Chapter 4 The value of common stocks - Tiếng anh chuyên ngành | Đại học Lâm Nghiệp

Chapter 04 - The Value of Common Stocks Chapter 04 The Value of Common Stocks Multiple Choice Questions
1. The major secondary market for GE shares is: A. London Stock Exchange B. New York Stock Exchange C. Nasdaq D. none of the above
2. Assume General Electric (GE) has about 10.3 billion shares outstanding and the stock price
is $37.10. Also assume the P/E ratio is about 18.3. Calculate the market capitalization for GE. (Approximately) A. $679 billion B. $188 billion C. $382 billion D. None of the above
3. The following are foreign companies that are traded on the New York Stock Exchange:
I) Toyota, II) Brasil Telecom, III) Nokia, IV) Endesa, V) General Electric A. I, II and III only B. I,II, III and IV only C. I,II,III and V only
D. All of the given companies are foreign companies
4. If the Volume is reported in 100s as 292,059 in the Wall Street Journal quotation, then the
trading volume for that day of trading is: A. 292,059 shares B. 2,920,590 shares C. 29,205,900 shares D. 292,059,000 shares 4-1
Chapter 04 - The Value of Common Stocks
5. The dividend yield reported as Yld. % in The Wall Street Journal quotation is calculated as follows: A. (dividends/hi) B. (dividends/lo) C. (dividends/close) D. None of the above
6. The Wall Street Journal quotation for a company has the following values: Div: $1.12, PE:
18.3, Close: $37.22. Calculate the dividend pay out ratio for the company (Approximately). A. 18% B. 55% C. 45% D. None of the above
7. If the Wall Street Journal Quotation for a company has the following values close: 55.14;
Net chg: = + 1.04; then the closing price for the stock for the previous trading day was? A. $56.18 B. $54.10 C. $55.66 D. None of the above.
8. The exchange-traded fund (EFT) that tracks the Nasdaq 100 index is called: A. SPDR B. DIAMONDS C. QQQQ D. None of the above
9. The following are auction markets except: A. New York Stock Exchange B. London Stock Exchange C. Tokyo Stock Exchange D. Nasdaq 4-2
Chapter 04 - The Value of Common Stocks
10. The following is an example of a dealer market: A. New York Stock Exchange B. London Stock Exchange C. Tokyo Stock Exchange D. Nasdaq
11. In which of the following stock exchange specialists act as the auctioneers: A. New York Stock Exchange B. London Stock Exchange C. Tokyo Stock Exchange D. Frankfurt Stock Exchange
12. In which of the following exchanges a computer acts as the auctioneer:
I) New York Stock Exchange, II) London Stock Exchange, III) Tokyo Stock Exchange IV) Frankfurt Stock Exchange A. I, II, III, and IV B. I, III, and IV only C. I, II, and III only D. II, III, and IV only
13. Super Computer Company's stock is selling for $100 per share today. It is expected that
this stock will pay a dividend of 6 dollars per share, and then be sold for $114 per share at the
end of one year. Calculate the expected rate of return for the shareholders. A. 20% B. 15% C. 10% D. 25%
14. The value of a common stock today depends on:
A. Number of shares outstanding and the number of shareholders
B. The expected future dividends and the discount rate C. The Wall Street analysts
D. Present value of the future earnings per share 4-3
Chapter 04 - The Value of Common Stocks
15. CK Company stockholders expect to receive a year-end dividend of $5 per share and then
be sold for $115 dollars per share. If the required rate of return for the stock is 20%, what is
the current value of the stock? A. $100 B. $122 C. $132 D. $110
16. Deluxe Company expects to pay a dividend of $2 per share at the end of year-1, $3 per
share at the end of year-2 and then be sold for $32 per share. If the required rate on the stock
is 15%, what is the current value of the stock? A. $28.20 B. $32.17 C. $32.00 D. None of the given answers
17. Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and
these dividends are expected to grow at a constant rate of 6% per year forever. If the required
rate of return on the stock is 18%, what is current value of the stock today? A. $25 B. $50 C. $100 D. $54
18. The constant dividend growth formula P0 = Div1/(r - g) assumes:
I) the dividends are growing at a constant rate g forever. II) r > g III) g is never negative. A. I only B. II only C. I and II only D. III only 4-4
Chapter 04 - The Value of Common Stocks
19. Will Co. is expected to pay a dividend of $2 per share at the end of year -1(D1) and the
dividends are expected to grow at a constant rate of 4% forever. If the current price of the
stock is $20 per share calculate the expected return or the cost of equity capital for the firm. A. 10% B. 4% C. 14% D. None of the above.
20. World-Tour Co. has just now paid a dividend of $2.83 per share (D0); the dividends are
expected to grow at a constant rate of 6% per year forever. If the required rate of return on the
stock is 16%, what is the current value on stock, after paying the dividend? A. $30 B. $56 C. $70 D. $48
21. The expected rate of return or the cost of equity capital is estimated as follows:
A. Dividend yield - expected rate of growth in dividends
B. Dividend yield + expected rate of growth in dividends
C. Dividend yield/expected rate of growth in dividends
D. (Dividend yield) * (expected rate of growth in dividends)
22. Dividend growth rate for a stable firm can be estimated as:
A. Plow back rate/the return on equity (ROE)
B. Plow back rate * the return on equity (ROE)
C. Plow back rate + the return on equity (ROE)
D. Plow back rate - the return on equity (ROE)
23. MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the
stable dividend growth rate for the firm? A. 9% B. 5% C. 6% D. 15% 4-5
Chapter 04 - The Value of Common Stocks
24. Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are
expected to grow at 20% per year for the next four years and then grow 6% per year
thereafter. Calculate the expected dividend in year 5. A. $4.15 B. $2.95 C. $4.40 D. $3.81
25. Otobai Motor Company is currently paying a dividend of $1.40 per year. The dividends
are expected to grow at a rate of 18% for the next three years and then a constant rate of 5%
thereafter. What is the expected dividend per share in year 5? A. $2.35 B. $2.54 C. $2.91 D. $1.50
26. The In-Tech Co. has just paid a dividend of $1 per share. The dividends are expected to
grow at 25% per year for the next three years and at the rate of 5% per year thereafter. If the
required rate of return on the stock is 18%(APR), what is the current value of the stock? A. $12.97 B. $11.93 C. $15.20 D. None of the above
27. R&D Technology Corporation has just paid a dividend of $0.50 per share. The dividends
are expected to grow at 24% per year for the next two years and at 8% per year thereafter. If
the required rate of return in the stock is 16% (APR), calculate the current value of the stock. A. $1.11 B. $7.71 C. $8.82 D. None of the above 4-6
Chapter 04 - The Value of Common Stocks
28. Ocean Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book
value per share is $25, what is the expected growth rate in dividends (g)? A. 16% B. 12% C. 8% D. 4%
29. Seven-Seas Co. has paid a dividend $3 per share out of earnings of $5 per share. If the
book value per share is $40 and the market price is 52.50 per share, calculate the required rate of return on the stock. A. 12% B. 11% C. 5% D. 6%
30. River Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book
value per share is $25 and is currently selling for $40 per share, calculate the required rate of return on the stock. A. 15.2% B. 7.2% C. 14.7% D. 13.4%
31. Lake Co. has paid a dividend $3 per share out of earnings of $5 per share. If the book
value per share is $40, what is the expected growth rate in dividends? A. 7.5% B. 8% C. 12.5% D. 5% 4-7
