fin/320 complete exam

FIN 320 Week 7 Quiz – Strayer

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Quiz 5 Chapter 12 and 13

Chapter 12: ___________________________________________________________________________

1. A top-down analysis of a firm's prospects starts with an analysis of the ____.

A. firm's position in its industry

B. U.S. economy or even the global economy

C. industry

D. specific firm under consideration 2. In 1980 the dollar-yen exchange rate was about $.0045. In 2012 the yen-dollar exchange rate was about 80

yen per dollar. A Japanese producer would have had to increase the dollar price of a good sold in the United States by approximately _____ to maintain the same yen price in 2012.

A. 178%

B. 79.5%

C. 265.4%

D. 36% 3. An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to

either _____________ on its U.S. sales.

A. lose market share or reduce its profit margin

B. gain market share or reduce its profit margin

C. lose market share or increase its profit margin

D. gain market share or increase its profit margin

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4. You estimate that the present value of a firm's cash flow is valued at $15 million. The break up value of the firm if you were to sell the major assets and divisions separately would be $20 million. This is an example of what Peter Lynch would call ___________.

A. a stalwart

B. slow growth

C. a star

D. an asset play 5. Between 1999 and 2010, the purchasing power of the U.S. dollar increased relative to the purchasing power

of _______.

A. the United Kingdom

B. the Euro

C. Switzerland

D. Canada 6. If you believe the economy is about to go into a recession, you might change your asset allocation by

selling _______ and buying ______.

A. growth stocks; long-term bonds

B. long-term bonds; growth stocks

C. defensive stocks; growth stocks

D. defensive stocks; long-term bonds 7. The yield curve spread between the 10-year T-bond yield and the federal funds rate is a _______ economic

indicator.

A. leading

B. lagging

C. coincident

D. mixed

8. The Conference Board's Consumer Confidence Index is released ______.

A. daily

B. weekly

C. monthly

D. quarterly 9. You can earn abnormal returns on your investments via macro forecasting ______.

A. if you can forecast the economy at all

B. if you can forecast the economy as well as the average forecaster

C. if you can forecast the economy better than the average forecaster

D. only if you can forecast the economy with perfect accuracy 10. Which of the following industries would most analysts classify as mature?

A. Internet service providers

B. Biotechnology

C. Wireless communication

D. Auto manufacturing 11. Which one of the following stocks represents industries with below-average sensitivity to the state of the

economy?

A. Financials

B. Technology

C. Food and beverage

D. Cyclicals

12. The most widely used monetary policy tool is _________.

A. altering the discount rate

B. altering reserve requirements

C. open market operations

D. increasing the budget deficit 13. Which one of the following is the ratio of actual output from factories to potential output from factories?

A. Capacity utilizationrate

B. Participation rate

C. Durable goods orders rate

D. Industrial production rate 14. According to __________ economists, the growth of the U.S. economy in the 1980s can be attributed to

lower marginal tax rates, which improved the incentives for people to work.

A. Keynesian

B. monetarist

C. supply-side

D. demand-side 15. The market value of all goods and services produced during a given time period is called ______.

A. GDP

B. industrial production

C. capacity utilization

D. factory orders

16. A big increase in government spending is an example of a _________.

A. positive demand shock

B. positive supply shock

C. negative demand shock

D. negative supply shock 17. GDP refers to _________.

A. the amount of personal disposable income in the economy

B. the difference between government spending and government revenues

C. the total manufacturing output in the economy

D. the total production of goods and services in the economy 18. Portfolio manager Peter Lynch would classify Coca-Cola as _________.

A. an asset play

B. a slow grower

C. a stalwart

D. a turnaround 19. Attempting to forecast future earnings and dividends is consistent with which of the following approaches

to securities analysis?

