FINA Test 3

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1. ABC common stock is expected to have $37.42 10. Common stock can be valued using the Dividends are
extraordinary growth of 20% per year for two perpetuity valuation formula if the: not expected
years, at which time the growth rate will settle to grow
into a constant 6%. If the discount rate is 15%
11. A company reports significantly higher Weak-form
and the most recent dividend was $2.50, what
earnings on a Monday. You purchase the efficient at the
should be the current share price?
stock on Tuesday and earn superior best.
2. According to random-walk theory, what are 50.0% returns in the absence of other new
the odds that a stock will increase in price information. The market appears to be:
after having increased on two consecutive
12. A company with a return on equity of 15% 9%
days of trading?
and a plowback ratio of 60% would
3. According to the constant dividend growth Sum of all expect a constant growth rate of:
model, a stock price should equal the: discounted
13. The difference between a fundamental A fundamental
future
analyst and a technical analyst is: analyst
dividends
analyzes such
4. According to the dividend discount model, the Present information as
current value of a stock is equal to the: value of all earnings and
expected asset values.
future
14. Dividends that are expected to be paid Lesser impact
dividends.
far into the future have: on current
5. According to the semi-strong form of market Stock stock price due
efficiency, when new information becomes prices will to discounting.
available in the market: accurately
15. Dividing a stock's earnings per share by Is zero
and rapidly
the expected rate of return will value the
adjust to
share correctly if no new shares are
reflect this
issued and the dividend yield:
new
information. 16. An example that specifically contradicts Excess profits
strong-form market efficiency in U.S. are observed in
6. An analyst who relies upon past cycles of Assuming
stock markets is that: cases of insider
stock pricing to make investment decisions is: that the
trading
market is
not weak- 17. The expected return on a common stock Both dividend
form is composed of: yield and
efficient capital
appreciation.
7. Assuming all of the following firms have a A firm with
required return of 14%, which would you a P/E ratio 18. Firms having a higher expected return Level of
expect to have a positive present value of of 9 have a higher: expected risk
growth opportunities? 19. A firm's liquidation value is the amount: Realized from
8. BestFirm has a 50-year history of solid growth Should be selling all
and ever-increasing profits. It is widely a safe buy assets and
regarded as the leading firm of its industry. paying off its
Hence, BestFirm's stock: creditors.

9. The book value of a firm's equity is The 20. Firms with valuable intangible assets are High going-
determined by: difference more likely to show a(n): concern value.
between 21. A fundamental analyst: Studies a firm's
book financial
values of statements to
assets and determine
liabilities. pricing
inefficiencies.
22. The g in the constant-growth dividend A. the annual 34. If no price change occurs in a stock on The market was
model refers to: growth rate for the day that it announces its next expecting this
dividends. dividend, it can be assumed that: information
B. the annual
35. If stock prices follow a random walk: Successive stock
growth rate for
price changes are
stock price.
not related
C. both 'a' and 'b'
above. 36. If stock prices follow a random walk, A. Successive
which of the following statement(s) stock price
23. Given that markets are efficient, what is The manager's
is(are) correct? changes are not
the most logical explanation of the fact results have not
related.
that a portfolio manager can outperform been adjusted
B. The history of
the S&P 500 by 5% annually? for the riskiness
stock prices
of the portfolio
cannot be used to
24. Given the efficiency of our financial Both technical predict future
markets, and fundamental returns to
analysts serve a investors.
useful function. C. Both A and B.
25. How is it possible to ignore cash Have an 37. If stock prices incorporate all publicly Semi-strong-form
dividends that occur far into the future insignificant available information, then the market efficient
when using a dividend discount model? present value. is considered to be:
Those dividends:
38. If the correlation of prices between Fall when the
26. How many round lots were traded in a 4,678 round lots two stocks is 0.35, then the price of other stock price
specific stock on a day in which 467,800 one stock would be expected to: falls
shares changed hands?
39. If the dividend yield for year one is $1.49
27. How much of a stock's $30 price is $10.00 expected to be 5% based on the
reflected in PVGO if it expects to earn current price of $25, what will the year
$4 per share, has an expected dividend four dividend be if dividends grow at a
of $2.50, and a required return of 20%? constant 6%?
28. How much should you pay for a share of $45.45 40. If the liquidation value of a corporation Firm has no value
stock that offers a constant growth rate exceeds the market value of the as a going
of 10%, requires a 16% rate of return, and equity, then the: concern
is expected to sell for $50 one year
41. If the liquidation value of a firm is The firm's debt
from now?
negative, then: exceeds the
29. If a stock's P/E ratio is 13.5 at a time $40.50 market value of
when earnings are $3 per year, what is assets.
the stock's current price?
42. If the price of a stock falls on four Can still be
30. If a stock's price decreased during the Either direction consecutive days of trading, then stock following a
past week, what is the most likely of price change prices: random walk
prediction about this week's price is equally likely.
