ACCOUNTING

Question 20

An increase in a firm’s expected growth rate would cause its required rate of return to

Answer

increase.

decrease.

fluctuate less than before.

fluctuate more than before.

possibly increase, possibly decrease, or possibly remain constant.

2 points

Question 21

Which of the following statements is CORRECT?

Answer

If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.

The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm’s common stock.

The stock valuation model, P0

= D1/(rs – g), cannot be used for firms that have negative growth rates.

The stock valuation model, P0

= D1/(rs – g), can be used only for firms whose growth rates exceed their required returns.

2 points

Question 22

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Answer

The company’s current stock price is $20.

The company’s dividend yield 5 years from now is expected to be 10%.

The constant growth model cannot be used because the growth rate is negative.

The company’s expected capital gains yield is 5%.

The company’s expected stock price at the beginning of next year is $9.50.

2 points

Question 23

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B

Beta 1.10 0.90

Constant growth rate 7.00% 7.00%

Answer

Stock A must have a higher stock price than Stock B.

Stock A must have a higher dividend yield than Stock B.

Stock B’s dividend yield equals its expected dividend growth rate.

Stock B must have the higher required return.

Stock B could have the higher expected return.

2 points

Question 24

The expected return on Natter Corporation’s stock is 14%. The stock’s dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

Answer

The stock’s dividend yield is 7%.

The stock’s dividend yield is 8%.

The current dividend per share is $4.00.

The stock price is expected to be $54 a share one year from now.

The stock price is expected to be $57 a share one year from now.

2 points

Question 25

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Answer

the expected future return must be less than the most recent past realized return.

The past realized return must be equal to the expected return during the same period.

the required return must equal the realized return in all periods.

the expected return must be equal to both the required future return and the past realized return.

the expected future returns must be equal to the required return.

2 points

Question 26

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Answer

The two stocks must have the same dividend per share.

If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

If one stock has a higher dividend yield, it must also have a higher dividend growth rate.

The two stocks must have the same dividend growth rate.

The two stocks must have the same dividend yield.

2 points

Question 27

If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Answer

The expected return on the stock is 5% a year.

The stock’s dividend yield is 5%.

The price of the stock is expected to decline in the future.

The stock’s required return must be equal to or less than 5%.

The stock’s price one year from now is expected to be 5% above the current price.

2 points

Question 28

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

X Y

Price $30 $30

Expected growth (constant) 6% 4%

Required return 12% 10%

Answer

Stock X has a higher dividend yield than Stock Y.

Stock Y has a higher dividend yield than Stock X.

One year from now, Stock X’s price is expected to be higher than Stock Y’s price.

Stock X has the higher expected year-end dividend.

Stock Y has a higher capital gains yield.

2 points

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