Chapter 04 - The Value of Common Stocks
32. The growth rate in dividends is a function of two ratios. They are: A. ROA and ROE.
B. Dividend yield and growth rate in dividends.
C. ROE and the Retention Ratio.
D. Book value per share and EPS.
33. Company X has a P/E ratio of 10 and a stock price of $50 per share. Calculate earnings per share of the company. A. $6 per share B. $10 per share C. $0.20 per share D. $5 per share
34. Which of the following formulas regarding earnings to price ratio is true: A. EPS/Po = r[1 + (PVGO/Po] B. EPS/Po = r[1 - (PVGO/Po)] C. EPS/Po = [r + (PVGO/Po)]
D. EPS/Po = [r + (1 + (PVGO/Po)]/r
35. Generally high growth stocks pay: A. Low or no dividends B. High dividends C. Erratic dividends D. Both A and C
36. A high proportion of the value of a growth stock comes from: A. Past dividend payments B. Past earnings
C. PVGO (Present Value of the Growth Opportunities) D. Both A and B 4-8
Chapter 04 - The Value of Common Stocks
37. Summer Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per
share. If the required rate of return on the stock is 15% and dividends are growing at a current
rate of 10% per year, calculate the present value of the growth opportunity for the stock (PVGO). A. $80 B. $30 C. $50 D. $26
38. Parcel Corporation is expected to pay a dividend of $5 per share next year, and the
dividends pay out ratio is 50%. If the dividends are expected to grow at a constant rate of 8%
forever and the required rate of return on the stock is 13%, calculate the present value of the growth opportunity. A. $100 B. $76.92 C. $23.08 D. None of the above
39. Which of the following stocks is (are) an income stock(s)? A. Dow Chemicals B. Starbucks C. Microsoft D. None of the above
40. The following stocks are examples of income stocks except: A. Cummins, Inc. B. Dow Chemicals C. Starbucks
D. All of the above are income stocks 4-9
Chapter 04 - The Value of Common Stocks
41. Which of the following stocks is/are a growth stock(s)? A. Unilever B. Cummins, Inc C. Starbucks
D. All of the above are growth stocks
42. The following stocks are examples of growth stocks except: A. Scottish Power B. e2v Technologies C. Microsoft D. Starbucks
43. Universal Air is a no growth firm and has two million shares outstanding. It is expected to
earn a constant 20 million per year on its assets. If all earnings are paid out as dividends and
the cost of capital is 10%, calculate the current price per share for the stock. A. $200 B. $150 C. $100 D. $50
44. A firm forecasts of cash flows ($millions) in years 1 thru 4 to be $120, $130, 135, and
$137, respectively. If the project ends at the end of the fourth year, what is the horizon value
given the company has historical growth of 3% and a discount rate of 10%? (answers in $millions) A. $0 B. $1.37 C. $1.96 D. $4.87 4-10
Chapter 04 - The Value of Common Stocks
45. A company forecasts growth of 6% for 5 years and 3% thereafter. Given last year's cash
flow was $100, what is the horizon value if the company cost of capital is 8%? A. $0 B. $1,672 C. $2,000 D. $2,676 True / False Questions
46. It is more likely than not that a high tech growth company which reports record earnings
and announces its first ever dividend will have the stock price of the firm drop. True False
47. An increase in PVGO will almost always coincide with a decrease in dividends. True False
48. The New York Stock Exchange is the only stock market in the US. True False
49. Most of the trading on the NYSE is in ordinary common stocks. True False
50. The return that is expected by investors from a common stock is also called its market
capitalization rate or cost of equity capital. True False
51. All securities in an equivalent risk class are priced to offer the same expected return. True False 4-11
Chapter 04 - The Value of Common Stocks
52. The only payoff to the owners of common stocks is in the form cash dividends. True False
53. The constant growth formula for stock valuation does not work for firms with negative
growth (declining) rates in dividends. True False
54. The cost of equity equals the dividend yield minus the growth rate in dividends for a
constant dividend growth stock. True False
55. It is not possible to value a firm with supernormal (variable) growth rate for the first few years of its life. True False
56. A large percentage of the total value of a growth stock comes from the growth opportunity. True False
57. Everyone regards Microsoft as an income stock and Cummins as a growth stock. True False
58. The discounted-cash-flow formulas that is used to value common stocks can also be used to value entire businesses. True False Essay Questions 4-12