A. Technical analysis

B. Fundamental analysis

C. Both technical analysis and fundamental analysis

D. Indexing

20. The analysis of the determinants of firm value is called _____________.

A. fundamental analysis

B. technical analysis

C. momentum analysis

D. indexing 21. Which of the following companies is the best example of a turnaround?

A. Coca-Cola

B. Microsoft

C. ExxonMobil

D. Kmart 22. Inflation is caused by ________________.

A. unions

B. rapid growth of the money supply

C. excess supply

D. low rates of capacity utilization 23. Everything else equal, if you expect a larger interest rate increase than other market participants, you

should _________.

A. buy long-term bonds

B. buy short-term bonds

C. buy common stocks

D. buy preferred stocks

24. To obtain an approximate estimate of the real interest rate, one must _________ the __________ the nominal risk-free rate.

A. add; default premium to

B. subtract; default premium from

C. add; expected inflation to

D. subtract; expected inflation from 25. Which of the following would not be considered a supply shock?

A. A change in the price of imported oil

B. Frost damage to the orange crop

C. A change in the level of education of the average worker

D. An increase in the level of government spending 26. If economic conditions are such that very slow growth is expected in the foreseeable future, one would

want to invest in industries with __________ sensitivity to economic conditions.

A. below-average

B. average

C. above-average

D. Since growth is expected to be slow, sensitivity to economic conditions is not an issue. 27. Which of the following is not an example of fiscal policy?

A. Social Security spending

B. Medicare spending

C. Fed purchases of Treasury securities

D. Changes in the tax rate

28. Supply-side economics tends to focus on _______________.

A. government spending

B. price controls

C. monetary policy

D. increasing productive capacity 29. Which one of the following describes the amount by which government spending exceeds government

revenues?

A. Balance of trade

B. Budget deficit

C. Gross domestic product

D. Output gap 30. Which one of the following is probably the most direct and immediate way to stimulate or slow the

economy, although it is not very useful for fine-tuning economic performance?

A. Fiscal policy

B. Monetary policy

C. Supply-side policy

D. Rising minimum wages 31. In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an

example of a _________.

A. demand shock

B. supply shock

C. monetary shock

D. refinery shock

32. ______________ in interest rates are associated with stock market declines.

A. Anticipated increases

B. Unanticipated increases

C. Anticipated decreases

D. Unanticipated decreases 33. The average duration of unemployment is _________.

A. a leading economic indicator

B. a coincidental economic indicator

C. a lagging economic indicator

D. both a coincidental indicator and a lagging indicator 34. The ratio of the purchasing power of two economies is termed the _______.

A. balance of trade

B. real exchange rate

C. real interest rate

D. nominal exchange rate 35. Everything else equal, an increase in the government budget deficit would:

I. Increase the government's demand for fundsII. Shift the demand curve for funds to the leftIII. Increase the interest rate in the economy

A. II only

B. I and II only

C. I and III only

D. I, II, and III

36. Which of the following affects a firm's sensitivity of its earnings to the business cycle?

I. Financial leverageII. Operating leverageIII. Type of product

A. II only

B. I and II only

C. I and III only

D. I, II, and III 37. Which of the following describes the rate at which your ability to purchase grows while you hold an

interest-earning investment?

A. The nominal exchange rate

B. The nominal interest rate

C. The real exchange rate

D. The real interest rate 38. An example of a highly cyclical industry is the _________.

A. automobile industry

B. tobacco industry

C. pharmaceutical industry

D. utility industry 39. The stock price index and contracts and orders for nondefense capital goods are _________.

A. leading economic indicators

B. coincidental economic indicators

C. lagging economic indicators

D. leading and coincidental indicators, respectively

40. Which one of the following is not a demand shock?

A. Increase in government spending

B. Increases in the money supply

C. Reductions in consumer spending

D. Improvements in education of U.S. workers 41. Which one of the following is not a U.S. supply shock?

A. Unions force an increase in national wage rates.

B. The oil supply from the Middle East drops 30%.

C. Extended droughts reduce U.S. food production 25%.

D. Chinese purchases of U.S. exports increase. 42. Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the

business cycle.

