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FINA Test 3
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Terms in this set (120)
If stock prices follow a random walk, which of the following statement(s) is(are) correct?
A. Successive stock price changes are not related.
B. The history of stock prices cannot be used to predict future returns to investors.
C. Both A and B.
In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.
Not guaranteed; not guaranteed
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?
10.0%
Which of the following values treats the firm as a going concern?
Market value
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?
$40.50
How many round lots were traded in a specific stock on a day in which 467,800 shares changed hands?
4,678 round lots
The book value of a firm's equity is determined by:
The difference between book values of assets and liabilities.
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?
$40.00
If the liquidation value of a firm is negative, then:
The firm's debt exceeds the market value of assets.
A firm's liquidation value is the amount:
Realized from selling all assets and paying off its creditors.
Which of the following is least likely to account for an excess of market value over book value of equity?
Inaccurate depreciation methods
Firms with valuable intangible assets are more likely to show a(n):
High going-concern value.
Which of the following is inconsistent with a firm that sells for very near book value?
High future earning power
The main purpose of a market-value balance sheet is to:
Value assets and liabilities without GAAP restrictions.
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?
$86.20
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?
It is expected to pay $3 in annual dividends.
The expected return on a common stock is composed of:
Both dividend yield and capital appreciation.
Firms having a higher expected return have a higher:
Level of expected risk
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?
$45.45
According to the dividend discount model, the current value of a stock is equal to the:
Present value of all expected future dividends.
How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:
Have an insignificant present value.
If the dividend yield for year one is expected to be 5% based on the current price of $25, what will the year four dividend be if dividends grow at a constant 6%?
$1.49
What is the expected dividend to be paid in three years if yesterday's dividend was $6.00, dividends are expected to grow at a constant 6% annual rate, and the firm has a 10% expected return?
$7.15
The value of common stock will likely decrease if:
The discount rate increases
When valuing stock with the dividend discount model, the present value of future dividends will:
Remain constant regardless of the time horizon selected.
Common stock can be valued using the perpetuity valuation formula if the:
Dividends are not expected to grow
What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?
$43.75
Dividing a stock's earnings per share by the expected rate of return will value the share correctly if no new shares are issued and the dividend yield:
Is zero
If next year's dividend is forecast to be $5.00, the constant growth rate is 4%, and the discount rate is 16%, then the current stock price should be:
$43.33
What price would you expect to pay for a stock with 13% required rate of return, 4% rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?
$31.39
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%?
6.75%
The g in the constant-growth dividend model refers to:
A. the annual growth rate for dividends.
B. the annual growth rate for stock price.
C. both 'a' and 'b' above.
What rate of return is expected from a stock that sells for $30 per share, pays $1.50 annually in dividends, and is expected to sell for $33 per share in one year?
15.00%
ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price?
$37.42
A payout ratio of 35% for a company indicates that:
35% of earnings are paid out as dividends.
What would be the expected price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00?
$68.62
A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant growth rate of:
9%
What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?
66.67%
What is the return on equity for a firm that has a constant dividend growth rate of 7% and a dividend payout ratio of 60%?
17.50%
A positive value for PVGO suggests that the firm has:
Investment opportunities with superior returns
Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?
A firm with investment opportunities yielding 15%
Other things equal, a firm's sustainable growth rate could increase as a result of:
Increasing the plowback ratio
In general, if a firm has positive present value of growth opportunities, then its price-earnings ratio:
Is greater than is required rate of return
Assuming all of the following firms have a required return of 14%, which would you expect to have a positive present value of growth opportunities?
A firm with a P/E ratio of 9
Which of the following describes a seasoned offering?
An additional equity issue from a publicly-traded firm.
Investors are willing to purchase stocks having high P/E ratios because:
They expect these shares to have greater growth opportunities
Which of the following is least likely to contribute to going concern value?
High liquidation value
What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?
Its stock price will remain constant.
What can be expected to happen when stocks having the same expected risk do not have the same expected return?
At least one of the stocks becomes temporarily mispriced.
Dividends that are expected to be paid far into the future have:
Lesser impact on current stock price due to discounting.
The terminal value of a share of stock:
Refers to the share value at the end of the investor's holding period.
Which of the following best characterizes the difference between growth stocks and income stocks?
Growth stocks have greater PVGO.
Which of the following is more likely to be responsible for a firm having low PVGO?
Payout is very high.
What is the most likely value of the PVGO for a stock with current price of $50, expected earnings of $6 per share, and a required return of 20%?
$20
What is the expected, constant growth rate of dividends for a stock with current price of $100, expected dividend payment of $10 per share, and a required return of 16%?
6.00%
Which of the following is true for a firm having a stock price of $42, and expected dividend of $3, and a sustainable growth rate of 8%?
It has a required return of 22%
Which of the following is least assured for firms that plowback a portion of earnings into the firm?
Growth in stock price
What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of $45, and a constant growth rate of 12%?
$1.80
What is the required return for a stock that has a 6% constant growth rate, a price of $25, an expected dividend of $2, and a P/E ratio of 10?
14%
What should be the price of a stock that offers a $4 annual dividend with no prospects of growth, and has a required return of 12.5%?
$32.00
According to the constant dividend growth model, a stock price should equal the:
Sum of all discounted future dividends
If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock:
Pays $0.25 quarterly, or an estimated $1 annually.
Which of the following is a characteristic of a dealer market, rather than auction market, for common stock?
Dealers may not all offer the same price for the same security.
What is the minimum amount that shareholders should expect to receive in the event of a complete corporate liquidation?
Zero
What is meant by the term true depreciation?
The amount necessary to overcome deterioration of corporate assets
What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend growth rate of 7%?
$37.45
The required return on an equity security is comprised of a:
Dividend yield and a capital gains yield.