Chapter 04 - The Value of Common Stocks
59. Explain the term "primary market."
60. Explain the term "secondary market."
61. Briefly explain the major types of exchanges prevalent in the USA.
62. Briefly explain the term "market capitalization rate." 4-13
Chapter 04 - The Value of Common Stocks
63. Discuss the general principle in the valuation of a common stock.
64. Briefly explain the assumptions associated with the constant dividend growth formula.
65. Discuss the term "price-earnings (P/E) ratio."
66. Briefly explain how the formulas that are used for valuing common stocks can also be used to value businesses. 4-14
Chapter 04 - The Value of Common Stocks
67. Briefly explain why Microsoft experienced a significant drop in price when it announced
its first ever regular dividend along with huge profits. 4-15
Chapter 04 - The Value of Common Stocks
Chapter 04 The Value of Common Stocks Answer Key Multiple Choice Questions
1. The major secondary market for GE shares is: A. London Stock Exchange B. New York Stock Exchange C. Nasdaq D. none of the above Type: Easy
2. Assume General Electric (GE) has about 10.3 billion shares outstanding and the stock price
is $37.10. Also assume the P/E ratio is about 18.3. Calculate the market capitalization for GE. (Approximately) A. $679 billion B. $188 billion C. $382 billion D. None of the above
market capitalization = (10.3)(37.10) = $382.13 billion Type: Medium
3. The following are foreign companies that are traded on the New York Stock Exchange:
I) Toyota, II) Brasil Telecom, III) Nokia, IV) Endesa, V) General Electric A. I, II and III only B. I,II, III and IV only C. I,II,III and V only
D. All of the given companies are foreign companies Type: Easy 4-16
Chapter 04 - The Value of Common Stocks
4. If the Volume is reported in 100s as 292,059 in the Wall Street Journal quotation, then the
trading volume for that day of trading is: A. 292,059 shares B. 2,920,590 shares C. 29,205,900 shares D. 292,059,000 shares
Trading volume = 292059 * 100 = 29,205,900 Type: Easy
5. The dividend yield reported as Yld. % in The Wall Street Journal quotation is calculated as follows: A. (dividends/hi) B. (dividends/lo) C. (dividends/close) D. None of the above Type: Medium
6. The Wall Street Journal quotation for a company has the following values: Div: $1.12, PE:
18.3, Close: $37.22. Calculate the dividend pay out ratio for the company (Approximately). A. 18% B. 55% C. 45% D. None of the above
EPS = (37.22)/18.3 = 2.03; dividend payout = 1.12/2.03 = 0.55 = 55% Type: Difficult 4-17
Chapter 04 - The Value of Common Stocks
7. If the Wall Street Journal Quotation for a company has the following values close: 55.14;
Net chg: = + 1.04; then the closing price for the stock for the previous trading day was? A. $56.18 B. $54.10 C. $55.66 D. None of the above.
