Question 1

Which of the following statements is correct?

Accepted Answer

The semistrong form of the efficient markets hypothesis suggests that all publicly available information is already reflected in the stock prices, which means that you cannot consistently earn profits from trading on information published in the company annual reports. Option A is incorrect because an increase in beta would generally lead to a decrease in the stock price. Option B is incorrect because market efficiency only suggests that the average realized returns on all stocks will equal the expected rates of return, but individual stocks may have higher or lower returns. Option C is incorrect because the weak-form efficiency suggests that past price and volume data cannot be used to predict future stock prices.

Question 2

Ewert Enterprises' stock currently sells for $30.50 per share. The stock's dividend is projected to increase at a constant rate of 4.50% per year. The required rate of return on the stock, rs, is 10.00%. What is Ewert's expected price 3 years from today?

Accepted Answer

The answer of Ewert Enterprises' stock currently sells for $30.50...

Question 3

Stock X has a required return of 10%, while Stock Y has a required return of 12%. Which of the following statements is correct?

Accepted Answer

If Stock Y has a lower expected dividend yield but a higher required return, it must compensate with a higher expected growth rate to meet the required return.

Question 4

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 12.5%, and the expected constant growth rate is g = 8.5%. What is its current price?

Accepted Answer

Using the constant growth formula, we can find the current price of the stock:
Price = Dividend / (Required rate of return - Expected growth rate)
Price = 0.75 / (0.125 - 0.085)
Price = $18.75

Question 5

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Accepted Answer

The expected capital gains yield is calculated as (D1 - D0) / P0, where D1 is the expected dividend in the coming year, D0 is the current dividend, and P0 is the current stock price. In this case, D1 = $1.50, D0 = $1.50, and P0 = $56. Therefore, the expected capital gains yield is (1.50 - 1.50) / 56 = 0.00.

Question 6

Assuming that markets are semistrong efficient, which of the following statements is correct?

Accepted Answer

If markets are semistrong efficient, all publicly available information, including past stock prices, should already be reflected in the current stock prices, making it difficult to consistently earn higher returns than those predicted by the SML. While investors may get lucky or have access to private information, this is not guaranteed, and they shouldn't expect to consistently earn returns higher than what the SML predicts. Choice A is incorrect because stocks can have different expected returns based on their risk level. Choice B is incorrect because past stock prices are already incorporated into current prices in a semistrong efficient market. Choice D is incorrect because investors should only expect to earn the returns predicted by the SML, not more.

Question 7

Which of the following statements best describes the efficient markets hypothesis?

Accepted Answer

The efficient markets hypothesis (EMH) states that it is impossible to consistently achieve returns in excess of average market returns on a risk-adjusted basis. Weak-form efficiency implies that past prices and trading volumes are already reflected in current prices, so analyzing past prices cannot help one earn above-normal returns. Option A is incorrect because strong-form efficiency suggests that all information, public or private, is already reflected in market prices, not just bond and stock returns. Option B is partially correct, but it doesn't quite capture the whole idea of what weak-form efficiency means. Option C is incorrect because the ability to earn a return higher than the overall stock market does not necessarily mean that the stock market is inefficient.

Question 8

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Accepted Answer

The answer of If D1 = $1.25, g (which is...

Question 9

A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 5.0%, and if investors' required rate of return is 10.5%, what is the stock price?

Accepted Answer

The answer of A share of common stock has just...

Question 10

For a stock to be in equilibrium, that is, for there to be no consistent pressure for its price to depart from its current level, what must occur?

Accepted Answer

In order for a stock to be in equilibrium, the expected future returns must be equal to the required return. This means that investors expect to earn the return that is required to compensate for the risk they are taking on. If the expected returns are higher than the required return, investors will want to buy the stock, driving up its price, and if the expected returns are lower than the required return, investors will want to sell the stock, driving down its price. Only when the expected future returns are exactly equal to the required return will there be no pressure for the stock's price to depart from its current level, and the stock will be in equilibrium.

Question 11

Assume that markets are semistrong efficient, but not strong-form efficient. Which of the following statements is correct?

