous trading day was?

A)$56.18
B)$54.10
C)$55.66
D)$53.02

Question 11

Will Co.is expected to pay a dividend of $2 per share at the end of year 1(D₁),and the dividends are expected to grow at a constant rate of 4% forever.If the current price of the stock is $20 per share,calculate the expected return or the cost of equity capital for the firm.

A)10%
B)4%
C)14%
D)20%

Question 12

Assume General Electric (GE)has about 10.3 billion shares outstanding and the stock price is $37.10.Also,assume the P/E ratio is about 18.3.Calculate the approximate market capitalization for GE.

A)$679 billion
B)$188 billion
C)$382 billion
D)$103 billion

Question 13

The valuation of a common stock today primarily depends on:

A)the number of shares outstanding and the number of its shareholders.
B)its expected future dividends and its discount rate.
C)Wall Street analysts.

Question 14

Casino Inc.expects to pay a dividend of $3 per share at the end of year 1 (D₁)and these dividends are expected to grow at a constant rate of 6% per year forever.If the required rate of return on the stock is 18%,what is the current value of the stock today?

A)$25
B)$50
C)$100
D)$54

Question 15

Super Computer Company's stock is selling for $100 per share today.It is expected that-at the end of one year-it will pay a dividend of $6 per share and then be sold for $114 per share.Calculate the expected rate of return for the shareholders.

A)20%
B)15%
C)10%
D)25%

Question 16

In which of the following exchanges does a computer act as the auctioneer?
i.New York Stock Exchange; II)London Stock Exchange; III)Tokyo Stock Exchange; IV)Frankfurt Stock Exchange

A)I,II,III,and IV
B)I,III,and IV only
C)I,II,and III only
D)II,III,and IV only

Question 17

The constant dividend growth formula P₀ = Div₁/(r - g)assumes:
i.that dividends grow at a constant rate g,forever; II)r > g; III)g is never negative

A)I only
B)II only
C)I and II only
D)III only

Question 18

Deluxe Company expects to pay a dividend of $2 per share at the end of year 1,$3 per share at the end of year 2,and then be sold for $32 per share at the end of year 2.If the required rate of return on the stock is 15%,what is the current value of the stock?

A)$28.20
B)$32.17
C)$32.00
D)$29.18

Question 19

One can estimate the expected rate of return or the cost of equity capital as follows:

A)Dividend yield - expected rate of growth in dividends.
B)Dividend yield + expected rate of growth in dividends.
C)Dividend yield/expected rate of growth in dividends.
D)(Dividend yield)× (expected rate of growth in dividends).

Question 20

The exchange-traded fund (ETF)that tracks the Nasdaq 100 index is called:

A)SPDR.
B)DIAMONDS.
C)QQQQ.
D)NDAQQ.

Question 21

Parcel Corporation expects to pay a dividend of $5 per share next year,and the dividend payout ratio is 50%.If dividends are expected to grow at a constant rate of 8% forever,and the required rate of return on the stock is 13%,calculate the present value of growth opportunities.

A)$100.00
B)$76.92
C)$23.08

Question 22

Otobai Motor Company just paid a dividend of $1.40.Analysts expect its dividend to grow at a rate of 18% for the next three years and then a constant rate of 5% thereafter.What is the expected dividend per share at the end of year 5?

A)$2.35
B)$2.54
C)$2.91
D)$1.50

Question 23

Generally high growth stocks pay:

A)low or no dividends.
B)high,steadily growing dividends.
C)erratic dividends.
D)decreasing dividends.

Question 24

Which of the following formulas regarding the earnings-to-price ratio is true?

A)EPS/P₀ = r[1 + PVGO/P₀]
B)EPS/P₀ = r[1 - PVGO/P₀]
C)EPS/P₀ = [r + PVGO/P₀]
D)EPS/P₀ = [1 + r + PVGO/P₀)]/r

Question 25

MJ Co.pays out 60% of its earnings as dividends.Its return on equity is 15%.What is the stable dividend growth rate for the firm?

A)9%
B)5%
C)6%
D)15%

Question 26

Which of the following stocks is an income stock?

A)Dow Chemicals
B)Starbucks
C)Facebook
D)Google

Question 27

One can estimate the dividend growth rate for a stable firm as:

A)plow-back rate/the return on equity (ROE).
B)plow-back rate - the return on equity (ROE).
C)plow-back rate + the return on equity (ROE).
D)plow-back rate × the return on equity (ROE).

Question 28

Company X has a P/E ratio of 10 and a stock price of $50 per share.Calculate earnings per share of the company.

A)$6 per share
B)$10 per share
C)$0.20 per share
D)$5 per share

Question 29

Summer Co.expects to pay a dividend of $4.00 per share-one year from now-out of earnings of $7.50 per share.If the required rate of return on the stock is 15% and its dividends are growing at a constant rate of 10% per year,calculate the present value of growth opportunities for the stock (PVGO).

A)$80
B)$30
C)$50
D)$26

Question 30

Ocean Co.just paid a dividend of $2 per share out of earnings of $4 per share.If the book value per share is $25,what is the expected growth rate in dividends (g)?

A)16%
B)12%
C)8%

Question 31

Lake Co.just paid a dividend of $3 per share out of earnings of $5 per share.If its book value per share is $40,what is the expected growth rate in dividends?

