Question 1

Chill Out Corporation's next annual dividend is expected to be $1.06 per share. Dividends and earnings have been growing at 6% a year and you expect this growth rate to continue indefinitely. If your required rate of return for this stock is 14%, what is the maximum price you should be willing to pay for it?

$7.57

$1.24

$13.25

$17.66

Question 2

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price

True

False

Question 3

The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value?

$150

$100

$50

$25

$10

Question 4

Thames Inc.'s most recent dividend was $2.40 per share (i.e., D0 = $2.40). The dividend is expected to grow at a rate of 6 percent per year. The risk-free rate is 5 percent and the return on the market is 9 percent. If the company's beta is 1.3, what is the price of the stock today?

$72.14

$57.14

$40.00

$68.06

$60.57

Question 5

The constant growth model used for evaluating the price of a share of common stock may also be used to find the price of perpetual preferred stock or any other perpetuity.

True

False

Question 6

An increase in a firm's expected growth rate would cause the firm's stock price to

Increase.

Decrease.

Fluctuate.

Remain constant.

Possibly increase, possibly decrease, or possibly remain unchanged.

Question 7

Stewart Industries expects to pay a $3.00 per share dividend on its common stock at the end of the year (D1 = $3.00). The dividend is expected to grow 25 percent a year until t = 3, after which time the dividend is expected to grow at a constant rate of 5 percent a year (i.e., D3 = $4.6875 and D4 = $4.9219). The stock's beta is 1.2, the risk-free rate of interest is 6 percent, and the rate of return on the market is 11 percent. What is the company's current stock price? $29.89

$30.64

$37.29

$53.69

$59.05

Question 8

Which of the following statements is most correct?

If a market is strong-form efficient this implies that the returns on bonds and stocks should be identical.

If a market is weak-form efficient this implies that all public information is rapidly incorporated into market prices.

If your uncle earns a return higher than the overall stock market, this means the stock market is inefficient.

Both answers a and b are correct.

None of the above answers is correct.

Question 9

Most studies of stock market efficiency suggest that the stock market is highly efficient in the weak form and reasonably efficient in the semistrong form. Based on these findings which of the following statements are correct?

Information you read in The Wall Street Journal today cannot be used to select stocks that will consistently beat the market.

The stock price for a company has been increasing for the past 6 months. Based on this information it must be true that the stock price will also increase during the current month.

Information disclosed in companies' most recent annual reports can be used to consistently beat the market.

Statements a and c are correct.

All of the statements above are correct.

Question 10

A preferred stock pays a $7 dividend, and the required rate of return that investors have for this stock is 9%. Given these conditions, what is today's value of the stock?

$63.00

$77.78

$16

$1.29

$0.78