A. peak

B. contraction

C. trough

D. expansion 43. Capital goods industries such as industrial equipment, transportation, and construction would be good

investments during the _____ stage of the business cycle.

A. peak

B. contraction

C. trough

D. expansion

44. If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because __________.

A. you have more information than others

B. you are a better analyst than others

C. you have the same information as others

D. you are an equally good analyst as others 45. If the economy is going into a recession, a good industry to invest in would be the __________ industry.

A. automobile

B. banking

C. construction

D. medical services 46. Members of the Board of Governors of the Federal Reserve System are appointed by ____________ to

serve _____________ terms.

A. the Senate; 10-year

B. the House of Representatives; 8-year

C. the President; 14-year

D. the Secretary of the Treasury; 6-year

47. A firm in the early stages of its industry life cycle will likely have _________.

A. low dividend payout rates

B. low rates of investment

C. low rates of return on investment

D. low R&D spending

48. Which of the following describes the percentage of the total labor force that has yet to find work?

A. The capacity utilization rate

B. The participation rate

C. The unemployment rate

D. The natural rate 49. Which of the following is the rate at which the general level of prices for goods and services is rising?

A. The exchange rate

B. The gross domestic product growth rate

C. The inflation rate

D. The real interest rate 50. An analyst starts by examining the broad economic environment and then considers the implications of the

economy on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis.

A. bottom-up

B. outside-inside

C. top-down

D. upside-down 51. Assume that the Federal Reserve increases the money supply. This will cause:

I. Interest rates to decreaseII. Consumption and investment to decreaseIII. Inflation to fall

A. I only

B. I and II only

C. II and III only

D. I, II, and III

52. The discount rate is the ________.

A. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

B. interest rate the Fed charges commercial banks on short-term loans

C. interest rate that the U.S. Treasury pays on its bills

D. interest rate that banks charge their best corporate customers 53. If the currency of your country is depreciating, this should __________ exports and __________ imports.

A. stimulate; stimulate

B. stimulate; discourage

C. discourage; stimulate

D. discourage; discourage 54. If interest rates increase, business investment expenditures are likely to __________ and consumer durable

expenditures are likely to _________.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease 55. Increases in the money supply will cause demand for investment and consumption goods to __________ in

the short run and may cause prices to __________ in the long run.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

56. The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be _________.

A. 2.91%

B. 3.85%

C. 1.45%

D. 2.12% 57. The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be _________.

A. -6%

B. 4%

C. 5.77%

D. 14.4% 58. Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up

phase:

I. MaturityII. Relative declineIII. Consolidation

A. III, I, II

B. I, III, II

C. III, II, I

D. I, II, III 59. An investment strategy that entails shifting the portfolio into industry sectors that are expected to

outperform others based on macroeconomic forecasts is termed ______________.

A. sector rotation

B. contraction/expansion analysis

C. life-cycle analysis

D. business-cycle shifting

60. Firm A produces gadgets. The price of gadgets is $2 each. Firm A has total fixed costs of $1,000,000 and variable costs of $1 per gadget. The corporate tax rate is 40%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy enters a recession, the after-tax profit of firm A will be _________.

A. $0

B. $90,000

C. $180,000

D. $270,000 61. Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and

variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy is strong, the after-tax profit of firm B will be _________.

A. $90,000

B. $210,000

C. $300,000

D. $630,000 62. The fed funds rate is the __________.

A. interest rate that banks charge their best corporate customers

B. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

C. interest rate the Fed charges commercial banks on short-term loans

D. interest rate that the U.S. Treasury pays on its bills 63. Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and

variable costs of $1.40 per gadget. The corporate tax rate is 40%. What is the breakeven number of gadgets B must sell to make a zero after-tax profit?

