Question 1

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?

Accepted Answer

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Question 2

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?

Accepted Answer

The answer of Stocks A and B have the following...

Question 3

Which of the following statements is CORRECT?

Accepted Answer

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

Question 4

Which of the following statements is CORRECT?

Accepted Answer

The correct method to implement the corporate valuation model is by discounting projected free cash flows at the weighted average cost of capital (WACC). This is because the WACC takes into consideration the cost of debt and equity, which are the sources of financing for the company. Discounting net income or net operating profit after taxes (NOPAT) is not correct because they do not consider the cost of capital or the amount of debt in a firm's capital structure. Additionally, the corporate valuation model does not require the assumption of a constant growth rate in all years, but rather a stable growth rate in the future.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. This allows existing shareholders to maintain their ownership percentage in the company and prevents dilution of their ownership stake. Option A is incorrect as it is possible for two classes of common stock to have different voting rights. Option B is incorrect as the right to approve or disapprove of a merger is usually given to shareholders as a whole, not just those with preemptive rights. Option D is incorrect as the stock valuation model can be used for firms with negative growth rates, but the resulting stock price may be negative. Option E is incorrect as the stock valuation model can be used for firms with growth rates lower than their required return, but the result may be a negative stock price.

Question 6

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?

Accepted Answer

In an efficient market, if a stock is in equilibrium, the expected dividend yield and growth rate are equal, as they both contribute to the total expected return.

Question 7

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

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Question 8

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?

Accepted Answer

The answer of Stocks A and B have the following...

Question 9

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

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Question 10

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

Since both stocks are in equilibrium and the stock market is efficient, their prices should reflect all available information. We can see from the data that Stock X has a higher expected growth rate and expected capital gains yield than Stock Y. However, Stock Y has a higher P/E ratio, suggesting that investors are willing to pay more for Stock Y's earnings. This could be because Stock Y pays a higher dividend per share than Stock X, making it more attractive to income-seeking investors. Therefore, choice B is the correct answer.

Question 11

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

Accepted Answer

Companies can issue different classes of common stock, and some class or classes of common stock are entitled to more votes per share than other classes. This is known as a dual-class share structure, where one class of shares has more voting rights than another. Typically, founders and insiders hold the shares with more voting rights, while public shareholders own shares with fewer voting rights. This structure allows insiders to maintain control over the company's decisions while raising capital from external sources.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

Preferred stock is generally less risky to investors than common stock because it typically pays a fixed dividend and has priority over common stock in terms of receiving dividends and assets in the event of the company's liquidation. Bondholders have priority over preferred stockholders in the event of bankruptcy. Corporations can buy the preferred stocks of other corporations. Preferred dividends can be cumulative or non-cumulative depending on the terms of the specific issue. Dividends on preferred stocks are not tax deductible by the issuing corporation.

Question 13

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

The answer of Stocks X and Y have the following...

Question 14

Which of the following statements is NOT CORRECT?

Accepted Answer

The correct statement is that the corporate valuation model discounts free cash flows by the weighted average cost of capital (WACC), not the required return on equity.

Question 15

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?

Accepted Answer

The answer of Stocks A and B have the following...

Question 16

Which of the following statements is CORRECT?

Accepted Answer

Preferred stock is expected to provide steadier, more reliable income to investors than common stock, and as a result, the expected after-tax yield on preferred stock is lower than the after-tax expected return on common stock. The other statements are either incorrect or misleading.

Question 17

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Accepted Answer

The required rate of return is composed of the dividend yield (expected dividend per share divided by the stock price) and the capital gains yield (expected change in price over the year). Since Stock A has a higher required rate of return, it must have a higher expected capital gains yield than Stock B. Therefore, if Stock A has a lower dividend yield than Stock B (which it must, since they have the same price but Stock A has a higher required return), then its expected capital gains yield must be higher to compensate for the lower dividend yield.

Question 18

A 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 If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Accepted Answer

The answer of A stock is expected to pay a...

Question 19

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

Accepted Answer

According to the constant growth model, the expected total return on a stock is equal to its expected dividend yield plus its expected capital gains yield. Therefore, if a stock is in equilibrium, its dividend yield must equal its expected total return minus its expected capital gains yield. Choice B is incorrect because the expected dividend yield on a stock growing at a constant rate is not necessarily equal to the rate at which its dividend is growing. Choice C is incorrect because a stock's dividend yield can exceed its expected growth rate if its price decreases. Choice D is incorrect because the constant growth model can be used if the expected growth rate is less than, equal to, or greater than the required rate of return. Choice E is incorrect because the higher a company's beta coefficient, the higher its required rate of return.

Question 20

The expected return on Natter Corporation's stock is 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?

Accepted Answer

The answer of The expected return on Natter Corporation's stock...

Quiz 9: Stocks and Their Valuation

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?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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?

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

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?

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, 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?

Which of the following statements is CORRECT?

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

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?

Which of the following statements is CORRECT?

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

A 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 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, assuming stocks are in equilibrium?

The expected return on Natter Corporation's stock is 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?