43. If The Wall Street Journal lists a stock's Pays $0.25
change?
dividend as $1, then it is most likely the quarterly, or an
31. If investors can consistently profit from Weak-form case that the stock: estimated $1
thorough reading of published financial efficient annually.
information, then the market can, at
44. In a valuation of a non-constant Present value of
best, be characterized as:
dividend growth stock, the terminal future dividends
32. If it proves possible to make abnormal Is not weak-form value represents the: from that point on
profits based on information regarding efficient
45. In general, if a firm has positive Is greater than is
past stock prices, then the market:
present value of growth opportunities, required rate of
33. If next year's dividend is forecast to be $43.33 then its price-earnings ratio: return
$5.00, the constant growth rate is 4%,
46. In the calculation of rates of return on Not guaranteed;
and the discount rate is 16%, then the
common stock, dividends are _______ not guaranteed
current stock price should be:
and capital gains are ______.
47. An investor is faced with the decision of Both stocks 57. Research indicates that the correlation Quite close to
whether to invest in a stock with an are priced coefficient between successive days' zero
expected return of 14% or a stock in the correctly stock price changes is:
same industry with an expected 20% return. given their
58. The rise of the dot.coms in the late 1990s Investors being
Which of the following seems most likely? perceived
is probably due to: reluctant to
risk.
incur losses
48. Investors are willing to purchase stocks They expect and being
having high P/E ratios because: these shares overconfident
to have
59. Security prices are said to follow a Successive
greater
"random walk," which means that: price changes
growth
are
opportunities
unpredictable
49. LookGood, Inc. has just announced the bad Increases
60. Semistrong form efficiency describes a Prices reflect
news that its earnings have dropped by 30
market in which: all publicly
percent. In fact, its investors had
available
anticipated even worse results (a decrease
information
of 40 percent ). As a result, LookGood's
stock price: 61. The statement that there are no free Security prices
lunches on Wall Street suggests that: reflect all
50. The main purpose of a market-value Value assets
available
balance sheet is to: and liabilities
information
without
GAAP 62. A stock paying $5 in annual dividends $86.20
restrictions. sells now for $80 and has an expected
return of 14%. What might investors
51. Other things equal, a firm's sustainable Increasing
expect to pay for the stock one year
growth rate could increase as a result of: the
from now?
plowback
ratio 63. Stocks that have the same expected risk Have the same
should: expected rate
52. A payout ratio of 35% for a company 35% of
of return.
indicates that: earnings are
paid out as 64. The study of published financial Fundamental
dividends. information on a company in order to analysis
make investment decisions is known as:
53. A positive value for PVGO suggests that the Investment
firm has: opportunities 65. Technical analysts are most likely to be Not to be
with superior successful in a market that is considered: weak-form
returns efficient

54. A primary goal of fundamental analysis is Locate 66. Technical analysts can provide: An important
to: stocks that role in stock
are not market
correctly efficiency
valued 67. Technical and fundamental analysts help Trying to earn
55. Reinvesting earnings into a firm will not The ROE of keep the market efficient by: superior returns
increase the stock price unless: new in the stock
investments market.
exceeds the 68. The terminal value of a share of stock: Refers to the
firm's share value at
required the end of the
return. investor's
56. The required return on an equity security is Dividend holding period.
comprised of a: yield and a 69. Trends of past stock market prices would Technical
capital gains be considered useful or even essential to analyst
yield. a(n):
70. Under which of the following forms of Strong-form 82. What is the minimum amount that shareholders Zero
market efficiency would stock prices efficiency should expect to receive in the event of a
always reflect fair value? complete corporate liquidation?
71. The value of common stock will likely The discount 83. What is the most likely value of the PVGO for a $20
decrease if: rate increases stock with current price of $50, expected
earnings of $6 per share, and a required return of
72. What can be expected to happen when At least one
20%?
stocks having the same expected risk do of the stocks
not have the same expected return? becomes 84. What is the plowback ratio for a firm that has 66.67%
temporarily earnings per share of $12.00 and pays out $4.00
mispriced. per share as dividends?
73. What constant growth rate in dividends is 6.75% 85. What is the required return for a stock that has a 14%
expected for a stock valued at $32.00 if 6% constant growth rate, a price of $25, an
next year's dividend is forecast at $2.00 expected dividend of $2, and a P/E ratio of 10?
and the appropriate discount rate is 13%?
86. What is the return on equity for a firm that has a 17.50%
74. What dividend yield would be reported in 10.0% constant dividend growth rate of 7% and a
the financial press for a stock that dividend payout ratio of 60%?
currently pays a $1 dividend per quarter
87. What is the value of the expected dividend per $1.80
and the most recent stock price was $40?
share for a stock that has a required return of 16%,
75. What happens to a firm that reinvests its Its stock price a price of $45, and a constant growth rate of 12%?
earnings at a rate equal to the firm's will remain
88. What price would you expect to pay for a stock $31.39
required return? constant.
with 13% required rate of return, 4% rate of
76. What is meant by the term true The amount dividend growth, and an annual dividend of $2.50
depreciation? necessary to which will be paid tomorrow?
overcome
89. What proportion of earnings is being plowed back 40%
deterioration
into the firm if the sustainable growth rate is 8%
of corporate
and the firm's ROE is 20%?
assets
90. What rate of return is expected from a stock that 15.00%
77. What is the current price of a share of $40.00
sells for $30 per share, pays $1.50 annually in
stock for a firm with $5 million in balance-
dividends, and is expected to sell for $33 per
sheet equity, 500,000 shares of stock
share in one year?
outstanding, and a price/book value ratio
of 4? 91. What should be the current price of a share of $37.86
stock if a $5 dividend was just paid, the stock has
78. What is the expected constant growth rate 9.26%
a required return of 20%, and a constant dividend
of dividends for a stock currently priced at
growth rate of 6%?
