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Chapter Quiz
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1
The dividend discount model does not hold for investors who have a preference for capital gains.
A)True
B)False
2
Stock value is always increased whenever earnings are plowed back into the firm.
A)True
B)False
3
Which of the following is a characteristic of secondary markets for common stock?
A)Only low-priced shares are traded in these markets.
B)Only high-risk shares are traded in these markets.
C)Secondary markets are where corporations borrow funds.
D)Secondary-market trades do not provide funds for corporations whose stock is traded.
4
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)15.0%
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?
A)$4.50
B)$18.00
C)$22.22
D)$40.50
6
The book value of a firm's equity is determined by:
A)multiplying share price by shares outstanding.
B)multiplying share price at issue by shares outstanding.
C)the difference between book values of assets and liabilities.
D)the difference between market values of assets and liabilities.
7
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
B)$10.00
C)$20.00
D)$40.00
8
A firm's liquidation value is the amount:
A)necessary to repurchase all shares of common stock.
B)realized from selling all assets and repaying debts.
C)a purchaser would pay for the firm in bankruptcy.
D)equal to the book value of equity.
9
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?
A)$82.20
B)$86.20
C)$87.20
D)$91.20
10
Which of the following statements is correct about a stock currently selling for $50 per share that has a 16% expected return and a 10% expected capital appreciation?
A)Its expected dividend exceeds the actual dividend.
B)Its expected return will exceed the actual return.
C)It is expected to pay $3 in annual dividends.
D)It is expected to pay $8 in annual dividends.
11
The expected return on a common stock is composed of:
A)dividend yield.
B)capital appreciation.
C)both dividend yield and capital appreciation.
D)capital appreciation minus the dividend yield.
12
How much should you pay for a share of stock that offers a constant growth rate of 10%, requires a 16% rate of return, and is expected to sell for $50 one year from now?
A)$42.00
B)$45.00
C)$45.45
D)$47.00
13
Common stock can be valued using the perpetuity valuation formula if the:
A)discount rate is expected to remain constant.
B)dividends are not expected to grow.
C)growth rate in dividends is not constant.
D)investor does not intend to sell the stock.
14
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%?
A)5.00%
B)6.25%
C)6.75%
D)15.38%
15
A payout ratio of 35% for a company indicates that:
A)35% of dividends are plowed back for growth.
B)65% of dividends are plowed back for growth.
C)65% of earnings are paid out as dividends.
D)35% of earnings are paid out as dividends.
16
Which of the following statements is incorrect about efficient-market theory?
a. The weak form states that prices reflect all the information contained in the past series of stock prices. In this case it is possible to earn superior profits simply by looking for past patterns in stock prices.
b. The semistrong form of the theory states that prices reflect all published information, so it is impossible to make consistently superior returns just by reading the newspaper, looking at the company's annual accounts, and so on.
c. The strong form states that stock prices effectively impound all available information. This form tells us that private information is hard to come by, because in pursuing it you are in competition with thousands—perhaps millions—of active and intelligent investors. The best you can do in this case is to assume that securities are fairly priced.
d. The relationship between the information and the levels of market efficiency is shown in the following Venn's diagram:
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A)a
B)b
C)c
D)d
17
Which of the following statements is incorrect regarding the present value of a stock?
a. Stockholders generally expect to receive cash dividends but not capital gains or losses.
b. The rate of return that stockholders expect over the next year is defined as the expected dividend per share DIV1 plus the expected increase in price (P1 – P0), all divided by the price at the start of the year P0.
c. Unlike the fixed interest payments that the firm promises to bondholders, the dividends that are paid to stockholders depend on the fortunes of the firm. That's why a company's common stock is riskier than its debt.
d. The return that investors expect on any one stock is also the return that they demand on all stocks subject to the same degree of risk. The present value of a stock equals the present value of the forecast future dividends and future stock price, using that expected return as the discount rate.
A)a
B)b
C)c
D)d
18
Which of the following statements are incorrect in interpreting price-earnings ratios?
a. We can think of a share's value as the sum of two parts—the value of the assets in place and the present value of growth opportunities, that is, of future opportunities for the firm to invest in high-return projects.
b. The price-earnings (P/E) ratio reflects the market's assessment of the firm's growth opportunities.
A)a
B)b
C)both a and b are incorrect.
D)neither a nor b is incorrect.
19
Which of the following statements are incorrect regarding the expected rate of return on a common stock?
a. The present value of a share is equal to the stream of expected dividends per share up to some horizon date plus the expected price at this date, all discounted at the return that investors require.
b. If the horizon date is three-years away, we simply say that stock price equals the present value of all future dividends per share. This is the dividend discount model.
c. If dividends are expected to grow forever at a constant rate g, then the expected return on the stock is equal to the dividend yield (DIV1/P0) plus the expected rate of dividend growth. The value of the stock according to this constant-growth dividend discount model is P0 = DIV1/(r – g).
A)a
B)b
C)c
D)a and c
20
Which of the following statements are incorrect regarding applying the random walk theory to stocks?
a. Successive stock prices are not related.
b. Successive stock price changes are not related.
c. Stock prices fluctuate above and below a normal long-run price.
d. The history of stock prices cannot be used to predict future returns to investors.
A)a
B)b
C)c
D)a and c







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