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AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main Content

Lecture 6 - Stocks and Their Valuation, and Stock Market E ciency
Review Test Submission: Lecture 6: Online Assignment

Review Test Submission: Lecture 6: Online Assignment

User CoB (NBS) LOOMBA RISHABH

Course AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main
Test Lecture 6: Online Assignment
Started 3/4/20 3:28 PM
Submitted 3/4/20 3:30 PM
Due Date 3/16/20 11:59 PM
Status Completed
Attempt Score 100 out of 100 points  
Time Elapsed 1 minute
Instructions Answer the questions below to check your understanding of the concepts
covered in Lecture 6.

Results All Answers, Submitted Answers, Correct Answers, Feedback, Incorrectly

Displayed Answered Questions

Question 1 10 out of 10 points

A share of common stock just paid a dividend of $1.00.

If the expected long-run growth rate for this stock is 5.4%, and if investors'
required rate of return is 11.4%, what is the stock price?

Selected Answer: D. $17.57

Answers: A. $16.28

B. $16.70

C. $17.13

D. $17.57

E. $18.01

Response Feedback: Last dividend (D0)       $1.00

Long-run growth rate   5.4%
Required return   11.4%
D1 = D0(1 + g) =    $1.054
P0 = D1/(rs - g)   $17.57
Question 2 10 out of 10 points

Which one of the following statements is INCORRECT?

Selected B.
Answer: Since the Singapore stock market is very e cient, SIA’s required rate
of return should be 20%, because its realised return was 20% last
year.

Answers: A.
When markets are e cient, there are times when the market price of
a stock deviates from its intrinsic value.

B.
Since the Singapore stock market is very e cient, SIA’s required rate
of return should be 20%, because its realised return was 20% last
year.

C.
Seasoned equity o ering on the Singapore Exchange (SGX) is not the
same as the initial public o ering.

D.
In equilibrium, the price of the stock should be close to or equals its
intrinsic value.

E.
When markets are e cient, investors would not be able to
consistently make abnormal pro ts by buying undervalued stocks
and selling overvalued stocks.

Question 3 10 out of 10 points

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.

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

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

B. The stock’s dividend yield is 5%.

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

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

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

Response
 Feedback: Statement e is true, because the stock price is expected to grow
at the dividend growth rate.

Question 4 10 out of 10 points

Sorenson Corp.’s expected year-end dividend is D1 = $1.60, its required return is

rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be
constant in the future.
What is Sorenson's expected stock price in 7 years, i.e., what is  ?

Selected Answer: A. $37.52

Answers: A. $37.52

B. $39.40

C. $41.37

D. $43.44

E. $45.61

Response Feedback: Next expected dividend = D1 =   $1.60

Required return   11.0%
Dividend yield = D1/P0 =   6.0%
Find the growth rate: g = rs - yield =   5.0%
Find P0 = D1/(rs-g) =   $26.67
Years in the future   7
 = P0(1+g)7       $37.52

Question 5 10 out of 10 points

Which of the following statements is CORRECT?

Selected E.
Answer: The preferred stock of a given rm is generally less risky to investors
than the same rm’s common stock.

Answers: A.
Corporations cannot buy the preferred stocks of other corporations.

B.
A big advantage of preferred stock is that dividends on preferred
stocks are tax deductible by the issuing corporation.

C.
Preferred stockholders have a priority over bondholders in the event
of bankruptcy to the income, but not to the proceeds in a liquidation.

D. Preferred dividends are not generally cumulative.

 E.
The preferred stock of a given rm is generally less risky to investors
than the same rm’s common stock.

Question 6 10 out of 10 points

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

Selected C.
Answer: possibly increase, possibly decrease, or possibly remain
constant.

Answers: A. increase.

B. uctuate less than before.

C.
possibly increase, possibly decrease, or possibly remain
constant.

D. uctuate more than before.

E. decrease.

Response Answer should be "Possibly increase, possibly decrease, or possibly

Feedback: remain constant." In the CAPM, a  rm’s required rate of return
depends on its beta. Therefore, unless the change in expected
growth rate a ects beta, it is unclear how a change in the expected
growth rate, g, will a ect required returms.

Some students may erroneously argue that since required returns =

dividend yield + capital gains yield where capital gains yield = g, this
would then imply that when g increases, required returns will
increase. However, note that when g increases, dividend yield will be
a ected.Note that g = (1-Payout Ratio)*ROE, therefore if g increases,
this would imply either ROE increases or payout ratio decreases. If
ROE stays the same, this implies that the increase in g is due
to payout ratio decreasing, i.e. less dividends. 

Question 7 10 out of 10 points

Nachman Industries just paid a dividend of D0 = $1.32.

Analysts expect the company's dividend to grow by 30% this year, by 10% in Year
2, and at a constant rate of 5% in Year 3 and thereafter.
The required return on this low-risk stock is 9.00%.
What is the best estimate of the stock’s current market value?

Selected Answer: D. $44.87

Answers: A. $41.59

B. $42.65
 C. $43.75

D. $44.87

E. $45.99

Response rs=9.0%
Feedback:
Year 0 1 2 3

Growth rates:   30.0% 10.0% 5.0%

   
Dividend $1.716 $1.888
 $1.32  $1.982
Horizon value = D3/(rs-g3)
    49.550  
=
 
Total CFs   $1.716 $51.437  
 
PV of CFs    $43.294  
 $1.574
         
Stock price = $44.87        

Question 8 10 out of 10 points

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

Selected E.
Answer: the expected future return must be equal to the required return.

Answers: A.
the past realised return must be equal to the expected return
during the same period.

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

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

D.
the required return must equal the realised return in all periods.

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

Question 9 10 out of 10 points

The cash ows associated with common stock are more di cult to estimate than
those related to bonds because stock has a residual claim against the company
versus a contractual obligation for a bond.
 Selected Answer: True
Answers: True
False

Question 10 10 out of 10 points

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual
dividend of $7.50 per share.
If the required return on this preferred stock is 6.5%, at what price should the
stock sell?

Selected Answer: E. $115.38

Answers: A. $104.27

B. $106.95

C. $109.69

D. $112.50

E. $115.38

Response Feedback: Preferred dividend     $7.50

Required return   6.5%
Preferred price = Dp/rp =   $115.38

Wednesday, March 4, 2020 3:30:21 PM SGT

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