$50, that just paid a dividend of $4, and has
a required return of 18%? 92. What should be the current price of a stock if the $35.71
expected dividend is $5, the stock has a required
79. What is the expected, constant growth rate 6.00%
return of 20%, and a constant dividend growth
of dividends for a stock with current price
rate of 6%?
of $100, expected dividend payment of $10
per share, and a required return of 16%? 93. What should be the price for a common stock $43.75
paying $3.50 annually in dividends if the growth
80. What is the expected dividend to be paid in $7.15
rate is zero and the discount rate is 8%?
three years if yesterday's dividend was
$6.00, dividends are expected to grow at a 94. What should be the price of a stock that offers a $32.00
constant 6% annual rate, and the firm has a $4 annual dividend with no prospects of growth,
10% expected return? and has a required return of 12.5%?

81. What is the maximum gain after two coin $1.25 95. What should be the stock value one year from $37.45
tosses for a person who starts with $1 if the today for a stock that currently sells for $35, has
occurrence of a head produces a 50% gain a required return of 15%, an expected dividend of
while the occurrence of a tail produces a $2.80, and a constant dividend growth rate of 7%?
50% loss?
96. What stock price reaction would you expect Price 104. Which of the following describes a An additional
from a firm that unexpectedly raises its should seasoned offering? equity issue
dividend permanently and by a substantial rise, given from a
amount? dividend publicly-
discount traded firm.
models
105. Which of the following is a characteristic Dealers may
97. What would be the expected price of a stock $68.62 of a dealer market, rather than auction not all offer
when dividends are expected to grow at a market, for common stock? the same
25% rate for three years, then grow at a price for the
constant rate of 5%, if the stock's required same security.
return is 13% and next year's dividend will be
106. Which of the following is inconsistent with High future
$4.00?
a firm that sells for very near book value? earning
98. When investors are not capable of making Strong- power
superior investment decisions on a continual form
107. Which of the following is least assured for Growth in
basis based on past prices, public or private efficient
firms that plowback a portion of earnings stock price
information, the market is said to be:
into the firm?
99. When new information becomes available in Stock
108. Which of the following is least likely to Inaccurate
the market, evidence suggests that: prices will
account for an excess of market value depreciation
adjust to
over book value of equity? methods
the
information 109. Which of the following is least likely to High
rapidly contribute to going concern value? liquidation
value
100. When valuing stock with the dividend Remain
discount model, the present value of future constant 110. Which of the following is more likely to be Payout is very
dividends will: regardless responsible for a firm having low PVGO? high.
of the time 111. Which of the following is true for a firm It has a
horizon having a stock price of $42, and expected required
selected. dividend of $3, and a sustainable growth return of 22%
101. Which group of investors is capable of No one rate of 8%?
earning consistent, superior profits if will be 112. Which of the following observations Managers
financial markets are strong-form efficient? capable of provides evidence against strong-form trading in their
sustained, market efficiency? own stock
superior obtain
profits. superior
102. Which of the following best characterizes the Growth returns.
difference between growth stocks and stocks 113. Which of the following should increase the Increase the
income stocks? have firm's sustainable growth rate? plowback
greater ratio
PVGO.
114. Which of the following situations A firm with
103. Which of the following bond investment All accurately describes a growth stock, investment
strategies should be selected by an investor strategies assuming that each firm has a required opportunities
who wants to maximize return over a three- should return of 12%? yielding 15%
year investment horizon? Bond A that offers offer
115. Which of the following situations is most The stock has
a 10% yield for two years, then rolls the similar,
likely to occur today for a stock that went no
proceeds into a one-year bond, Bond B that risk-
down in price yesterday? predictable
offers an 11% yield for three years, or invest adjusted
price-change
in three consecutive one-year bonds? yields
pattern.
116. Which of the following statements is It is expected
correct about a stock currently selling for to pay $3 in
$50 per share that has a 16% expected annual
return and a 10% expected capital dividends.
appreciation?
117. Which of the following values treats the firm as a going concern? Market value
118. With respect to the notion that stock prices follow a random walk, several researchers Past stock price changes provide little
have concluded that: useful information about current stock
prices.
119. With semi-strong form market efficiency: 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
120. Your broker suggests that you can make consistent, excess profits by purchasing The market violates even weak-form
stocks on the 20th of the month and selling them on the last day of the month. If this is efficiency
true, then: