Fin 3010
Exam III
Summer 2009
Time: 100 minutes
1. In constant growth model, expected capital gains yield changes year to year.
a. True b. False
2. Expected dividend divided by the current price of a stock is called
a. Actual Dividend b. Dividend Growth c. Dividend Yield d. Dividend Payout.
3. Target (or optimal) capital structure is the percentages of debt, preferred stock, and common
equity that maximizes the firm’s stock prices.
a. True b. False
4. The reason for using MIRR is that
a. a project may have multiple NPVs
b. a project may have multiple IRRs
c. NPV is better method than IRR
d. none of the above
5. Payback period is flawed because
a. cash flows at different years get same weight
b. cash flows beyond payback year are not considered
c. it shows how wealth is maximized
d. both statements a and b.
6. Which of the following is a legitimate reason the valuation of common stock is generally
harder than the valuation of bonds?
I. Future cash flows on stocks are not known in advance.
II. Common stocks don't have a maturity date.
III. Common stock valuation is sensitive to estimates of the dividend growth rate.
a. I only b. I, II, and III only c. II and III only d. I and III only
7. Interest rates and tax rates are the factors that are beyond the firm’s control but obviously
affect the firm’s WACC.
a. True b. False
8. The XYZ Company just paid a dividend of $1 per share, and that dividend is expected to grow at a
constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is
5%, and the risk-free rate is 3%. What is the company's current stock price?
a. $19.25 b. $21.00 c. $22.75 d. $24.50 e. None of them
Cost of stock = 9%
Price = 1*1.05/(.09 - .05) = $26.25
9. A share of preferred stock pays a quarterly dividend of $1.50. If the price of the stock is $50, what
1
, is the effective annual (not nominal) rate of return on the preferred stock?
a. 7.88% b. 8.01% c. 12.55% d. 11.47% e. 10.70%
Return = Div/Price = 1.50/50 = 3%
Compounded quarterly 1.03^4 – 1 = 12.55%, it is the effective rate.
10. If D1 = $4.00, g (which is constant) = 6%, and P 0 = $40, what is the stock’s expected dividend
yield for the coming year?
a. 5.0% b. 10.0% c. 7.0% d. 8.0% e. 9.0%
DY = 4/40 = 10%
11. If D0 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected total return
for the coming year?
a. 9.8% b.10.3% c. 10.8% d. 11.8% e. 11.3%
r-hat = 2*1.06/40 + 6% = 11.3%
12. Luna Corp.’s stock has a required rate of return of 10%, and it sells for $40 per share. Wald's
dividend is expected to grow at a constant rate of 7% per year. What is the expected year-end
dividend, D1?
a. $0.90 b. $1.00 c. $1.10 d. $1.20 e. $1.30
P-hat-zero = D1/(rs – g), Thus, D1 = $40(.10 - .07) = $1.20
13. Bettis Corp.’s stock price is $20 per share, and its expected year-end dividend is $2 a share (D 1 =
$2.00). The stock’s required return is 15%, and the dividend is expected to grow at a constant rate
forever. What is the expected price of the stock 8 years from now?
a. $27.18 b. $28.14 c. $29.55 d. $30.45 e. $31.81
P-hat-zero = D1/(rs – g), Thus substituting values, g = 5%
Now price 7 years from now, $20*(1.05)^8 = $29.55
14. A marginal investor’s actions reflect the beliefs of those people who are currently trading stocks.
a. True b. False
15. The ABC Corp.’s last dividend was $2.00. The dividend growth rate is expected to be constant
at 3% for 2 years, after which dividends are expected to grow at a rate of 8% forever. ABC’s
required return (rs) is 12%. What is Erhardt's current stock price?
a. $57.30 b. $51.40 c. $53.80 d. $55.10 e. $49.20
Div1 = $2.06, Div2 = $2.12, Div3 = $2.28
Terminal Value = 2.29/(.12-.08) = $57.25
PV1 = 2.06/1.12 = $1.84
PV2 = 59.43/1.12^2 = $47.36
Stock Price = 49.20
16. LTRT Corporation expects to pay an end-of-year dividend, D1, of $1.50. For the next two years,
the dividend is expected to grow by 25% per year, and at a constant rate of 7% per year,
thereafter. If the stock has a required return of 12%, what is the price of the stock today?
a. $45.03 b. $37.97 c. $36.38 d. $45.03 e. None of the above
2
Exam III
Summer 2009
Time: 100 minutes
1. In constant growth model, expected capital gains yield changes year to year.
a. True b. False
2. Expected dividend divided by the current price of a stock is called
a. Actual Dividend b. Dividend Growth c. Dividend Yield d. Dividend Payout.
