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Multiple choice

1. WWW Servers just paid a dividend of D0 = $1.00. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on WWW's stock is 9.00%. What is the best estimate of the stock's current intrinsic value?

a.
$31.50

b.
$32.31

c.
$33.14

d.
$33.99

e.
$34.84

2. Most studies of stock market efficiency suggest that the stock market is highly efficient in the weak form and reasonably efficient in the semi-strong form. (This is true.) Based on these findings, which of the following statements is CORRECT?

a.
Information disclosed in companies' most recent annual reports can be used to consistently beat the market.

b.
The stock price for a company has been increasing for the past 6 months. Based on this information, it must be true that the stock price will also increase during the current month.

c.
Information you read in The Wall Street Journal today cannot be used to select stocks that will consistently beat the market.

d.
Stock prices will respond whenever financial information is released to the public. It does not matter whether this financial information had been expected or not.

e.
Managers who have inside information that is not available to the public cannot consistently earn abnormal returns, i.e., returns that are higher than those predicted by the SML.

3. Stocks A and B have the same price, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

a.
If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.

b.
Stock B must have a higher dividend yield than Stock A.

c.
Stock A must have a higher dividend yield than Stock B.

d.
If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's.

e.
Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.

4. Which of the following statements is CORRECT?

a.
A tracking, or target, stock is the same as the stock of an independent stand-alone company.

b.
If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

c.
The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.

d.
The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates.

e.
The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required return.

5. Schnusenberg Corporation just paid a dividend of $0.65 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future. The company's beta is 0.95, the required return on the market is 10.50%, and the risk-free rate is 5.00%. What is the company's current stock price?

a.
$21.57

b.
$22.11

c.
$22.66

d.
$23.22

e.
$23.80

6. If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that

a.
The investor thinks the stock is experiencing supernormal growth.

b.
The investor thinks the stock should be sold.

c.
The investor thinks the stock is a good buy.

d.
The investor thinks management is probably not trying to maximize the price per share.

e.
The investor thinks dividends are not likely to be declared.

7. Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

a.
Strike price.

b.
Variability of the stock price.

c.
Option's time to maturity.

d.
All of the above.

e.
None of the above.

Solution Summary

The solution explains some multiple choice questions relating to financial options and cost of capital

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