A. 300,000

B. 400,000

C. 500,000

D. 600,000

64. The goal of supply-side policies is to _______.

A. increase government involvement in the economy

B. create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods

C. maximize tax revenues of the government

D. focus more on wealth redistribution policies 65. An industry analysis for manufacturers of a small personal care gadget observed the following

characteristics:

1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate.2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year.4. The current penetration rate in the United States is 60% of households and will be difficult to increase.5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.8. New manufacturers continue to enter the market.

Characteristics 4 and 5 would indicate that the industry is in the _________ stage.

A. start-up

B. consolidation

C. maturity

D. relative decline

66. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics:


Characteristics _______ would be typical of an industry that is in the start-up stage.

A. 4 and 7

B. 1 and 4

C. 2 and 5

D. none of these options



Characteristics ____ would be typical of an industry that is in the consolidation stage.

A. 6 and 7

B. 1 and 4

C. 5 and 6

D. 2 and 8



Which of the characteristics would be typical of an industry that is in the maturity stage?

A. 1, 2, and 3

B. 4 and 5

C. 6, 7, and 8

D. all of these options 69. Countercyclical fiscal policy is best described by which of the following statements?

A. Government surpluses are planned during economic booms, and deficits are planned during economic recessions.

B. The annual budget should always be balanced.

C. Deficits should always equal surpluses.

D. Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

70. A supply-side economist would likely agree with which of the following statements?

A. Real output and aggregate employment are primarily determined by aggregate demand.

B. Real income will rise when government expenditures and tax rates increase.

C. Real output and aggregate employment are primarily determined by tax rates.

D. Increasing the money supply will increase real output without causing higher inflation.

71. Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation?

A. Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

B. Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

C. Decrease the discount rate, lowering interest rates and causing both costs and prices to fall.

D. Increase taxes, reducing costs and causing prices to fall. 72. The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S.

goods in Japan?

A. U.S. goods will increase in cost, and Japan will import more.

B. U.S. goods will increase in cost, and Japan will import less.

C. U.S. goods will decrease in cost, and Japan will import more.

D. U.S. goods will increase in cost, and Japan will export less. 73. Which of the following are examples of cyclical industries?

I. MaytagII. Computer chip manufacturersIII. Kellogg's Frosted FlakesIV. Pfizer

A. I and II only

B. I, II, and III only

C. II, III, and IV only

D. I, II, III, and IV

74. You would expect the beta of cyclical industries to be ______ and the beta of defensive industries to be ______.

A. greater than 1; less than 1

B. less than 1; less than 1

C. less than 1; greater than 1

D. greater than 1; greater than 1 75. What economic variable is most closely associated with increasing corporate profits?

A. Exchange rates

B. Inflation

C. Gross domestic product

D. Budget deficits 76. The federal government decides to pay for the transition to private social security accounts with a one-time

$1 trillion bond issue. What will be the biggest concern to businesses relative to the "crowding out" effect?

A. Higher interest rates due to the new government borrowing

B. Inflation resulting from more government purchases

C. A negative supply shock

D. Shortage of investment due to new accounts 77. An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the

demand, what is the likely impact on the economy?

A. An economic slowdown is likely

B. Employment trends will reverse and unemployment will occur

C. Government deficits will result from capacity utilization

D. Inflation may result from upward wage pressures

78. An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of ____________.

A. asset allocation

B. capacity utilization

C. employment management

D. strategic planning 79. The expansion of the money supply at a rate that exceeds the increase in goods and services will likely

result in ___________.

A. expanding economy

B. increased inflation

C. interest rate declines

D. lower GDP 80. The supply of funds in the economy is controlled primarily by ____________.

A. the Federal Reserve System

B. Congress

C. money center banks

D. the Treasury department 81. The classification system used to classify firms into industries is now called the _____ code.

A. SIC

B. NAICS

C. ISO 57

D. ISM

82. During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event?

A. Demand shock

B. Equilibrium event

C. Expanding commodity event

D. Supply shock 83. Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer

to this type of event as a ______________.

