Shares and bonds are float in �����?

A. Money market
B. Capital market
C. Commercial bank
D. Equity market

ANSWER: B

The dividend discount model?

A. Ignores capital gains

B. Incorporates the after-tax value of capital gains
C. Includes capital gains implicitly
D. Restricts capital gains to a minimum
ANSWER: C

Stock that have priority of claim on assets?

A. Common stock
B. Preferred stock
C. Share
D. DDM
ANSWER: B

The dividend growth rate is referred to as the?

A. Dividend yield
B. Discount rate
C. Market rate
D. Capital gains yield
ANSWER: A

Who determine the market price of a share of common stock?

A. The board of directors of the firm

B. The stock exchange on which the stock is listed
C. The president of the company
D. Market forces buying and selling of the stock
ANSWER: D

The firm of Sun and Moon purchased a share of ABC.com common stock exactly one year
ago for Rs. 45. During the past year the common stock paid an annual dividend of
Rs. 2.40. The firm sold the security today for Rs. 85. What is the rate of return
the firm has earned?

A. 5.3%
B. 194.2%
C. 94.2%
D. None
ANSWER: C

A preferred stock will pay a dividend of Rs. 3.00 in the upcoming year, and every
year thereafter, for three year. You require a return of 9% on this stock. Use the
constant growth model to calculate the intrinsic value of this preferred stock?

A. Rs. 33.33
B. Rs. 10.27
C. Rs. 31.82
D. Rs. 7.59
ANSWER: D

What is difference between shares and bonds?

A. Bonds represent ownership whereas shares do not

B. Shares represent ownership whereas bonds do not
C. Shares and bonds both represent equity
D. Shares and bond both represent liabilities
ANSWER: B

The ______ is defined as the present value of all cash proceeds to the investor in
the stock?

A. Intrinsic value
B. Dividend pay-out ratio
C. Market capitalization rate
D. Plowback ratio
ANSWER: A

You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is
expected to pay a dividend of Rs. 3 in the upcoming year while Stock Y is expected
to pay a dividend of Rs. 4 in the upcoming year. The expected growth rate of
dividends for both stocks is 7%. The intrinsic value of stock X?

A. Will be greater than the intrinsic value of stock Y

B. Will be the same as the intrinsic value of stock Y
C. Will be less than the intrinsic value of stock Y
D. Cannot be calculated without knowing the market rate of return
ANSWER: C

According to the constant growth model:

A. the higher the discount rate, the higher the stock price
B. the growth rate should be larger than the discount factor
C. the value of a stock is a function of its expected growth rate in dividends
D. the larger the holding period, the higher the stock price
E. the value of a stock depends on the holding period of an investor
ANSWER: C

Which of the following statements is correct?

A. The P/E ratio is a useful measure to analyze super growth firms

B. The P/E ratio as an investment criterion is not based on the principle of
discounted future cash flows
C. The constant dividend valuation formula cannot be employed for super growth
firms
D. In practice, there is only one stock valuation model
E. Both a and b are correct
ANSWER: B

Suppose GE, which is selling at �75, will pay at the end of each year in the next
two years an expected dividend of �5 per share. At the end of the second year, the
stock will be either �70 or �100 with equal probability.

A. No, because GE is overvalued

B. No, because GE is a large capitalization stock
C. Yes, because GE is undervalued
D. Yes, because GE is fairly priced
E. No, because the dividend yield is too low
ANSWER: C

Windmere stock price is �35, and the dividend per share per year is �2. The
appropriate discount rate is 13%. What is the expected price of Windmere one year
from now?

A. �39.55
B. �38.13
C. �37.55
D. �37.94
E. Cannot be determined from the given data
ANSWER: C

A firm's earnings per share increased from �2 to �2.40, its dividends increased
from �0.40 to �0.48, and its share price increased from �60 to �67. Given this
information, it follows that:

A. the company had a decrease in its dividend pay-out ratio

B. the required rate of return decreased
C. the firm increased its number of shares outstanding
D. the stock experienced a drop in its P/E ratio
E. the stock experienced an increase in its P/E ratio
ANSWER: D

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a
market index is most likely to have:

A. a dividend yield which is less than that of the average company

B. an anticipated earnings growth rate which is less than that of the average
company
C. less predictable earnings growth than that of the average company
D. greater cyclicality of earnings growth than that of the average company
E. both c and d
ANSWER: A

A firm has a return on equity of 20% and a dividend payout ratio of 40%. Its
sustainable earnings growth rate is:

A. 16%
B. 12%
C. 8%
D. 10%
E. 20%
ANSWER: B

At the end of the year, IBM will pay a �2.00 dividend per share, an increase from
the current dividend of �1.50 per share. After that the dividend is expected to
increase at a constant rate of 5%. If you require a 12% return on the stock, what
is the value of IBM stock?

A. �27.48
B. �28.57
C. �31.47
D. �28.89
E. �30.00
ANSWER: B

Upjohn has a required return of 15%, a constant growth rate of 10%, and a dividend
payout of 45%. The P/E ratio of Upjohn should be:

A. 8.8 times
B. 3.0 times
C. 5.1 times
D. 9 times
E. 4.5 times
ANSWER: E

Merck is currently paying a dividend of �2. Its high dividend growth rate of 12%
next year will drop to 7% for the foreseeable future. The discount rate of Merck is
13%. What is the stock price of Merck?

A. �33.33
B. �37.33
C. �40.25
D. �42.68
E. �38.15
ANSWER: B

The P/E of Oracle, which is a normal-growth firm, is 16. The expected dividend next
year is �1, and the current stock price is �19. What is the growth rate of Oracle?

A. 1%
B. 9%
C. 4%
D. 2%
E. Oracle has a negative growth rate
ANSWER: A