7. Which of the following statements is incorrect?

A-- Houses are traded only rarely in the markets to determine their true market value and therefore we rely on estimates of market value made by experts or real estate appraisers.

B-- The risk-neutral investor can have different risk preferences, and therefore two risk-neutral investors are likely to have different required returns for the same asset.

C-- All the answers are correct except one.

D-- The intrinsic value of an asset is the present value of the expected future cash flows of the asset discounted by the required rate of return for the investor.

E-- Free cash flow is defined as total operating cash flow after taxes less the reinvestment in operating assets that is required to maintain the firms growth rate.

8. Which of the following statements is correct?

A-- Like a common stock, preferred stock generally pays a growing dividend payment each period, and also, like a bond, there is no maturity date, so the life of a share is effectively finite.

B-- All the answers are correct.

C-- The essential idea is that the E/P ratio tells us how much investors are willing to giving up for each dollar of dividends.

D-- In order to establish the value of an asset, it is important that both the buyer and seller be willing and able.

E-- It is not easy to determine the market value of securities traded in the public markets.

9. Which of the following statements is correct?

A-- Houses are traded in the markets daily determining their true market value, and therefore we rely on daily market prices of the houses.

B-- The expected risk premium in the Capital Asset Pricing Model (CAPM) is found by adding the risk-free rate of return to the expected market return which can be thought of as the risk premium of an average risk security.

C-- All the answers are correct.

D-- Market value is the price of an asset as determined by an appraiser of the asset.

E-- According to the earnings model, the value of the stock will increase only if the firms ROE (r) is greater than its required return (k).

10. Which of the following statements is incorrect?

A-- According to the earnings model, the value of the common stock for a firm, that does not reinvest and therefore does not grow, is equal to the firms required return (k) divided by next periods earnings per share (EPS1).

B-- Through proper diversification, unsystematic risk can often be eliminated from a portfolio.

C-- The constant-growth dividend discount model (DDM) is also known as the Gordon Growth Model.

D-- The CAPM is no more than a sophisticated version of the simple risk premium model, (E(Ri) = Base Rate + Risk Premium, which applies to all assets.

E-- All the answers are correct except one.