Question 1

Which of the following situations does the dividend discount model work well for?

Accepted Answer

A)   Companies involved in significant share repurchase arrangements.
B)   Large corporations in mature industries with stable profits and an established dividend policy.
C)   Companies in distress, companies that are in the process of restructuring, companies involved in acquisitions, and private companies.
D)   Many resource based companies, which are cyclical in nature and often display erratic growth in earnings and dividends. In addition many of these companies (especially the smaller ones)  do not distribute dividends to shareholders.

Question 2

The value of a $30 par value preferred share that pays annual dividends based on a 6% dividend rate, when the market yield is 6%, is closest to:

Accepted Answer

A)   $1.80.
B)   $30.00.
C)   $31.80.
D)   $36.00. B

Question 3

Capital gains yield is the return on a stock in the form of cash dividends; the ratio of the dividend per share to the value of the stock.

Accepted Answer

A) True 
 B)False

Question 4

The free cash flow approach to valuation is used alternatively to dividends, because dividends are discretionary and many firms may choose to not pay out the amount of dividends they could. Free cash flow is a measure of what a firm could pay out if it chose to.

Accepted Answer

A) True 
 B)False

Question 5

The government Treasury bond yield is 3% and the risk premium of Tri-Star Machinery is 5%. Tri-Star Machinery's common stock's required rate of return is closest to:

Accepted Answer

A)   2.00%
B)   3.00%
C)   5.00%
D)   8.00%

Question 6

When market rates are greater than the dividend rate, preferred shares will trade at:

Accepted Answer

A)   par.
B)   a discount.
C)   a premium.

Question 7

List some of the difficulties in valuing common stock.

Accepted Answer

Determining what cash flow should be dis...

Question 8

In the dividend valuation model, the price of the stock is higher:

Accepted Answer

A)   the higher the required rate of return.
B)   the lower the expected dividend payment.
C)   the higher the expected growth rate of dividends.

Question 9

Valuing a company relative to other comparable companies is best described as the:

Accepted Answer

A)   relative valuation
B)   free cash flow model
C)   dividend discount model
D)   multi-stage growth model

Question 10

Which of the following is not a workable assumption in the dividend valuation model?

Accepted Answer

A)   The growth of dividends is negative.
B)   The growth of dividends exceeds the required rate of return.
C)   The company pays a dividend, but this dividend is a constant amount.

Question 11

Which of the following statements is incorrect?

Accepted Answer

A)   One of the common approaches to valuing common stock is the discounted cash flow approach, with its many variations.
B)   Valuing common stock is more straightforward than valuing bonds or preferred stock because of the certainty of future cash flows to owners and the timing of such cash flows.
C)   One of the common approaches to valuing common stock is the method of multiples, using the market's evaluation of the value of equity of similar companies to value a company's equity.
D)   We generally value preferred stock using discounted cash flow methods, discounting the expected dividends at a discount rate that reflects the uncertainty associated with the payment of these dividends.

Question 12

Which of the following statements is incorrect?

Accepted Answer

A)   The dividend discount model is well suited for companies that are growing at a steady and sustainable rate.
B)   The dividend discount model works reasonable well for large corporations in mature industries with stable profits and an established dividend policy.
C)   The dividend discount model is well suited for companies that pay dividends based on a stable dividend payout history that they want to maintain in the future.
D)   The dividend discount model works well for many resource based companies, which are cyclical in nature and often display erratic growth in earnings and dividends.

Question 13

A publicly-traded company cannot issue more than one class of common stock.

Accepted Answer

A) True 
 B)False  False

Question 14

If a company has EPS of $2.50 and a payout ratio of 30%, assuming a growth rate of 5% and a required rate of return of 10%, the value of a common share of the company's stock is closest to:

Accepted Answer

A)   $15.00.
B)   $15.75.
C)   $26.25. A

Question 15

If a company currently pay $1.00 per share in dividends, investors expect annual growth in dividends to be 4 percent, and the estimated required rate of return to be 8%, the value of a share of stock of this company is closest to:

Accepted Answer

A)   $12.50.
B)   $25.00.
C)   $26.00.

Question 16

When market rates are equal to the dividend rate, preferred shares will trade at:

Accepted Answer

A)   par.
B)   a discount.
C)   a premium.

Question 17

One of the assumptions of the dividend discount model is that investors are rational.

Accepted Answer

A) True 
 B)False

Question 18

The present value of a perpetuity formula is used to estimate the value of a share of preferred stock.

Accepted Answer

A) True 
 B)False

Question 19

Pizza Unlimited is expected to pay a dividend of $1.50 at the end of this year, a $2.00 dividend at the end of year 2, and a $2.50 dividend at the end of year 3. It is estimated that its dividends will grow at a constant rate of 4 percent per year thereafter. The market value of Pizza Unlimited' s common shares, if the required rate of return is 10 percent, is closet to:

Accepted Answer

A)   $32.56.
B)   $37.45.
C)   $43.33.

