True / False Questions
1. The dividend discount model indicates that the value of a stock is the present value of the dividends it will pay over the investor's horizon, plus the present value of the expected stock price at the end of that horizon.
True False
2. An excess of market value over the book value of equity can be attributed to going concern value.
True False
3. Securities with the same expected risk should offer the same expected rate of return.
True False
4. If the stock prices follow a random walk, successive stock prices are not related.
True False
5. Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.
True False
6. If the market is efficient, stock prices should be expected to react only to new information that is released.
True False
7. The intent of technical analysis is to discover patterns in past stock prices.
True False
8. Strong-form market efficiency implies that one could earn above-average returns by examining the history of a firm's stock price.
True False
Multiple Choice Questions
9. The growth of mature companies is primarily funded by:
A. issuing new shares of stock.
B. issuing new debt securities.
C. reinvesting company earnings.
D. increasing accounts payable.
10. Wilt's has earnings per share of $2.98 and dividends per share of $.35. What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%?
A. 2.14%
B. 1.71%
C. 12.89%
D. 16.06%
11. What is the difference between a fundamental analyst and a technical analyst?
A. Only a fundamental analyst believes markets are inefficient.
B. A technical analyst focuses on financial statement analysis.
C. Only a technical analyst helps keep the market efficient.
D. A fundamental analyst analyzes information such as earnings and asset values.
12. According to the semi strong form of market efficiency, when new information becomes available in the market, the related stock prices will:
A. remain unchanged because they already reflect this information.
B. accurately and rapidly adjusts to include this new information.
C. adjusts to accurately reflect this new information over the course of the next few days.
D. most likely increases because all new information has a positive effect on stock prices.
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%
B. 4.0%
C. 10.0%
D. 5.0%
14. If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%, what is the stock's current price?
A. $24.30
B. $18.00
C. $22.22
D. $40.50
15. With respect to the notion that stock prices follow a random walk, several researchers have concluded that:
A. stock prices reflect a majority of available information about the firm.
B. successive price changes are predictable.
C. past stock price changes provide little useful information about current stock prices.
D. stock prices always rise excessively in January.
16. Firms with valuable intangible assets are more likely to show a(n):
A. excess of book value over market value of equity.
B. high going-concern value.
C. low liquidation value.
D. low P/E ratio.
17. A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%.
What might investors expect to pay for the stock one year from now?
A. $82.20
B. $86.20
C. $87.20
D. $91.20
18. The expected return on a common stock is equal to:
A. [(1 + dividend yield) × (1 + capital appreciation rate)] - 1.
B. the capital appreciation rate + dividend yield.
C. (1 + capital appreciation rate)/(1 + dividend yield).
D. the capital appreciation rate - dividend yield.
19. If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividends be if dividends grow annually at a constant rate of 6%?
A. $1.33
B. $1.49
C. $1.58
D. $1.67
20. What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?
A. $27.55
B. $30.28
C. $26.60
D. $31.37
21. What rate of return is expected from a stock that sells for $30 per share, pays $1.54 annually in dividends, and is expected to sell for $32.80 per share in one year?
A. 15.03%
B. 14.28%
C. 14.09%
D. 14.47%
22. A positive value for PVGO suggests that the firm has:
A. a positive return on equity.
B. a positive plowback ratio.
C. investment opportunities with superior returns.
D. a high rate of constant growth.
23. What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%?
A. 60%
B. 80%
C. 20%
D. 40%
24. How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share, has an expected dividend of $2.50, and a required return of 20%?
A. $0
B. $6
C. $8
D. $10