Previous closing = today's closing net chg. = 55.14 - 1.04 = $54.10 Type: Medium
8. The exchange-traded fund (EFT) that tracks the Nasdaq 100 index is called: A. SPDR B. DIAMONDS C. QQQQ D. None of the above Type: Easy
9. The following are auction markets except: A. New York Stock Exchange B. London Stock Exchange C. Tokyo Stock Exchange D. Nasdaq Type: Easy
10. The following is an example of a dealer market: A. New York Stock Exchange B. London Stock Exchange C. Tokyo Stock Exchange D. Nasdaq Type: Easy 4-18
Chapter 04 - The Value of Common Stocks
11. In which of the following stock exchange specialists act as the auctioneers: A. New York Stock Exchange B. London Stock Exchange C. Tokyo Stock Exchange D. Frankfurt Stock Exchange Type: Medium
12. In which of the following exchanges a computer acts as the auctioneer:
I) New York Stock Exchange, II) London Stock Exchange, III) Tokyo Stock Exchange IV) Frankfurt Stock Exchange A. I, II, III, and IV B. I, III, and IV only C. I, II, and III only D. II, III, and IV only Type: Medium
13. Super Computer Company's stock is selling for $100 per share today. It is expected that
this stock will pay a dividend of 6 dollars per share, and then be sold for $114 per share at the
end of one year. Calculate the expected rate of return for the shareholders. A. 20% B. 15% C. 10% D. 25% r = (114 + 6 - 100)/100 = 20% Type: Easy 4-19
Chapter 04 - The Value of Common Stocks
14. The value of a common stock today depends on:
A. Number of shares outstanding and the number of shareholders
B. The expected future dividends and the discount rate C. The Wall Street analysts
D. Present value of the future earnings per share Type: Easy
15. CK Company stockholders expect to receive a year-end dividend of $5 per share and then
be sold for $115 dollars per share. If the required rate of return for the stock is 20%, what is
the current value of the stock? A. $100 B. $122 C. $132 D. $110 P = (115 + 5)/1.2 = 100 Type: Medium
16. Deluxe Company expects to pay a dividend of $2 per share at the end of year-1, $3 per
share at the end of year-2 and then be sold for $32 per share. If the required rate on the stock
is 15%, what is the current value of the stock? A. $28.20 B. $32.17 C. $32.00 D. None of the given answers
P0 = (2/1.15) + [(3 + 32)/(1.15^2)] = $28.20 Type: Medium 4-20
Chapter 04 - The Value of Common Stocks
17. Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and
these dividends are expected to grow at a constant rate of 6% per year forever. If the required
rate of return on the stock is 18%, what is current value of the stock today? A. $25 B. $50 C. $100 D. $54
P0 = Div1/(r - g) = (3/(0.18 - 0.06)) = 25 Type: Medium
18. The constant dividend growth formula P0 = Div1/(r - g) assumes:
I) the dividends are growing at a constant rate g forever. II) r > g III) g is never negative. A. I only B. II only C. I and II only D. III only Type: Medium
19. Will Co. is expected to pay a dividend of $2 per share at the end of year -1(D1) and the
dividends are expected to grow at a constant rate of 4% forever. If the current price of the
stock is $20 per share calculate the expected return or the cost of equity capital for the firm. A. 10% B. 4% C. 14% D. None of the above.
r = [(D1/P0 ) + g] = (2/20) + 0.04 = 14% Type: Medium 4-21
Chapter 04 - The Value of Common Stocks
20. World-Tour Co. has just now paid a dividend of $2.83 per share (D0); the dividends are
expected to grow at a constant rate of 6% per year forever. If the required rate of return on the
stock is 16%, what is the current value on stock, after paying the dividend? A. $30 B. $56 C. $70 D. $48
P0 = (2.83 * 1.06)/(0.16 - 0.06) = 30 Type: Medium
21. The expected rate of return or the cost of equity capital is estimated as follows:
A. Dividend yield - expected rate of growth in dividends
B. Dividend yield + expected rate of growth in dividends
C. Dividend yield/expected rate of growth in dividends
D. (Dividend yield) * (expected rate of growth in dividends) Type: Medium
22. Dividend growth rate for a stable firm can be estimated as:
A. Plow back rate/the return on equity (ROE)
B. Plow back rate * the return on equity (ROE)
C. Plow back rate + the return on equity (ROE)
D. Plow back rate - the return on equity (ROE) Type: Difficult 4-22
Chapter 04 - The Value of Common Stocks
23. MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the
stable dividend growth rate for the firm? A. 9% B. 5% C. 6% D. 15% g = (1 - 0.60) * 15 = 6% Type: Difficult
24. Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are
expected to grow at 20% per year for the next four years and then grow 6% per year
thereafter. Calculate the expected dividend in year 5. A. $4.15 B. $2.95 C. $4.40 D. $3.81
Div6 = (2.0) * (1.20^4) * (1.06) = 4.40 Type: Medium
25. Otobai Motor Company is currently paying a dividend of $1.40 per year. The dividends
are expected to grow at a rate of 18% for the next three years and then a constant rate of 5%
thereafter. What is the expected dividend per share in year 5? A. $2.35 B. $2.54 C. $2.91 D. $1.50
D5 = (1.4) * (1.18^3) * (1.05^2) = 2.54 Type: Medium 4-23
Chapter 04 - The Value of Common Stocks
26. The In-Tech Co. has just paid a dividend of $1 per share. The dividends are expected to
grow at 25% per year for the next three years and at the rate of 5% per year thereafter. If the
required rate of return on the stock is 18%(APR), what is the current value of the stock? A. $12.97 B. $11.93 C. $15.20 D. None of the above
P = (1.25/1.18) + (1.5625/1.18^2) + (1.9531/1.18^3) + (2.0508/((1.18^3) * (0.18 - 0.05)) = 12.97 Type: Difficult
27. R&D Technology Corporation has just paid a dividend of $0.50 per share. The dividends
are expected to grow at 24% per year for the next two years and at 8% per year thereafter. If
the required rate of return in the stock is 16% (APR), calculate the current value of the stock. A. $1.11 B. $7.71 C. $8.82 D. None of the above
Po = [(0.5 * 1.24)/1.16] + [(0.5 * 1.24^2)/(1.16^2)] +
[(0.5 * 1.24^2 * 1.08)/((1.16^2 * (0.16 - 0.08))] = $8.82 Type: Difficult
28. Ocean Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book
value per share is $25, what is the expected growth rate in dividends (g)? A. 16% B. 12% C. 8% D. 4%
Payout ratio = 50%; Plowback ratio = 50%; g = (1 - 0.5) (4/25) = 0.08 or 8% Type: Difficult 4-24
Chapter 04 - The Value of Common Stocks
29. Seven-Seas Co. has paid a dividend $3 per share out of earnings of $5 per share. If the
book value per share is $40 and the market price is 52.50 per share, calculate the required rate of return on the stock. A. 12% B. 11% C. 5% D. 6%
g = (1 - 0.6) (5/40) = .05 or 5%; r = [(3 * 1.05)/52.50] + 0.05 = 0.11 = 11%. Type: Difficult
30. River Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book
value per share is $25 and is currently selling for $40 per share, calculate the required rate of return on the stock. A. 15.2% B. 7.2% C. 14.7% D. 13.4%
g = (1 - 0.5)(4/25) = 0.08 or 8%; r = [(2 * 1.08)/40] + 0.08 = 13.4%. Type: Difficult
31. Lake Co. has paid a dividend $3 per share out of earnings of $5 per share. If the book
value per share is $40, what is the expected growth rate in dividends? A. 7.5% B. 8% C. 12.5% D. 5%
g = (1 - 3/5)(5/40) = .05 or 5%. Type: Difficult 4-25
Chapter 04 - The Value of Common Stocks
32. The growth rate in dividends is a function of two ratios. They are: A. ROA and ROE.
B. Dividend yield and growth rate in dividends.
C. ROE and the Retention Ratio.
D. Book value per share and EPS. Type: Medium
33. Company X has a P/E ratio of 10 and a stock price of $50 per share. Calculate earnings per share of the company. A. $6 per share B. $10 per share C. $0.20 per share D. $5 per share EPS = 50/10 = $5 Type: Medium
34. Which of the following formulas regarding earnings to price ratio is true: A. EPS/Po = r[1 + (PVGO/Po] B. EPS/Po = r[1 - (PVGO/Po)] C. EPS/Po = [r + (PVGO/Po)]
D. EPS/Po = [r + (1 + (PVGO/Po)]/r Type: Difficult
35. Generally high growth stocks pay: A. Low or no dividends B. High dividends C. Erratic dividends D. Both A and C Type: Medium 4-26
Chapter 04 - The Value of Common Stocks
36. A high proportion of the value of a growth stock comes from: A. Past dividend payments B. Past earnings
C. PVGO (Present Value of the Growth Opportunities) D. Both A and B Type: Medium
37. Summer Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per
share. If the required rate of return on the stock is 15% and dividends are growing at a current
rate of 10% per year, calculate the present value of the growth opportunity for the stock (PVGO). A. $80 B. $30 C. $50 D. $26
No growth value = 7.5/0.15 = 50; Po = 4/(0.15 - 0.1) = 80; PVGO = 80 - 50 = 30 Type: Difficult
38. Parcel Corporation is expected to pay a dividend of $5 per share next year, and the
dividends pay out ratio is 50%. If the dividends are expected to grow at a constant rate of 8%
forever and the required rate of return on the stock is 13%, calculate the present value of the growth opportunity. A. $100 B. $76.92 C. $23.08 D. None of the above
EPS = (5/0.5) = $10; No Growth Value = 10/0.13 = 76.92;
Growth Value = 5/(0.13 - 0.08) = 100; PVGO = 100 - 76.92 = 23.08 Type: Difficult 4-27
Chapter 04 - The Value of Common Stocks
39. Which of the following stocks is (are) an income stock(s)? A. Dow Chemicals B. Starbucks C. Microsoft D. None of the above Type: Easy
40. The following stocks are examples of income stocks except: A. Cummins, Inc. B. Dow Chemicals C. Starbucks
D. All of the above are income stocks Type: Easy
41. Which of the following stocks is/are a growth stock(s)? A. Unilever B. Cummins, Inc C. Starbucks
D. All of the above are growth stocks Type: Easy
42. The following stocks are examples of growth stocks except: A. Scottish Power B. e2v Technologies C. Microsoft D. Starbucks Type: Medium 4-28
Chapter 04 - The Value of Common Stocks
43. Universal Air is a no growth firm and has two million shares outstanding. It is expected to
earn a constant 20 million per year on its assets. If all earnings are paid out as dividends and
the cost of capital is 10%, calculate the current price per share for the stock. A. $200 B. $150 C. $100 D. $50
EPS = DPS = 20/2 = $10 per share = Po = 10/0.1 = 100 Type: Medium
44. A firm forecasts of cash flows ($millions) in years 1 thru 4 to be $120, $130, 135, and
$137, respectively. If the project ends at the end of the fourth year, what is the horizon value
given the company has historical growth of 3% and a discount rate of 10%? (answers in $millions) A. $0 B. $1.37 C. $1.96 D. $4.87
If the project terminates, there is no horizon value. Type: Medium
45. A company forecasts growth of 6% for 5 years and 3% thereafter. Given last year's cash
flow was $100, what is the horizon value if the company cost of capital is 8%? A. $0 B. $1,672 C. $2,000 D. $2,676
The future value at 5 years of 100 is 133.82. The horizon value = 133.82/(.08 - .03) Type: Difficult True / False Questions 4-29
Chapter 04 - The Value of Common Stocks
46. It is more likely than not that a high tech growth company which reports record earnings
and announces its first ever dividend will have the stock price of the firm drop. TRUE Type: Difficult
47. An increase in PVGO will almost always coincide with a decrease in dividends. TRUE Type: Difficult
48. The New York Stock Exchange is the only stock market in the US. FALSE Type: Easy
49. Most of the trading on the NYSE is in ordinary common stocks. TRUE Type: Easy
50. The return that is expected by investors from a common stock is also called its market
capitalization rate or cost of equity capital. TRUE Type: Medium
51. All securities in an equivalent risk class are priced to offer the same expected return. TRUE Type: Difficult 4-30
Chapter 04 - The Value of Common Stocks
52. The only payoff to the owners of common stocks is in the form cash dividends. FALSE Type: Difficult
53. The constant growth formula for stock valuation does not work for firms with negative
growth (declining) rates in dividends. FALSE Type: Difficult
54. The cost of equity equals the dividend yield minus the growth rate in dividends for a
constant dividend growth stock. FALSE Type: Medium
55. It is not possible to value a firm with supernormal (variable) growth rate for the first few years of its life. FALSE Type: Medium
56. A large percentage of the total value of a growth stock comes from the growth opportunity. TRUE Type: Medium 4-31
Chapter 04 - The Value of Common Stocks
57. Everyone regards Microsoft as an income stock and Cummins as a growth stock. FALSE Type: Medium
58. The discounted-cash-flow formulas that is used to value common stocks can also be used to value entire businesses. TRUE Type: Difficult Essay Questions
