question

If stock prices follow a random walk, which of the following statement(s) is(are) correct?

answer

A. Successive stock price changes are not related.
B. The history of stock prices cannot be used to predict future returns to investors.
C. Both A and B.

question

In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.

answer

Not guaranteed; not guaranteed

question

What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40?

answer

10.0%

question

Which of the following values treats the firm as a going concern?

answer

Market value

question

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's current price?

answer

$40.50

question

How many round lots were traded in a specific stock on a day in which 467,800 shares changed hands?

answer

4,678 round lots

question

The book value of a firm's equity is determined by:

answer

The difference between book values of assets and liabilities.

question

What is the current price of a share of stock for a firm with $5 million in balance-sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4?

answer

$40.00

question

If the liquidation value of a firm is negative, then:

answer

The firm's debt exceeds the market value of assets.

question

A firm's liquidation value is the amount:

answer

Realized from selling all assets and paying off its creditors.

question

Which of the following is least likely to account for an excess of market value over book value of equity?

answer

Inaccurate depreciation methods

question

Firms with valuable intangible assets are more likely to show a(n):

answer

High going-concern value.

question

Which of the following is inconsistent with a firm that sells for very near book value?

answer

High future earning power

question

The main purpose of a market-value balance sheet is to:

answer

Value assets and liabilities without GAAP restrictions.

question

A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14%. What might investors expect to pay for the stock one year from now?

answer

$86.20

question

Which of the following statements is correct about a stock currently selling for $50 per share that has a 16% expected return and a 10% expected capital appreciation?

answer

It is expected to pay $3 in annual dividends.

question

The expected return on a common stock is composed of:

answer

Both dividend yield and capital appreciation.

question

Firms having a higher expected return have a higher:

answer

Level of expected risk

question

How much should you pay for a share of stock that offers a constant growth rate of 10%, requires a 16% rate of return, and is expected to sell for $50 one year from now?

answer

$45.45

question

According to the dividend discount model, the current value of a stock is equal to the:

answer

Present value of all expected future dividends.

question

How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:

answer

Have an insignificant present value.

question

If the dividend yield for year one is expected to be 5% based on the current price of $25, what will the year four dividend be if dividends grow at a constant 6%?

answer

$1.49

question

What is the expected dividend to be paid in three years if yesterday's dividend was $6.00, dividends are expected to grow at a constant 6% annual rate, and the firm has a 10% expected return?

answer

$7.15

question

The value of common stock will likely decrease if:

answer

The discount rate increases

question

When valuing stock with the dividend discount model, the present value of future dividends will:

answer

Remain constant regardless of the time horizon selected.

question

Common stock can be valued using the perpetuity valuation formula if the:

answer

Dividends are not expected to grow

question

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

answer

$43.75

question

Dividing a stock's earnings per share by the expected rate of return will value the share correctly if no new shares are issued and the dividend yield:

answer

Is zero

question

If next year's dividend is forecast to be $5.00, the constant growth rate is 4%, and the discount rate is 16%, then the current stock price should be:

answer

$43.33

question

What price would you expect to pay for a stock with 13% required rate of return, 4% rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?

answer

$31.39

question

What constant growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 13%?

answer

6.75%

question

The g in the constant-growth dividend model refers to:

answer

A. the annual growth rate for dividends.
B. the annual growth rate for stock price.
C. both 'a' and 'b' above.

question

What rate of return is expected from a stock that sells for $30 per share, pays $1.50 annually in dividends, and is expected to sell for $33 per share in one year?

answer

15.00%

question

ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price?

answer

$37.42

question

A payout ratio of 35% for a company indicates that:

answer

35% of earnings are paid out as dividends.

question

What would be the expected price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00?

answer

$68.62

question

A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant growth rate of:

answer

9%

question

What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

answer

66.67%

question

What is the return on equity for a firm that has a constant dividend growth rate of 7% and a dividend payout ratio of 60%?

answer

17.50%

question

A positive value for PVGO suggests that the firm has:

answer

Investment opportunities with superior returns

question

Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?

answer

A firm with investment opportunities yielding 15%

question

Other things equal, a firm's sustainable growth rate could increase as a result of:

answer

Increasing the plowback ratio

question

In general, if a firm has positive present value of growth opportunities, then its price-earnings ratio:

answer

Is greater than is required rate of return

question

Assuming all of the following firms have a required return of 14%, which would you expect to have a positive present value of growth opportunities?

answer

A firm with a P/E ratio of 9

question

Which of the following describes a seasoned offering?