A. demand shock

B. equilibrium event

C. expanding commodity event

D. supply shock 84. Items that are ____________ and product purchases for which ________ is not important tend to be less

cyclical in nature.

A. necessities; income

B. luxuries; leverage

C. discretionary goods; time of purchase

D. produced with high fixed costs; entertainment 85. Cash cows are typically found in the _________ stage of the industry life cycle.

A. start-up

B. consolidation

C. maturity

D. relative decline

86. At what point in the industry life cycle are inefficiencies in competitors most likely to be removed?

A. Start-up stage

B. Consolidation stage

C. Maturity stage

D. Relative decline stage 87. Stalwarts are typically found in the _________ stage of the industry life cycle.

A. start-up

B. consolidation

C. maturity

D. relative decline 88. Large-growth companies generally emerge in the __________ stage.

A. start-up

B. consolidation

C. maturity

D. relative decline 89. Which of the following are barriers to entry?

I. Large economies of scale required to be profitableII. Established brand loyaltyIII. Patent protection for the firm's productIV. Rapid industry growth

A. I and II only

B. I, II, and III only

C. II, III, and IV only

D. III and IV only

Chapter 13: ___________________________________________________________________________

1. The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

A. book value

B. market value

C. liquidation value

D. Tobin's q 2. The price-to-sales ratio is probably most useful for firms in which phase of the

industry life cycle?

A. Start-up phase

B. Consolidation

C. Maturity

D. Relative decline 3. If a firm increases its plowback ratio, this will probably result in _______ P/E

ratio.

A. a higher

B. a lower

C. an unchanged

D. The answer cannot be determined from the information given.

4. The value of Internet companies is based primarily on _____.

A. current profits

B. Tobin's q

C. growth opportunities

D. replacement cost 5. New-economy companies generally have higher _______ than old-economy

companies.

A. book value per share

B. P/E multiples

C. profits

D. asset values 6. P/E ratios tend to be _______ when inflation is ______.

A. higher; higher

B. lower; lower

C. higher; lower

D. They are unrelated. 7. Which one of the following statements about market and book value is correct?

A. All firms sell at a market-to-book ratio above 1.

B. All firms sell at a market-to-book ratio greater than or equal to 1.

C. All firms sell at a market-to-book ratio below 1.

D. Most firms have a market-to-book ratio above 1, but not all.

8. Earnings yields tend to _______ when Treasury yields fall.

A. fall

B. rise

C. remain unchanged

D. fluctuate wildly 9. Which one of the following is a common term for the market consensus value of

the required return on a stock?

A. Dividend payout ratio

B. Intrinsic value

C. Market capitalization rate

D. Plowback ratio 10. Which one of the following is equal to the ratio of common shareholders' equity to

common shares outstanding?

A. Book value per share

B. Liquidation value per share

C. Market value per share

D. Tobin's q 11. A firm has current assets that could be sold for their book value of $10 million.

The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is ________.

A. 1.83

B. 1.5

C. 1.35

D. 1.46

12. If a stock is correctly priced, then you know that ____________.

A. the dividend payout ratio is optimal

B. the stock's required return is equal to the growth rate in earnings and dividends

C. the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return

D. the present value of growth opportunities is equal to the value of assets in place 13. A stock has an intrinsic value of $15 and an actual stock price of $13.50. You

know that this stock ________.

A. has a Tobin's q value < 1

B. will generate a positive alpha

C. has an expected return less than its required return

D. has a beta > 1 14. Bill, Jim, and Shelly are all interested in buying the same stock that pays

dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct?

A. Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells.

B. Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's.

C. Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends.

D. All three should be willing to pay the same amount for the stock regardless of their holding period.

15. A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct?

I. All else equal, the firm's growth rate will accelerate after the payout change.II. All else equal, the firm's stock price will go up after the payout change.III. All else equal, the firm's P/E ratio will increase after the payout change.