59. Explain the term "primary market."
When new shares of common stocks are sold in the market to raise capital, it is called a
primary market transaction. A good example of a primary market transaction is the IPO (Initial Public Offering). Type: Easy
60. Explain the term "secondary market."
When already issued stocks are traded in the market, it is called a secondary market
transaction. Most transactions in the stock market are secondary market transactions. Type: Easy 4-32
Chapter 04 - The Value of Common Stocks
61. Briefly explain the major types of exchanges prevalent in the USA.
There are two types of exchanges that are prevalent in the USA. They are auction markets and
dealer markets. The New York Stock Exchange is an example of an auction market. Here
specialists act as auctioneers and match up would-be buyers and sellers. The Nasdaq is an
example of a dealer market. In the case of a dealer market all trades take place between a
group of dealers and the investors. Dealer markets are also active in trading many other types
of financial instruments such as bonds. Type: Medium
62. Briefly explain the term "market capitalization rate."
The rate of return expected by the investors in common stocks is called the market
capitalization rate. It is also called the cost of equity capital. For a constant growth stock it is
the dividend yield plus the growth rate in dividends. Type: Medium
63. Discuss the general principle in the valuation of a common stock.
The value of a common stock is the present value of all the dividends received by owning the
stock discounted at the market capitalization rate or the cost of equity. This is called the
discounted cash flow (DCF) method. Type: Medium
64. Briefly explain the assumptions associated with the constant dividend growth formula.
There are two important assumptions that are necessary for the formula to work correctly.
First assumption is that the growth rate in dividends is constant. The second assumption is
that the discount rate is greater than the growth rate in dividends. Type: Difficult 4-33
Chapter 04 - The Value of Common Stocks
65. Discuss the term "price-earnings (P/E) ratio."
The P/E ratio is a widely used financial indicator, but is also quite ambiguous. Generally, a
high P/E ratio indicates that the investors think a firm has good growth potential. It is the ratio
of current market price and earnings of a stock. Type: Medium
66. Briefly explain how the formulas that are used for valuing common stocks can also be used to value businesses.
The formulas that are used to value common stocks can also be used to value entire
businesses. In the case of businesses, free cash flows generated by the businesses are
discounted. Typically a two-stage DCF model is used. Free cash flows are forecasted out to a
horizon and discounted to present value. Then a horizon value is forecasted, discounted and
added to the present value of free cash flows. The sum is the value of the business. This may
look easy in theory but is quite complicated in practice. Type: Difficult
67. Briefly explain why Microsoft experienced a significant drop in price when it announced
its first ever regular dividend along with huge profits.
Under the concept of PVGO, Microsoft was converting form a company with significant
growth to a company with no growth. An increase in the dividend for a growth company is
often a sign of reduced growth. Thus, the market would have reacted negatively to the news. Type: Difficult 4-34