Corporate Finance, Chapter 7. Quiz Questions:

1. The New York Stock Exchange (NYSE) is an example of an auction market. True
2. 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
3. The dividend discount model should not be used to value stocks in which the dividend does not grow. False
4. According to the dividend discount model, a stock’s price today depends on the investor’s horizon for holding the stock. False
5. If the market is efficient, stock prices should only be expected to react to new information that is released. True
6. The intent of technical analysis is to discover patterns in past stock prices. True
7. Market efficiency implies that security prices impound new information quickly. True
8. 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
9. Fundamental analysts attempt to get rich by identifying patterns in stock prices. False
10. Investors known as fundamental analysts try to achieve superior returns by spotting and exploiting patterns in stok prices. False
11. If stock prices follow a random walk, which of the following statement(s) is(are) correct? C. Both A and B
12. In the calculation of rates of return on common stock, dividends are _____ and capital gains are _____. C. Not guaranteed; not guaranteed
13. 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%
14. 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
15. 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
16. 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
17. The expected return on a common stock is composed of: C. Both dividend yield and capital appreciation
18. Firms having a higher expected return have a higher: A. Level of expected risk
19. According to the dividend discount model, the current value of a stock is equal to the: A. Present value of all expected future dividends.
20. 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
21. 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
22. 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
23. 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
24. 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
25. 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%
26. 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%
27. 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
28. A payout ratio of 35% for a company indicates that: D. 35% of earnings are paid out as dividends
29. A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant growth rate of: B. 9%
30. 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%