FINC340 week 3 assignment

Question

Number

Question

1

What does beta represent?

A. Indiviudal company risk against market risk

B. Systematic risk for the company

C. Unsystematic risk of the company

D. Varabiity of returns for the company

2

The purpose of stock valuation is to:

A. To set a fair market value (FMV) for a given common stock

B. To determine whether the vlaue of a common stock is fairly represented by its market price

C. Of limited value since the efficient market hypothesis proves that all common stock is always fairly priced

D. More than one of the above

3

What two conditions are necessary to use the constant growth model:

1. The price must increase over time

2. The investors required rate of return must be known

3. Constant growth is necessary

4. Any growth is necessary

5. The required rate of return must exceed growth

The two conditions necessary for the constant growth model are:

A. 1 and 2

B. 2 and 3

C. 3 and 4

D. 3 and 5

4

The required rate of return is intended to provide:

A. Compensation for expected inflation

B. A premium for risk assumed

C. A minimum real rate of return

D. All of the above

5

What is the value of a stock which has a current divident (D₀) of $1.50 and is growing at the rate of 7%. The investor’s required rate of return is 12%

A. $26.75

B. $30.00

C. $32.10

D. None of the above

6

In order for any dividend valuation model to reflect a valid stock price for a company

A. The dividend growth rate must remain constant

B. The company must pay dividends

C. The required rate of return (discount rate) must remain constant

D. More than one of the above

7

The risk of holding stocks is measured by the:

A. Likelihood of price jumps

B. Volaliity and investment time horizon

C. Standard deviation of the expected return and beta

D. Macro-economic variable

8

The P/E ratio approach to stock valuation is based on:

A. A constant yearly range of P/E ratios and an earnings forecast derived from historial growth patterns and market projections

B. The average yearly P/E ratio relative to the market, a yearly range of P/E ratios, and earnings based on an assumed constant growth rate

C. An increasing yearly range of P/E ratios and an earnings forecast based on the EPS of previous years

D. None of the above

9

Which of the following is NOT a characteristic of a growth company?

A. A relatively high average expenditure on research and development

B. Growth stocks always outperform the overall market indexes

C. Consistently stable and high profit margins

D. All of the above are characteristics

10

Calcualte the expected rate of return (ER) for the following:

Po= purchase price = $50

P1= expected selling price = $75

I = Income = $5

What is the percenage of Exprected Return?

A. 40%

B. 50%

C. 60%

D. 70%

11

Assume D₁= $6.00, K_e = 15% using the Preferred Stock Dividend Valuation Model (the No Growth Model), compute P₀

A. $75.00

B. $71.43

C. $44.56

D. $40.00

12

Assume D₁= $3.00, K_e = 10%, and g = 12 % using the Constant Growth Dividend Valuation Model, compute P0

A. The Constant Growth Formula can’t be used

B. $150.00

C. $15.00

D. $13.64