Accepted Answer

When markets are semistrong efficient, all publicly available information is already reflected in stock prices. However, if investors have access to private information that has not been publicly revealed, they may be able to earn returns above those predicted by the SML. Therefore, statement B is correct. Statement A is incorrect because even though the market is efficient, each stock may have a different expected return due to its risk characteristics. Statement C is also incorrect because the information is already reflected in stock prices. Statement D is incorrect because the SML provides the expected return for a given level of risk, and investing in the stock market always involves some level of risk.

Question 12

McDonnell Manufacturing is expected to pay a dividend of $1.50 per share at the end of the year (D1 = $1.50). The stock sells for $34.50 per share, and its required rate of return is 11.5%. The dividend is
Expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Accepted Answer

The answer of McDonnell Manufacturing is expected to pay a...

Question 13

If the stock market is semistrong efficient, which of the following statements is correct?

Accepted Answer

If the stock market is semi-strong efficient, all publicly available information is already reflected in the stock prices, meaning investors cannot outperform the market by using public information. However, if an investor has access to private information that has not yet been disclosed to the public, they may potentially outperform the market. The other options are incorrect.

Question 14

A common share just paid a dividend of D0 = $1.75. The required rate of return is rs = 12.0%, and the constant growth rate is g = 4.0%. What is the current share price?

Accepted Answer

The answer of A common share just paid a dividend...

Question 15

If D1 = $1.75, g (which is constant) = 4.5%, and P0 = $46, what is the stock's expected dividend yield for the coming year?

Accepted Answer

The answer of If D1 = $1.75, g (which is...

Question 16

If markets are in equilibrium, which of the following will occur?

Accepted Answer

In equilibrium, the market has priced in all available information and the price of each stock reflects its expected return as seen by the marginal investor. The expected return of a stock should equal its required return to justify its price. Therefore, each stock's expected return should equal its required return as seen by the marginal investor.

Question 17

If D0 = $2.75, g (which is constant) = 3%, and P0 = $36, what is the stock's expected total return for the coming year?

Accepted Answer

The answer of If D0 = $2.75, g (which is...

Question 18

Which of the following statements is correct?

Accepted Answer

The preemptive right allows existing shareholders to maintain their proportional ownership by purchasing new shares before the company offers them to the public.

Question 19

Which of the following statements best describes the efficient markets hypothesis?

Accepted Answer

The Efficient Markets Hypothesis (EMH) allows for the presence of irrational investors, but posits that their actions are offset by rational investors, leading to a market that behaves rationally overall.

Question 20

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

The expected dividend yield is the ratio of the expected dividend next year to the current stock price. We can calculate the expected dividend next year using the constant growth rate formula:

D1 = D0*(1+g) = $2.25*(1+0.035) = $2.33

So the expected dividend yield is:

Expected Dividend Yield = D1/P0 = $2.33/$50 = 0.0466 = 4.66%

Therefore, the answer is B.

Quiz 8: Stocks, Stock Valuation, and Stock Market Equilibrium

Which of the following statements is correct?

Ewert Enterprises' stock currently sells for $30.50 per share. The stock's dividend is projected to increase at a constant rate of 4.50% per year. The required rate of return on the stock, rs, is 10.00%. What is Ewert's expected price 3 years from today?

Stock X has a required return of 10%, while Stock Y has a required return of 12%. Which of the following statements is correct?

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 12.5%, and the expected constant growth rate is g = 8.5%. What is its current price?

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Assuming that markets are semistrong efficient, which of the following statements is correct?

Which of the following statements best describes the efficient markets hypothesis?

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 5.0%, and if investors' required rate of return is 10.5%, what is the stock price?

For a stock to be in equilibrium, that is, for there to be no consistent pressure for its price to depart from its current level, what must occur?

Assume that markets are semistrong efficient, but not strong-form efficient. Which of the following statements is correct?

If the stock market is semistrong efficient, which of the following statements is correct?

A common share just paid a dividend of D0 = $1.75. The required rate of return is rs = 12.0%, and the constant growth rate is g = 4.0%. What is the current share price?

If D1 = $1.75, g (which is constant) = 4.5%, and P0 = $46, what is the stock's expected dividend yield for the coming year?

If markets are in equilibrium, which of the following will occur?

If D0 = $2.75, g (which is constant) = 3%, and P0 = $36, what is the stock's expected total return for the coming year?

Which of the following statements is correct?

Which of the following statements best describes the efficient markets hypothesis?

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?