Question 20

Cash flows of both stocks and bonds are legal obligations.

Accepted Answer

A) True 
 B)False

Exam 7: Equity Valuation

Which of the following situations does the dividend discount model work well for?

Correct Answer
verified

The value of a $30 par value preferred share that pays annual dividends based on a 6% dividend rate, when the market yield is 6%, is closest to:

Correct Answer
verified
B

Capital gains yield is the return on a stock in the form of cash dividends; the ratio of the dividend per share to the value of the stock.

Correct Answer
verified

The free cash flow approach to valuation is used alternatively to dividends, because dividends are discretionary and many firms may choose to not pay out the amount of dividends they could. Free cash flow is a measure of what a firm could pay out if it chose to.

Correct Answer
verified

The government Treasury bond yield is 3% and the risk premium of Tri-Star Machinery is 5%. Tri-Star Machinery's common stock's required rate of return is closest to:

Correct Answer
verified

When market rates are greater than the dividend rate, preferred shares will trade at:

Correct Answer
verified

List some of the difficulties in valuing common stock.

Correct Answer
verified
Determining what cash flow should be dis...
View Answer

In the dividend valuation model, the price of the stock is higher:

Correct Answer
verified

Valuing a company relative to other comparable companies is best described as the:

Correct Answer
verified

Which of the following is not a workable assumption in the dividend valuation model?

Correct Answer
verified

Which of the following statements is incorrect?

Correct Answer
verified

Which of the following statements is incorrect?

Correct Answer
verified

A publicly-traded company cannot issue more than one class of common stock.

Correct Answer
verified
False

If a company has EPS of $2.50 and a payout ratio of 30%, assuming a growth rate of 5% and a required rate of return of 10%, the value of a common share of the company's stock is closest to:

Correct Answer
verified
A

If a company currently pay $1.00 per share in dividends, investors expect annual growth in dividends to be 4 percent, and the estimated required rate of return to be 8%, the value of a share of stock of this company is closest to:

Correct Answer
verified

When market rates are equal to the dividend rate, preferred shares will trade at:

Correct Answer
verified

One of the assumptions of the dividend discount model is that investors are rational.

Correct Answer
verified

The present value of a perpetuity formula is used to estimate the value of a share of preferred stock.

Correct Answer
verified

Correct Answer
verified

Cash flows of both stocks and bonds are legal obligations.

Correct Answer
verified

Exam 7: Equity Valuation

Which of the following situations does the dividend discount model work well for?

Correct AnswerverifiedShow Answer

The value of a $30 par value preferred share that pays annual dividends based on a 6% dividend rate, when the market yield is 6%, is closest to:

Correct AnswerverifiedB

Capital gains yield is the return on a stock in the form of cash dividends; the ratio of the dividend per share to the value of the stock.

Correct AnswerverifiedShow Answer

The free cash flow approach to valuation is used alternatively to dividends, because dividends are discretionary and many firms may choose to not pay out the amount of dividends they could. Free cash flow is a measure of what a firm could pay out if it chose to.

Correct AnswerverifiedShow Answer

The government Treasury bond yield is 3% and the risk premium of Tri-Star Machinery is 5%. Tri-Star Machinery's common stock's required rate of return is closest to:

Correct AnswerverifiedShow Answer

When market rates are greater than the dividend rate, preferred shares will trade at:

Correct AnswerverifiedShow Answer

List some of the difficulties in valuing common stock.

Correct AnswerverifiedDetermining what cash flow should be dis...View AnswerShow Answer

In the dividend valuation model, the price of the stock is higher:

Correct AnswerverifiedShow Answer

Valuing a company relative to other comparable companies is best described as the:

Correct AnswerverifiedShow Answer

Which of the following is not a workable assumption in the dividend valuation model?

Correct AnswerverifiedShow Answer

Which of the following statements is incorrect?

Correct AnswerverifiedShow Answer

Which of the following statements is incorrect?

Correct AnswerverifiedShow Answer

A publicly-traded company cannot issue more than one class of common stock.

Correct AnswerverifiedFalse

If a company has EPS of $2.50 and a payout ratio of 30%, assuming a growth rate of 5% and a required rate of return of 10%, the value of a common share of the company's stock is closest to:

Correct AnswerverifiedA

If a company currently pay $1.00 per share in dividends, investors expect annual growth in dividends to be 4 percent, and the estimated required rate of return to be 8%, the value of a share of stock of this company is closest to:

Correct AnswerverifiedShow Answer

When market rates are equal to the dividend rate, preferred shares will trade at:

Correct AnswerverifiedShow Answer

One of the assumptions of the dividend discount model is that investors are rational.

Correct AnswerverifiedShow Answer

The present value of a perpetuity formula is used to estimate the value of a share of preferred stock.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Cash flows of both stocks and bonds are legal obligations.

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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B

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Determining what cash flow should be dis...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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False

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A

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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