Corporate Finance, Chapter 7. Quiz Questions:

- The New York Stock Exchange (NYSE) is an example of an auction market. True
- If investors believe a company will have the opportunity to make very profitable investments in the furutre, they will pay more for the company’s stock today. True
- The dividend discount model should not be used to value stocks in which the dividend does not grow. False
- According to the dividend discount model, a stock’s price today depends on the investor’s horizon for holding the stock. False
- If the market is efficient, stock prices should only be expected to react to new information that is released. True
- The intent of technical analysis is to discover patterns in past stock prices. True
- Market efficiency implies that security prices impound new information quickly. True
- If security prices follow a random walk, then on any particular day, the odds are that an increase or decrease in price is equally likely. True
- Fundamental analysts attempt to get rich by identifying patterns in stock prices. False
- Investors known as fundamental analysts try to achieve superior returns by spotting and exploiting patterns in stok prices. False
- If stock prices follow a random walk, which of the following statement(s) is(are) correct? C. Both A and B
- In the calculation of rates of return on common stock, dividends are _____ and capital gains are _____. C. Not guaranteed; not guaranteed
- What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40? A. 2.5%
- If a stock’s P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock’s current price? D. $40.50
- What is the current price of a share of stock for a firm with $5 million in balance-sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4? A. $2.50
- A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14%. What might investors expect to pay for the stock one year from now? B. $86.20
- The expected return on a common stock is composed of: C. Both dividend yield and capital appreciation
- Firms having a higher expected return have a higher: A. Level of expected risk
- According to the dividend discount model, the current value of a stock is equal to the: A. Present value of all expected future dividends.
- If the dividend yield for year one is expected to be 5% based on the current price of $25, what will the year four dividend be if dividends grow at a constant 6%? B. $1.49
- What is the expected dividend to be paid in three years if yesterday’s dividend was $6.00, dividends are expected to grow at a constant 6% annual rate, and the firm has a 210% expected return? B. $7.15
- What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? D. $43.75
- If next year’s dividend is forecast to be $5.0, the constant growth rate is 4%, and the discount rate is 16%, then the current stock price should be: C. $41.67
- What price would you expect to pay for a stock with 13% required rate of return, 4% rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow? D. $31.39
- What constant growth rate in dividends is expected for a stock valued at $32.00 if next year’s dividend is forecast at $2.00 and the appropriate discount rate is 13%? C. 6.75%
- What rate of return is expected from a stock that sells for $30 per share, pays $1.50 annually in dividends, and is expected to sell for $33 per share in one year? D. 15%
- ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price? C. $37.42
- A payout ratio of 35% for a company indicates that: D. 35% of earnings are paid out as dividends
- A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant growth rate of: B. 9%
- What is the plowback ratio for a firm that has earnings per share of $12 and pays out $4 per share as dividends? C. 66.67%