Question 6

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According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Select one:

True

False

Question 7

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Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $57.50, what is its nominal (not effective) annual rate of return?

Select one:

a.

7.03%

b.

8.56%

c.

6.75%

d.

5.84%

e.

6.96%

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Question 8

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Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share. If the required return on this preferred stock is 6.5%, then at what price should the stock sell?

Select one:

a.

$30.77

b.

$32.92

c.

$38.15

d.

$23.38

e.

$27.38

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Question 9

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Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 5.25% per year. The required rate of return on the stock, r_s, is 11.50%. What is the stock's expected price 5 years from now?

Select one:

a.

$45.53

b.

$52.81

c.

$40.06

d.

$39.15

e.

$47.80

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Question 10

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Which of the following statements is CORRECT?

Select one:

a.

The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

b.

If a stock has a required rate of return r_s = 12% and its dividend is expected to grow at a constant rate of 5%, then the stock's dividend yield is also 5%.

c.

The stock valuation model, P₀ = D₁/(r_s - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

d.

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

e.

The constant growth model cannot be used for a zero growth stock, wherein the dividend is expected to remain constant over time.

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