Question 1

Explain how the difference in the bid and ask prices might be considered a hidden cost to the investor.

Accepted Answer

The answer of Explain how the difference in the bid...

Question 2

What ten sectors of the economy are represented in the S&P 500 Index?

Accepted Answer

The answer of What ten sectors of the economy are...

Question 3

Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this stock. What is the percentage change in price if Coca-Cola is expected to grow at 7% versus 8%?

Accepted Answer

The answer of Coca-Cola recently paid a $3.00 dividend. Investors...

Question 4

What are the differences between common stock and preferred stock?

Accepted Answer

The answer of What are the differences between common stock...

Question 5

When might the constant growth model not be used?

Accepted Answer

The answer of When might the constant growth model not...

Question 6

A stock recently paid a dividend of $3 per share. Its growth rate is expected to be 8%. Investors require a 10% return. The stock is selling in the market for $140. What is this stock worth and is the stock undervalued or overvalued?

Accepted Answer

To find the intrinsic value of the stock using the dividend discount model:
PV = D / (r - g)
PV = 3 / (0.1 - 0.08) = 150
Therefore, the intrinsic value of the stock is $150, which is less than the current market price of $140, making the stock undervalued. However, we also need to consider the growth rate. Since the growth rate is positive, we can assume that the stock price will increase in the future leading to the intrinsic value of $162. Therefore, choice A is the best answer.

Question 7

Explain how important a firm's growth is by creating an example of a growth and no-growth stock.

Accepted Answer

The answer of Explain how important a firm's growth is...

Question 8

Laura is considering two investments: Stock A and B. Both stocks have a P/E ratio of 19. Stock A has an expected growth rate of 5% and stock B has an expected growth rate of 13%. Which is the better stock and why?

Accepted Answer

The answer of Laura is considering two investments: Stock A...

Question 9

Explain how stock is valued if the constant growth model cannot be used.

Accepted Answer

The answer of Explain how stock is valued if the...

Question 10

Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this stock. What is the difference in price if Coca-Cola is expected to grow at 7% versus 8%?

Accepted Answer

The answer of Coca-Cola recently paid a $3.00 dividend. Investors...

Question 11

Consider two firms with the same P/E ratio. Explain how one could be described as expensive compared to the other.

Accepted Answer

The answer of Consider two firms with the same P/E...

Question 12

Explain how it is possible for the Dow Jones Industrial Average and the Nasdaq Composite to move in different directions in one day.

Accepted Answer

The answer of Explain how it is possible for the...

Question 13

Which of the following statements is incorrect?

Accepted Answer

The answer of Which of the following statements is incorrect?
...

Question 14

A stock recently paid a dividend of $2.5 per share. Its growth rate is expected to be 8%. Investors require a 10% return. The stock is selling in the market for $150. What is this stock worth and is the stock undervalued or overvalued?

Accepted Answer

The answer of A stock recently paid a dividend of...

Question 15

Explain the characteristics of preferred stock.

Accepted Answer

The answer of Explain the characteristics of preferred stock....

Question 16

A firm's stock is selling at $75.00 per share. Its growth rate is 10% and investors demand 17% on this stock. What is the firm's expected dividend?

Accepted Answer

The answer of A firm's stock is selling at $75.00...

Question 17

Under what conditions would the constant-growth-rate model not be appropriate?

Accepted Answer

The answer of Under what conditions would the constant-growth-rate model...

Question 18

Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this stock. What is the difference in price if Coca-Cola is expected to grow at 6% versus 8%?

Accepted Answer

Using the dividend discount model: 
Price = Dividend / (Required return - Growth rate) 
If growth rate is 6%, 
Price = 3 / (0.12-0.06) = $25 
If growth rate is 8%, 
Price = 3 / (0.12-0.08) = $37.50 
The difference in price is $37.50 - $25 = $12.50. Therefore, none of the given options is the correct answer.

Quiz 8: Valuing Stocks