3. Target (or optimal) capital structure is the percentages of debt, preferred stock, and common
equity that maximizes the firm’s stock prices.
a. True b. False
4. The reason for using MIRR is that
a. a project may have multiple NPVs
b. a project may have multiple IRRs
c. NPV is better method than IRR
d. none of the above
5. Payback period is flawed because
a. cash flows at different years get same weight
b. cash flows beyond payback year are not considered
c. it shows how wealth is maximized
d. both statements a and b.
6. Which of the following is a legitimate reason the valuation of common stock is generally
harder than the valuation of bonds?
I. Future cash flows on stocks are not known in advance.
II. Common stocks don't have a maturity date.
III. Common stock valuation is sensitive to estimates of the dividend growth rate.
a. I only b. I, II, and III only c. II and III only d. I and III only
7. Interest rates and tax rates are the factors that are beyond the firm’s control but obviously
affect the firm’s WACC.
a. True b. False
8. The XYZ Company just paid a dividend of $1 per share, and that dividend is expected to grow at a
constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is
5%, and the risk-free rate is 3%. What is the company's current stock price?
a. $19.25 b. $21.00 c. $22.75 d. $24.50 e. None of them
Cost of stock = 9%
Price = 1*1.05/(.09 - .05) = $26.25
9. A share of preferred stock pays a quarterly dividend of $1.50. If the price of the stock is $50, what
1
, is the effective annual (not nominal) rate of return on the preferred stock?
a. 7.88% b. 8.01% c. 12.55% d. 11.47% e. 10.70%
Return = Div/Price = 1.50/50 = 3%
Compounded quarterly 1.03^4 – 1 = 12.55%, it is the effective rate.
10. If D1 = $4.00, g (which is constant) = 6%, and P 0 = $40, what is the stock’s expected dividend
yield for the coming year?
a. 5.0% b. 10.0% c. 7.0% d. 8.0% e. 9.0%
DY = 4/40 = 10%
11. If D0 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected total return
for the coming year?
a. 9.8% b.10.3% c. 10.8% d. 11.8% e. 11.3%
r-hat = 2*1.06/40 + 6% = 11.3%
12. Luna Corp.’s stock has a required rate of return of 10%, and it sells for $40 per share. Wald's
dividend is expected to grow at a constant rate of 7% per year. What is the expected year-end
dividend, D1?
a. $0.90 b. $1.00 c. $1.10 d. $1.20 e. $1.30
P-hat-zero = D1/(rs – g), Thus, D1 = $40(.10 - .07) = $1.20
13. Bettis Corp.’s stock price is $20 per share, and its expected year-end dividend is $2 a share (D 1 =
$2.00). The stock’s required return is 15%, and the dividend is expected to grow at a constant rate
forever. What is the expected price of the stock 8 years from now?
a. $27.18 b. $28.14 c. $29.55 d. $30.45 e. $31.81
P-hat-zero = D1/(rs – g), Thus substituting values, g = 5%
Now price 7 years from now, $20*(1.05)^8 = $29.55
14. A marginal investor’s actions reflect the beliefs of those people who are currently trading stocks.
a. True b. False
15. The ABC Corp.’s last dividend was $2.00. The dividend growth rate is expected to be constant
at 3% for 2 years, after which dividends are expected to grow at a rate of 8% forever. ABC’s
required return (rs) is 12%. What is Erhardt's current stock price?
a. $57.30 b. $51.40 c. $53.80 d. $55.10 e. $49.20
Div1 = $2.06, Div2 = $2.12, Div3 = $2.28
Terminal Value = 2.29/(.12-.08) = $57.25
PV1 = 2.06/1.12 = $1.84
PV2 = 59.43/1.12^2 = $47.36
Stock Price = 49.20
16. LTRT Corporation expects to pay an end-of-year dividend, D1, of $1.50. For the next two years,
the dividend is expected to grow by 25% per year, and at a constant rate of 7% per year,
thereafter. If the stock has a required return of 12%, what is the price of the stock today?
a. $45.03 b. $37.97 c. $36.38 d. $45.03 e. None of the above
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