answer

An additional equity issue from a publicly-traded firm.

question

Investors are willing to purchase stocks having high P/E ratios because:

answer

They expect these shares to have greater growth opportunities

question

Which of the following is least likely to contribute to going concern value?

answer

High liquidation value

question

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

answer

Its stock price will remain constant.

question

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

answer

At least one of the stocks becomes temporarily mispriced.

question

Dividends that are expected to be paid far into the future have:

answer

Lesser impact on current stock price due to discounting.

question

The terminal value of a share of stock:

answer

Refers to the share value at the end of the investor's holding period.

question

Which of the following best characterizes the difference between growth stocks and income stocks?

answer

Growth stocks have greater PVGO.

question

Which of the following is more likely to be responsible for a firm having low PVGO?

answer

Payout is very high.

question

What is the most likely value of the PVGO for a stock with current price of $50, expected earnings of $6 per share, and a required return of 20%?

answer

$20

question

What is the expected, constant growth rate of dividends for a stock with current price of $100, expected dividend payment of $10 per share, and a required return of 16%?

answer

6.00%

question

Which of the following is true for a firm having a stock price of $42, and expected dividend of $3, and a sustainable growth rate of 8%?

answer

It has a required return of 22%

question

Which of the following is least assured for firms that plowback a portion of earnings into the firm?

answer

Growth in stock price

question

What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of $45, and a constant growth rate of 12%?

answer

$1.80

question

What is the required return for a stock that has a 6% constant growth rate, a price of $25, an expected dividend of $2, and a P/E ratio of 10?

answer

14%

question

What should be the price of a stock that offers a $4 annual dividend with no prospects of growth, and has a required return of 12.5%?

answer

$32.00

question

According to the constant dividend growth model, a stock price should equal the:

answer

Sum of all discounted future dividends

question

If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock:

answer

Pays $0.25 quarterly, or an estimated $1 annually.

question

Which of the following is a characteristic of a dealer market, rather than auction market, for common stock?

answer

Dealers may not all offer the same price for the same security.

question

What is the minimum amount that shareholders should expect to receive in the event of a complete corporate liquidation?

answer

Zero

question

What is meant by the term true depreciation?

answer

The amount necessary to overcome deterioration of corporate assets

question

What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend growth rate of 7%?

answer

$37.45

question

The required return on an equity security is comprised of a:

answer

Dividend yield and a capital gains yield.

question

What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20%, and a constant dividend growth rate of 6%?

answer

$37.86

question

What should be the current price of a stock if the expected dividend is $5, the stock has a required return of 20%, and a constant dividend growth rate of 6%?

answer

$35.71

question

Reinvesting earnings into a firm will not increase the stock price unless:

answer

The ROE of new investments exceeds the firm's required return.

question

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%?

answer

40%

question

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share, has an expected dividend of $2.50, and a required return of 20%?

answer

$10.00

question

What is the expected constant growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18%?

answer

9.26%

question

Which of the following should increase the firm's sustainable growth rate?

answer

Increase the plowback ratio

question

If the liquidation value of a corporation exceeds the market value of the equity, then the:

answer

Firm has no value as a going concern

question

In a valuation of a non-constant dividend growth stock, the terminal value represents the:

answer

Present value of future dividends from that point on

question

Stocks that have the same expected risk should:

answer

Have the same expected rate of return.

question

Security prices are said to follow a "random walk," which means that:

answer

Successive price changes are unpredictable

question

If a stock's price decreased during the past week, what is the most likely prediction about this week's price change?

answer

Either direction of price change is equally likely.

question

Research indicates that the correlation coefficient between successive days' stock price changes is:

answer

Quite close to zero

question

An analyst who relies upon past cycles of stock pricing to make investment decisions is:

answer

Assuming that the market is not weak-form efficient

question

Given the efficiency of our financial markets,

answer

Both technical and fundamental analysts serve a useful function.

question

If it proves possible to make abnormal profits based on information regarding past stock prices, then the market:

answer

Is not weak-form efficient

question

The study of published financial information on a company in order to make investment decisions is known as:

answer

Fundamental analysis

question

A fundamental analyst:

answer

Studies a firm's financial statements to determine pricing inefficiencies.

