9-1ChapterNineValuationofCommonStocksThischaptercontains47multiplechoicequestions,17shortproblems,and9longerproblems.MultipleChoice1.Inaquotelistingofstocks,the________isdefinedastheannualizeddollardividenddividedbythestock’sprice,andisusuallyexpressedasapercentage.(a)cashdividend(b)dividendpayout(c)dividendcoverage(d)dividendyieldAnswer:(d)2.Accordingtothediscounted-dividendmodel,thepriceofashareofstockisthe________valueofallexpected________dividendspershare,discountedatthemarketcapitalizationrate.(a)present;current(b)present;future(c)future;future(d)future;currentAnswer:(b)3.Thevalueofcommonstockisdeterminedbywhichofthefollowingexpectedcashflows?(a)dividendsandinterestpayments(b)dividendsandmaturityvalueofstock(c)dividendsandnetcashflowsfromoperationsofthefirm(d)interestpaymentsandmaturityvalueAnswer:(c)9-24.The________istheexpectedrateofreturnthatinvestorsrequireinordertobewillingtoinvestinthestock.(a)marketcapitalizationrate(b)risk-adjusteddiscountrate(c)costofdebt(d)aandbAnswer:(d)5.The________ofdividendsisthemostbasicassumptionunderlyingthediscounteddividendmodel.(a)industryaverage(b)non-constantgrowth(c)constantgrowth(d)variabilityAnswer:(c)6.BHMstockisexpectedtopayadividendof$2.50ayearfromnow,anditsdividendsareexpectedtogrowby6%peryearthereafter.WhatisthepriceofaBHMshareifthemarketcapitalizationrateis7%peryear?(a)$250.00(b)$192.31(c)$25.00(d)$19.23Answer:(c)7.IOUstockisexpectedtopayadividendof$1.67ayearfromnow,anditsdividendsarenotexpectedtogrowintheforeseeablefuture.Ifthemarketcapitalizationrateis7%,whatisthecurrentpriceofashareofIOUstock?(a)$11.69(b)$23.86(c)$116.90(d)$238.60Answer:(b)9-38.GMATSstockiscurrentlysellingfor$34.50ashare.Thecurrentdividendforthisstockis$1.60anddividendsareexpectedtogrowataconstantrateof10%peryearthereafter.WhatmustbethemarketcapitalizationrateforashareofGMATSstock?(a)4.90%(b)5.36%(c)14.64%(d)15.10%Answer:(d)9.Avacorstockisexpectedtopayadividendof$1.89ayearfromnow,anditsdividendsareexpectedtogrowataconstantrateof5%peryearthereafter.Ifthemarketcapitalizationrateis14%peryear,whatisthecurrentpriceofashareofAvacorstock?(a)$13.50(b)$18.90(c)$21.00(d)$37.80Answer:(c)10.GRITOstockiscurrentlysellingfor$46.10ashare.Ifthecompanyisexpectedtopayadividendof$5.60ayearfromnowanddividendsarenotexpectedtogrowthereafter,whatisthemarketcapitalizationrateforashareofGRITOstock?(a)7.56%(b)8.23%(c)10.50%(d)12.15%Answer:(d)11.IntheDDMmodel,ifD1andkareheldconstant,whatwillhappentothepriceofastockiftheconstantgrowthrategetshigher?(a)thepriceofthestockwillbehigher(b)thepriceofthestockwillholdconstant(c)thepriceofthestockwillbelower(d)itcannotbedeterminedfromtheinformationgivenAnswer:(a)9-412.Therelationbetweenearningsanddividendsinanyperiodis________.(a)Dividends=Earnings/NetNewInvestment(b)Dividends=EarningsxNetNewInvestment(c)Dividends=Earnings+NetNewInvestment(d)Dividends=Earnings–NetNewInvestmentAnswer:(d)13.ConsiderafirmcalledNowhereCorporation,whoseearningspershareare$12.Thefirminvestsanamounteachyearthatisjustsufficienttoreplacetheproductioncapacitythatiswearingout,andsothenewinvestmentiszero.Thefirmpaysoutallitsearningsasdividends.CalculatethepriceofashareofNowhereCorporationstock,givethatk=14%.(a)$168.00(b)$166.67(c)$85.71(d)$82.40Answer:(c)14.ConsiderafirmcalledSureBetCorporation.SureBetreinvests55%ofitsearningseachyearintonewinvestmentsthatearnar...