A)7.5%
B)8%
C)12.5%
D)5%

Question 32

The growth rate in dividends is a function of two ratios.They are:

A)ROA and ROE.
B)dividend yield and growth rate in stock price.
C)ROE and the plowback ratio.
D)book value per share and EPS.

Question 33

A high proportion of the value of a growth stock typically comes from:

A)past dividend payments.
B)past earnings.
C)PVGO (present value of growth opportunities).
D)both A and B.

Question 34

The In-Tech Co.just paid a dividend of $1 per share.Analysts expect its dividend to grow at 25% per year for the next three years and then 5% per year thereafter.If the required rate of return on the stock is 18%,what is the current value of the stock?

A)$12.97
B)$11.93
C)$15.20
D)$15.78

Question 35

Universal Air is a no-growth firm and has two million shares outstanding.It expects to earn a constant $20 million per year on its assets.If it has no debt,all earnings are paid out as dividends,and the cost of capital is 10%,calculate the current price per share of the stock.

A)$200
B)$150
C)$100
D)$50

Question 36

Seven-Seas Co.just paid a dividend of $3 per share out of earnings of $5 per share.If its book value per share is $40 and its market price is $52.50 per share,calculate the required rate of return on the stock.

A)12%
B)11%
C)5%
D)6%

Question 37

Goodyear is an example of:

A)a growth stock.
B)an income stock.
C)a high dividend stock.
D)a low plowback stock.

Question 38

R&D Technology Corporation just paid a dividend of $0.50 per share.Analysts expect its dividend to grow at 24% per year for the next two years and then 8% per year thereafter.If the required rate of return in the stock is 16%,calculate the current value of the stock.

A)$1.11
B)$7.71
C)$8.82
D)$10.38

Question 39

River Co.just paid a dividend of $2 per share out of earnings of $4 per share.If its book value per share is $25 and its stock is currently selling for $40 per share,calculate the required rate of return on the stock.

A)15.2%
B)7.2%
C)14.7%
D)13.4%

Question 40

Michigan Co.just paid a dividend of $2.00 per share.Analysts expect future dividends to grow at 20% per year for the next four years and then grow at 6% per year thereafter.Calculate the expected dividend in year 5.

A)$4.15
B)$2.95
C)$4.40
D)$3.81

Question 41

Explain the term secondary market.

Question 42

A firm forecasts a project's net cash flows ($millions)in years 1 thru 4 as $120,$130,$135,and $137,respectively.If the project ends at the end of the fourth year,what is the horizon value of the project? Assume that the company had a historical growth rate of 3% and has a discount rate of 10%.

A)$0.00
B)$1.37
C)$1.96
D)$4.87

Question 43

The return that is expected by investors from a common stock is also called its market capitalization rate,or cost of equity capital.

Question 44

It is not possible to value a firm that has a supernormal (variable)growth rate for the first few years of its life.

Question 45

The New York Stock Exchange is the only stock market in the U.S.

Question 46

For most firms,market value is usually greater than book value.

Question 47

All securities in an equivalent risk class are priced to offer the same expected return.

Question 48

A large percentage of the total value of a growth stock comes from the present value of its growth opportunities.

Question 49

Galaxy Air,previously a no-growth firm,has two million shares outstanding.Until now,it consistently earned $20 million per year on its assets.(It has no debt and pays out all earnings as dividends.Its cost of capital is 10%.)Due to its newly appointed CEO,Galaxy Air is now able to squeeze out 1% annual growth by plowing back 5% of earnings.Calculate its stock price per share.

A)$200.00
B)$106.61
C)$100.00
D)$110.10

Question 50

Most of the trading on the NYSE is in ordinary common stocks.

Question 51

An investor who uses a market order instructs her brokerage firm to buy a given quantity of shares at the best available price.

Question 52

The only payoff to the owners of common stocks is in the form of cash dividends.

Question 53

Ottocell Motor Company just paid a dividend of $1.40.Analysts expect its dividend to grow at a rate of 10% next year,8% for the following two years,and then a constant rate of 5% thereafter.What is the expected dividend per share at the end of year 5?

A)$2.08
B)$1.98
C)$1.80
D)$0.99

Question 54

A company forecasts growth of 6% for the next five years and 3% thereafter.Given last year's free cash flow was $100,what is its horizon value if the company cost of capital is 8%?

A)$0
B)$1,672
C)$2,000
D)$2,676

Question 55

An investor who uses a limit order instructs his brokerage firm to buy a limited quantity of shares at the best available price.

Question 56

The cost of equity capital equals the dividend yield minus the growth rate in dividends for a constant dividend growth stock.

Question 57

The constant growth formula for stock valuation does not work for a firm with a negative growth rate (i.e.,a declining growth rate)in its dividend.

Question 58

A stock's price is based on the expected present value,at the market capitalization rate,of all the stock's future earnings.

Question 59

Explain the term primary market.

Question 60

One can use the discounted cash-flow formulas that are used to value common stocks in order to value entire businesses.

Question 61

Briefly explain how the formulas that are used for valuing common stocks can also be used to value businesses.

Question 62

Briefly explain the major types of exchanges prevalent in the U.S.

Question 63

Discuss the term price-earnings (P/E)ratio.

Question 64

Briefly explain the term market capitalization rate.

Question 65

Briefly explain why Microsoft experienced a significant drop in price when it announced its first ever,regular dividend along with huge profits.

Question 66

Discuss the general principle at work in valuing a common stock.

Question 67

Briefly explain the assumptions associated with the constant dividend growth formula.