What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20%, and a constant dividend growth rate of 6%?
$37.86
What should be the current price of a stock if the expected dividend is $5, the stock has a required return of 20%, and a constant dividend growth rate of 6%?
$35.71
Reinvesting earnings into a firm will not increase the stock price unless:
The ROE of new investments exceeds the firm's required return.
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%?
40%
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%?
$10.00
What is the expected constant growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18%?
9.26%
Which of the following should increase the firm's sustainable growth rate?
Increase the plowback ratio
If the liquidation value of a corporation exceeds the market value of the equity, then the:
Firm has no value as a going concern
In a valuation of a non-constant dividend growth stock, the terminal value represents the:
Present value of future dividends from that point on
Stocks that have the same expected risk should:
Have the same expected rate of return.
Security prices are said to follow a "random walk," which means that:
Successive price changes are unpredictable
If a stock's price decreased during the past week, what is the most likely prediction about this week's price change?
Either direction of price change is equally likely.
Research indicates that the correlation coefficient between successive days' stock price changes is:
Quite close to zero
An analyst who relies upon past cycles of stock pricing to make investment decisions is:
Assuming that the market is not weak-form efficient
Given the efficiency of our financial markets,
Both technical and fundamental analysts serve a useful function.
If it proves possible to make abnormal profits based on information regarding past stock prices, then the market:
Is not weak-form efficient
The study of published financial information on a company in order to make investment decisions is known as:
Fundamental analysis
A fundamental analyst:
Studies a firm's financial statements to determine pricing inefficiencies.
If investors can consistently profit from thorough reading of published financial information, then the market can, at best, be characterized as:
Weak-form efficient
If no price change occurs in a stock on the day that it announces its next dividend, it can be assumed that:
The market was expecting this information
When investors are not capable of making superior investment decisions on a continual basis based on past prices, public or private information, the market is said to be:
Strong-form efficient
Which group of investors is capable of earning consistent, superior profits if financial markets are strong-form efficient?
No one will be capable of sustained, superior profits.
Given that markets are efficient, what is the most logical explanation of the fact that a portfolio manager can outperform the S&P 500 by 5% annually?
The manager's results have not been adjusted for the riskiness of the portfolio
When new information becomes available in the market, evidence suggests that:
Stock prices will adjust to the information rapidly
An example that specifically contradicts strong-form market efficiency in U.S. stock markets is that:
Excess profits are observed in cases of insider trading
Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20th of the month and selling them on the last day of the month. If this is true, then:
The market violates even weak-form efficiency
What stock price reaction would you expect from a firm that unexpectedly raises its dividend permanently and by a substantial amount?
Price should rise, given dividend discount models
The statement that there are no free lunches on Wall Street suggests that:
Security prices reflect all available information
Which of the following bond investment strategies should be selected by an investor who wants to maximize return over a three-year investment horizon? Bond A that offers a 10% yield for two years, then rolls the proceeds into a one-year bond, Bond B that offers an 11% yield for three years, or invest in three consecutive one-year bonds?
All strategies should offer similar, risk-adjusted yields
An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return. Which of the following seems most likely?
Both stocks are priced correctly given their perceived risk.
Which of the following situations is most likely to occur today for a stock that went down in price yesterday?
The stock has no predictable price-change pattern.
What is the maximum gain after two coin tosses for a person who starts with $1 if the occurrence of a head produces a 50% gain while the occurrence of a tail produces a 50% loss?
$1.25
According to random-walk theory, what are the odds that a stock will increase in price after having increased on two consecutive days of trading?
50.0%
If the price of a stock falls on four consecutive days of trading, then stock prices:
Can still be following a random walk
If the correlation of prices between two stocks is 0.35, then the price of one stock would be expected to:
Fall when the other stock price falls
Trends of past stock market prices would be considered useful or even essential to a(n):
Technical analyst
Technical analysts can provide:
An important role in stock market efficiency
Technical analysts are most likely to be successful in a market that is considered:
Not to be weak-form efficient
A primary goal of fundamental analysis is to:
Locate stocks that are not correctly valued
If stock prices incorporate all publicly available information, then the market is considered to be:
Semi-strong-form efficient
Under which of the following forms of market efficiency would stock prices always reflect fair value?
Strong-form efficiency
A company reports significantly higher earnings on a Monday. You purchase the stock on Tuesday and earn superior returns in the absence of other new information. The market appears to be:
Weak-form efficient at the best.
With respect to the notion that stock prices follow a random walk, several researchers have concluded that:
Past stock price changes provide little useful information about current stock prices.
With semi-strong form market efficiency:
A. all historical information on past prices is reflected in the current stock price.
B. all currently published information is reflected in the current stock price.
D. Both A and B
According to the semi-strong form of market efficiency, when new information becomes available in the market:
Stock prices will accurately and rapidly adjust to reflect this new information.
Which of the following observations provides evidence against strong-form market efficiency?
Managers trading in their own stock obtain superior returns.
The difference between a fundamental analyst and a technical analyst is:
A fundamental analyst analyzes such information as earnings and asset values.
If stock prices follow a random walk:
Successive stock price changes are not related
Technical and fundamental analysts help keep the market efficient by:
Trying to earn superior returns in the stock market.
Semistrong form efficiency describes a market in which:
Prices reflect all publicly available information
LookGood, Inc. has just announced the bad news that its earnings have dropped by 30 percent. In fact, its investors had anticipated even worse results (a decrease of 40 percent). As a result, LookGood's stock price:
Increases
BestFirm has a 50-year history of solid growth and ever-increasing profits. It is widely regarded as the leading firm of its industry. Hence, BestFirm's stock:
Should be a safe buy
The rise of the dot.coms in the late 1990s is probably due to:
Investors being reluctant to incur losses and being overconfident
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