A. I only

B. I and II only

C. II and III only

D. I, II, and III 16. A firm cuts its dividend payout ratio. As a result, you know that the firm's

_______.

A. return on assets will increase

B. earnings retention ratio will increase

C. earnings growth rate will fall

D. stock price will fall 17. __________ is the amount of money per common share that could be realized by

breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

A. Book value per share

B. Liquidation value per share

C. Market value per share

D. Tobin's q

18. An underpriced stock provides an expected return that is ____________ the required return based on the capital asset pricing model (CAPM).

A. less than

B. equal to

C. greater than

D. greater than or equal to 19. Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock.

Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now ______.

A. 0%

B. 100%

C. between 0% and 50%

D. between 50% and 100% 20. The constant-growth dividend discount model (DDM) can be used only when the

___________.

A. growth rate is less than or equal to the required return

B. growth rate is greater than or equal to the required return

C. growth rate is less than the required return

D. growth rate is greater than the required return

21. Suppose that in 2012 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market will change by _____.

A. -10%

B. -20%

C. -25%

D. -33% 22. You want to earn a return of 10% on each of two stocks, A and B. Each of the

stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.

A. will be higher than the intrinsic value of stock B

B. will be the same as the intrinsic value of stock B

C. will be less than the intrinsic value of stock B

D. The answer cannot be determined from the information given. 23. Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming

year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.




D. The answer cannot be determined from the information given.

24. You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A _________.




D. The answer cannot be determined from the information given. 25. You are considering acquiring a common share of Sahali Shopping Center

Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return.

A. $31.25

B. $32.37

C. $38.47

D. $41.32 26. The market capitalization rate on the stock of Aberdeen Wholesale Company is

10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be _________.

A. 8.33

B. 12.5

C. 19.23

D. 24.15

27. The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 60%, its P/E ratio will be _________.

A. 7.14

B. 14.29

C. 16.67

D. 22.22 28. Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45

million in liabilities, and $25 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is _________.

A. $16.67

B. $25

C. $37.50

D. $40.83 29. Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market

capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate?

A. .5%

B. 1%

C. 1.5%

D. 2%

30. Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____.

A. 4.5%

B. 10.5%

C. 15%

D. 30% 31. A preferred share of Coquihalla Corporation will pay a dividend of $8 in the

upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth _________.

A. $13.50

B. $45.50

C. $91

D. $114.29 32. Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be

__________ if it follows a policy of paying 30% of earnings in the form of dividends.

A. 5%

B. 15%

C. 17.5%

D. 45%

33. A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today?

A. $25

B. $16.87

C. $19.24

D. $20.99 34. Rose Hill Trading Company is expected to have EPS in the upcoming year of $8.

The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be _________.

A. $1.12

B. $1.44

C. $2.40

D. $5.60 35. Rose Hill Trading Company is expected to have EPS in the upcoming year of $6.

The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________.

A. $20.93

B. $69.77

C. $128.57

D. $150

36. Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is _________.

A. 9%

B. 12%

C. 14%

D. 18% 37. Grott and Perrin, Inc., has expected earnings of $3 per share for next year. The

firm's ROE is 20%, and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities?

A. $20

B. $70

C. $90

D. $115 38. Ace Ventura, Inc., has expected earnings of $5 per share for next year. The firm's

ROE is 15%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities?

A. $25

B. $50

C. $75

D. $100

39. Annie's Donut Shops, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 18%, and its earnings retention ratio is 60%. If the firm's market capitalization rate is 12%, what is the value of the firm excluding any growth opportunities?

A. $25

B. $50

C. $83.33

D. $208 40. Flanders, Inc., has expected earnings of $4 per share for next year. The firm's ROE

is 8%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities?

A. -$6.33

B. $0

C. $20.34

D. $26.67 41. Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm

would you expect to have a higher P/E ratio?

A. Firm A

B. Firm B

C. Both would have the same P/E if they were in the same industry.

D. There is not necessarily any linkage between risk and P/E ratios.

42. Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with lower expected growth rates.