question

If investors can consistently profit from thorough reading of published financial information, then the market can, at best, be characterized as:

answer

Weak-form efficient

question

If no price change occurs in a stock on the day that it announces its next dividend, it can be assumed that:

answer

The market was expecting this information

question

When investors are not capable of making superior investment decisions on a continual basis based on past prices, public or private information, the market is said to be:

answer

Strong-form efficient

question

Which group of investors is capable of earning consistent, superior profits if financial markets are strong-form efficient?

answer

No one will be capable of sustained, superior profits.

question

Given that markets are efficient, what is the most logical explanation of the fact that a portfolio manager can outperform the S&P 500 by 5% annually?

answer

The manager's results have not been adjusted for the riskiness of the portfolio

question

When new information becomes available in the market, evidence suggests that:

answer

Stock prices will adjust to the information rapidly

question

An example that specifically contradicts strong-form market efficiency in U.S. stock markets is that:

answer

Excess profits are observed in cases of insider trading

question

Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20th of the month and selling them on the last day of the month. If this is true, then:

answer

The market violates even weak-form efficiency

question

What stock price reaction would you expect from a firm that unexpectedly raises its dividend permanently and by a substantial amount?

answer

Price should rise, given dividend discount models

question

The statement that there are no free lunches on Wall Street suggests that:

answer

Security prices reflect all available information

question

Which of the following bond investment strategies should be selected by an investor who wants to maximize return over a three-year investment horizon? Bond A that offers a 10% yield for two years, then rolls the proceeds into a one-year bond, Bond B that offers an 11% yield for three years, or invest in three consecutive one-year bonds?

answer

All strategies should offer similar, risk-adjusted yields

question

An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return. Which of the following seems most likely?

answer

Both stocks are priced correctly given their perceived risk.

question

Which of the following situations is most likely to occur today for a stock that went down in price yesterday?

answer

The stock has no predictable price-change pattern.

question

What is the maximum gain after two coin tosses for a person who starts with $1 if the occurrence of a head produces a 50% gain while the occurrence of a tail produces a 50% loss?

answer

$1.25

question

According to random-walk theory, what are the odds that a stock will increase in price after having increased on two consecutive days of trading?

answer

50.0%

question

If the price of a stock falls on four consecutive days of trading, then stock prices:

answer

Can still be following a random walk

question

If the correlation of prices between two stocks is 0.35, then the price of one stock would be expected to:

answer

Fall when the other stock price falls

question

Trends of past stock market prices would be considered useful or even essential to a(n):

answer

Technical analyst

question

Technical analysts can provide:

answer

An important role in stock market efficiency

question

Technical analysts are most likely to be successful in a market that is considered:

answer

Not to be weak-form efficient

question

A primary goal of fundamental analysis is to:

answer

Locate stocks that are not correctly valued

question

If stock prices incorporate all publicly available information, then the market is considered to be:

answer

Semi-strong-form efficient

question

Under which of the following forms of market efficiency would stock prices always reflect fair value?

answer

Strong-form efficiency

question

A company reports significantly higher earnings on a Monday. You purchase the stock on Tuesday and earn superior returns in the absence of other new information. The market appears to be:

answer

Weak-form efficient at the best.

question

With respect to the notion that stock prices follow a random walk, several researchers have concluded that:

answer

Past stock price changes provide little useful information about current stock prices.

question

With semi-strong form market efficiency:

answer

A. all historical information on past prices is reflected in the current stock price.
B. all currently published information is reflected in the current stock price.
D. Both A and B

question

According to the semi-strong form of market efficiency, when new information becomes available in the market:

answer

Stock prices will accurately and rapidly adjust to reflect this new information.

question

Which of the following observations provides evidence against strong-form market efficiency?

answer

Managers trading in their own stock obtain superior returns.

question

The difference between a fundamental analyst and a technical analyst is:

answer

A fundamental analyst analyzes such information as earnings and asset values.

question

If stock prices follow a random walk:

answer

Successive stock price changes are not related

question

Technical and fundamental analysts help keep the market efficient by:

answer

Trying to earn superior returns in the stock market.

question

Semistrong form efficiency describes a market in which:

answer

Prices reflect all publicly available information

question

LookGood, Inc. has just announced the bad news that its earnings have dropped by 30 percent. In fact, its investors had anticipated even worse results (a decrease of 40 percent). As a result, LookGood's stock price:

answer

Increases

question

BestFirm has a 50-year history of solid growth and ever-increasing profits. It is widely regarded as the leading firm of its industry. Hence, BestFirm's stock:

answer

Should be a safe buy

question

The rise of the dot.coms in the late 1990s is probably due to:

answer

Investors being reluctant to incur losses and being overconfident