Answer Options:
a. True
b. False
Answer: A. True
Question: The corporate valuation model can be used only when a company doesn’t pay dividends.
Answer Options:
a. True
b. False
Answer: B. False
Question: Founders’ shares are a type of classified stock where the shares are owned by the firm’s founders, and they generally have more votes per share than the other classes of common stock.
Answer Options:
a. True
b. False
Answer: A. True
Question: Which of the following statements is CORRECT?
Answer Options:
a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock.
b. Two firms with the same expected dividend and growth rate must also have the same stock price.
c. It is appropriate to use the constant growth model to estimate a stock’s value even if its growth rate is never expected to become constant.
d. If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock’s dividend yield is also 5%.
e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
Answer: A. The constant growth model takes into consideration the capital gains investors expect to earn on a stock.
Question: If a firm’s stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.
Answer Options:
a. True
b. False
Answer: B. False
Question: If markets are in equilibrium, which of the following conditions will exist?
Answer Options:
a. Each stock’s expected return should equal its realized return as seen by the marginal investor.
b. Each stock’s expected return should equal its required return as seen by the marginal investor.
c. All stocks should have the same expected return as seen by the marginal investor.
d. The expected and required returns on stocks and bonds should be equal.
e. All stocks should have the same realized return during the coming year.
Answer: B. Each stock’s expected return should equal its required return as seen by the marginal investor.
Question: Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?
Answer Options:
a. The two stocks must have the same dividend per share.
b. If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
c. If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
d. The two stocks must have the same dividend growth rate.
e. The two stocks must have the same dividend yield.
Answer: B. If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
Question: The preemptive right is important to shareholders because it
Answer Options:
a. allows managers to buy additional shares below the current market price.
b. will result in higher dividends per share.
c. is included in every corporate charter.
d. protects the current shareholders against a dilution of their ownership interests.
e. protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
Answer: D. protects the current shareholders against a dilution of their ownership interests.
Question: When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.
Answer Options:
a. True
b. False
Answer: A. True
Question: Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
Answer Options:
a. Stock A must have 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.
Answer: D. If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B’s.
Question: Which of the following statements is CORRECT, assuming stocks are in equilibrium?
Answer Options:
a. The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
b. Assume that the required return on a given stock is 13%. If the stock’s dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.
c. A stock’s dividend yield can never exceed its expected growth rate.
d. A required condition for one to use the constant growth model is that the stock’s expected growth rate exceeds its required rate of return.
e. Other things held constant, the higher a company’s beta coefficient, the lower its required rate of return.
Answer: A. The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
Question: If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.
Answer Options:
a. The expected return on the stock is 5% a year.
b. The stock’s dividend yield is 5%.
c. The price of the stock is expected to decline in the future.
d. The stock’s required return must be equal to or less than 5%.
e. The stock’s price one year from now is expected to be 5% above the current price.
Answer: E. The stock’s price one year from now is expected to be 5% above the current price.
Question: Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?
Answer Options:
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.
Answer: A. If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B’s.
Question: The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.
Answer Options:
a. True
b. False
Answer: A. True