A. higher than

B. equal to

C. lower than

D. There is not necessarily any linkage between risk and P/E ratios. 43. Value stocks are more likely to have a PEG ratio _____.

A. less than 1

B. equal to 1

C. greater than 1

D. less than zero 44. Generally speaking, as a firm progresses through the industry life cycle, you

would expect the PVGO to ________ as a percentage of share price.

A. increase

B. decrease

C. stay the same

D. No typical pattern can be expected.

45. Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is _________.

A. 1.4

B. .9

C. .8

D. .5 46. Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming

year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________.

A. 8%

B. 10.8%

C. 15.6%

D. 16.8% 47. Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming

year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is _________.

A. $24.29

B. $27.39

C. $31.13

D. $34.52

48. Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the CAPM, the return you should require on the stock is _________.

A. 7.25%

B. 10.25%

C. 14.75%

D. 21% 49. Todd Mountain Development Corporation is expected to pay a dividend of $3 in

the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the intrinsic value of the stock is _________.

A. 4

B. 17.65

C. 37.50

D. 50 50. Generally speaking, the higher a firm's ROA, the _________ the dividend payout

ratio and the _________ the firm's growth rate of earnings.

A. higher; lower

B. higher; higher

C. lower; lower

D. lower; higher

51. Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. Using the constant-growth DDM, the intrinsic value of the stock is _________.

A. $10

B. $22.73

C. $27.78

D. $41.67 52. Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the

upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the CAPM, the return you should require on the stock is _________.

A. 2%

B. 5%

C. 8%

D. 9% 53. Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the

upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the constant-growth DDM, the intrinsic value of the stock is _________.

A. $50

B. $100

C. $150

D. $200

54. Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.

A. $63.80

B. $65.13

C. $67.95

D. $85.60 55. Ace Frisbee Corporation produces a good that is very mature in the firm's product

life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today.

A. $13.07

B. $13.58

C. $18.25

D. $18.78 56. A firm's earnings per share increased from $10 to $12, its dividends increased

from $4 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that _________.

A. the stock experienced a drop in its P/E ratio

B. the company had a decrease in its dividend payout ratio

C. both earnings and share price increased by 20%

D. the required rate of return increased

57. Assuming all other factors remain unchanged, __________ would increase a firm's price-earnings ratio.

A. an increase in the dividend payout ratio

B. a reduction in investor risk aversion

C. an expected increase in the level of inflation

D. an increase in the yield on Treasury bills 58. A company with an expected earnings growth rate which is greater than that of the

typical company in the same industry most likely has _________________.

A. a dividend yield which is greater than that of the typical company

B. a dividend yield which is less than that of the typical company

C. less risk than the typical company

D. less sensitivity to market trends than the typical company 59. Everything else equal, which variable is negatively related to the intrinsic value of

a company?

A. D1

B. D0

C. g

D. k 60. Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to

pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is _________.

A. $26.67

B. $35.19

C. $42.94

D. $59.89

61. A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio?

A. 12

B. 8.33

C. 10.25

D. 18.55 62. A firm has an earnings retention ratio of 40%. The stock has a market

capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio?

A. 12.82

B. 7.69

C. 8.33

D. 9.46 63. A common stock pays an annual dividend per share of $1.80. The risk-free rate is

5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock?

A. $17.78

B. $20

C. $40

D. None of these options

64. Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the constant-growth rate of TTT dividends?

A. 5%

B. 10%

C. 20%

D. None of these options 65. A stock is priced at $45 per share. The stock has earnings per share of $3 and a

market capitalization rate of 14%. What is the stock's PVGO?

A. $23.57

B. $15

C. $19.78

D. $21.34 66. A firm increases its dividend plowback ratio. All else equal, you know that

_____________.

A. earnings growth will increase and the stock's P/E will increase

B. earnings growth will decrease and the stock's P/E will increase

C. earnings growth will increase and the stock's P/E will decrease

D. earnings growth will increase and the stock's P/E may or may not increase

67. A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio?

A. 1.5

B. 1.25

C. 1.1

D. 1 68. ART has come out with a new and improved product. As a result, the firm projects

an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock.

