1.Which if the following statements is CORRECT?

a.Two firms with the same expected capital gains and dividends must also have the same rate of return.

b.The constant growth model takes into account the capital gains investors expect to earn on a stock.

c.If a stock has a required rate of return r_s = 8%, and if its dividend is expected to grow at a constant rate of 2%, this implies that the stock's price will grow at the 10% rate annually.

d.The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

e.None of the above.

2. Stowell company has just successfully completed a project that leads you to expect that its earnings and dividends will grow at a rate of 25% (D1) this year, 20% the following year, and another 15% a year after. After that growth should return to the 4% industry average. Investors expect to earn no less than 11% rate of return on this type of investments. If the last dividend paid was $6, what is the estimated value of your firm's stock?

3. Gary has a portfolio of 20 stocks, and Peter has a portfolio of 2 stocks. Which of the following statements is CORRECT?

a.The required return on Gary's portfolio will be lower than that on Peter's portfolio because Gary's portfolio will have less total risk.

b.Peter's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Gary's portfolio, but the required (and expected) returns will be the same on both portfolios.

c.If the two portfolios have the same beta, their required returns will be the same, but Peter's portfolio will have less market risk than Gary's.

d.The expected return on Peter's portfolio must be lower than the expected return on Gary's portfolio because Peter is less diversified.

e.Gary's portfolio will have less diversifiable risk and also less market risk than Peter's portfolio.

f.None of the above.

4. Is it true? Most of the stock value is attributable to the short-term dividends and capital gains with the high required rate of return, as more distant cash flows are discounted largely and their value is close to zero. Explain.

5. Investment fund's manager has s $6 million portfolio. $3.4m are invested in Stock A with a beta of 1.37. The rest of portfolio funds are put in the Stock B with a beta of 0.58. The risk-free rate is 2.5%, and the market return is 10.8%. What is the fund's required return on this portfolio?

6. You have been hired by the CFO of the company to help estimate its cost of common equity. You have obtained the following data: (1) r_d = yield of the firm's bonds = 3.25% and the risk premium over its own debt cost = 3.00%. (2) r_RF = 2.25%, RP_m = 6.00%, and b = 0.84. (3) D₁ = $2.70, P₀ = $48.00, and g = 3.00% (constant). You were asked to estimate the cost of common equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?

7. Is it true? The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all the firm's outstanding obligations.

8. Which of the following statements is CORRECT?

a.Seasoned public offering could be made only by companies that are already registered as corporations, but did not issue shares for the public.

b.ADRs of the lever 2 could be sold to a broad categories of investors at the initial public offering.

c.At the secondary public offering existing shareholders sell their shares, and a company does not use sale proceeds to increase its shareholders equity.

d.According to the rule 144A private equity investors buy company's shares in order to make it private (buyout).