At what price would you expect ART to sell?

A. $25

B. $34.29

C. $42.86

D. $45.67 69. ART has come out with a new and improved product. As a result, the firm projects


At what P/E ratio would you expect ART to sell?

A. 8.33

B. 11.43

C. 14.29

D. 15.25

70. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock.

What is the present value of growth opportunities for ART?

A. $8.57

B. $9.29

C. $14.29

D. $16.29 71. ART has come out with a new and improved product. As a result, the firm projects


What price do you expect ART shares to sell for in 4 years?

A. $53.96

B. $44.95

C. $41.68

D. $39.76 72. The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital

expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm?

A. $85

B. $125

C. $185

D. $305

73. A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm?

A. $57

B. $65

C. $75

D. $95 74. The free cash flow to the firm is $300 million in perpetuity, the cost of equity

equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach?

A. $1 billion

B. $2 billion

C. $3 billion

D. $4 billion 75. If a firm has a free cash flow equal to $50 million and that cash flow is expected to

grow at 3% forever, what is the total firm value given a WACC of 9.5%?

A. $679.81 million

B. $715.54 million

C. $769.23 million

D. $803.03 million

76. The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm?

A. $405.6 million

B. $454.2 million

C. $505.8 million

D. $553.5 million 77. The free cash flow to the firm is reported as $275 million. The interest expense to

the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm?

A. $269 million

B. $296 million

C. $305 million

D. $327 million 78. The free cash flow to the firm is reported as $205 million. The interest expense to

the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%?

A. $2,168 billion

B. $2,445 billion

C. $2,565 billion

D. $2,998 billion

79. The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%?

A. $1,950 billion

B. $2,497 billion

C. $2,585 billion

D. $3,098 billion 80. Firm A has a stock price of $35, and 60% of the value of the stock is in the form

of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that:

I. Stock A will give us a higher return than Stock B.II. An investment in stock A is probably riskier than an investment in stock B.III. Stock A has higher forecast earnings growth than stock B.

A. I only

B. I and II only

C. II and III only

D. I, II, and III 81. A firm is expected to produce earnings next year of $3 per share. It plans to

reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

A. $27.27

B. $37.50

C. $66.67

D. $70

82. Next year's earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities?

A. $9.09

B. $10.10

C. $11.11

D. $12.21 83. Next year's earnings are estimated to be $6. The company plans to reinvest 33% of

its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?

A. $6

B. $24.50

C. $44.44

D. $75 84. When Google's share price reached $475 per share, Google had a P/E ratio of

about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google's stock price was represented by PVGO?

A. 92%

B. 87%

C. 77%

D. 64%

85. A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment?

A. 27 years

B. 37 years

C. 55 years

D. 75 years 86. In what industry are investors likely to use the dividend discount model and arrive

at a price close to the observed market price?

A. Import/export trade

B. Software

C. Telecommunications

D. Utility 87. Estimates of a stock's intrinsic value calculated with the free cash flow

methodology depend most critically on _______.

A. the terminal value used

B. whether one uses FCFF or FCFE

C. the time period used to estimate the cash flows

D. whether the firm is currently paying dividends 88. The greatest value to an analyst from calculating a stock's intrinsic value is

_______.

A. how easy it is to come up with accurate model inputs

B. the precision of the value estimate

C. how the process forces analysts to understand the critical variables that have the greatest impact on value

D. how all the different models typically yield identical value results

89. Which of the following valuation measures is often used to compare firms that have no earnings?

A. Price-to-book ratio

B. P/E ratio

C. Price-to-cash-flow ratio

D. Price-to-sales ratio

fin/320 complete exam

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