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Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. An increase in a firm's expected growth rate would cause its required rate of return to a. increase. b. decrease. c. fluctuate less than before. d. fluctuate more than before. e. possibly increase, possibly decrease, or possibly remain constant. 2. If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks a. the stock is experiencing supernormal growth. b. the stock should be sold. c. the stock is a good buy. d. management is probably not trying to maximize the price per share. e. dividends are not likely to be declared. 3. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT? a. All common stocks fall into one of three classes: A, B, and C. b. All common stocks, regardless of class, must have the same voting rights. c. All firms have several classes of common stock. d. All common stock, regardless of class, must pay the same dividend. e. Some class or classes of common stock are entitled to more votes per share than other classes. 4. 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. 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. 5. 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 a. the expected future return must be less than the most recent past realized return. b. the past realized return must be equal to the expected return during the same period. c. the required return must equal the realized return in all periods. d. the expected return must be equal to both the required future return and the past realized return. e. the expected future returns must be equal to the required return. 6. A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price? a. $23.11 b. $23.70 c. $24.31

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After t = 4.83 c.00%. The required rate of return on the stock.30)4 = $2. What is the stock's expected constant growth rate after t = 4.17% c.34% . so D4 = $1. is 9.65% 8.25).e. If the price of the stock is $45. 8. and its required rate of return is 10.72% d.01% b. $25. The firm just paid a dividend of $1.00.85 e.50 per share. g.57 ____ 7. rs.89% ____ ____ ____ 10.86 b. what is X? a. 6. 5.8561. Gay Manufacturing is expected to pay a dividend of $1. $41. $40. 8.67% e. The stock sells for $32.d.03% b. $37.33% d.50 per share. Reddick Enterprises' stock currently sells for $35. What is the stock's expected price 3 years from today? a. and the stock sells for $40 per share. 6.17% b.50% per year. 6.02% e. 6. forever. What is the equilibrium expected growth rate? a. $24. $39.. 6. 8.83 d.69 9. 6. Carter's preferred stock pays a dividend of $1. 6. the dividend is expected to grow at a constant rate of X% per year forever.5%. The dividend is expected to grow at some constant rate. 5. The dividend is projected to increase at a constant rate of 5. Savickas Petroleum's stock has a required return of 12%. 5. and the dividend is expected to grow by 30% per year for the next 4 years. $38. 8.00 per quarter.24% c.49% e.45% d. 8.00(1. i.25 per share at the end of the year (D1 = $1. what is its nominal (not effective) annual rate of return? a.93 e.00.44% c.

Chapter 7 iClickers Answer Section MULTIPLE CHOICE 1.85% 6. ANS: E Stock price $35.0% D1 = D0(1 + g) = $1.50 Growth rate 5. PTS: 1 DIF: Medium TOP: Constant growth stock 5.7 NAT: AACSB: C. G .5% 3.12 Market equilibrium OBJ: 7. G TOP: Required return MSC: Conceptual 3.6 MSC: Problem $1. G TOP: Required return MSC: Conceptual 2.50 D0 rs 10. because the stock price is expected to grow at the dividend growth rate.7 NAT: AACSB: C.2 NAT: AACSB: C. G TOP: Classified stock MSC: Conceptual 4.69 PTS: 1 DIF: Easy TOP: Constant growth: future price 9.56 $25.50% Years in the future 3 P3 = P0(1 + g)3 = $41. ANS: E OBJ: MSC: DIF: TOP: 7. ANS: E $1. ANS: E Expected dividend (D1) Stock price Required return Dividend yield Growth rate = rs − D1/P0 = PTS: 1 DIF: Easy TOP: Constant growth rate 8. ANS: E PTS: 1 DIF: Easy OBJ: 7.57 P0 = D1/(rs − g) PTS: 1 DIF: Easy TOP: Constant growth valuation 7.1% g 4.25 $32. G OBJ: 7. ANS: E PTS: 1 DIF: Medium OBJ: 7.65% OBJ: 7.7 NAT: AACSB: C.6 MSC: Problem NAT: AACSB: C. G Conceptual Medium OBJ: 7.6 MSC: Problem NAT: AACSB: C. G MSC: Conceptual 6. ANS: C PTS: 1 DIF: Easy OBJ: 7. G NAT: AACSB: C.50 10. ANS: E PTS: 1 NAT: AACSB: C. ANS: E Statement e is true.

0%.6777 $56.6900 $1.5338 $35. Change the forecasted growth rate till reach $40. G $40. If the sum equals the given price. We can forecast the dividends in Years 1−4.34% $3.00 $4.00 30. G KEY: Nonalgorithmic . quarterly dividend Annual dividend = Qtrly dividend × 4 = Preferred stock price Nom.6900 3 30.11 MSC: Problem $1.1607 Stock price = $40. We must solve for the long-run growth rate.9282 5 6.5638 Must equal $40.8 NAT: AACSB: C. We used Excel's Goal Seek function to simplify the process.0% $2.0% 12.Pref.0372 Terminal value = P4 = D5/(rs − g5): Total CFs $1. We need a growth rate to find D5 and the TV. required return = Annual dividend/Price = PTS: 1 DIF: Medium TOP: Preferred required return 10.0% $1. X Year Dividend 0 $1.0% $1. 2 30.00 $1.34% Arbitrarily set at 5% initially.0% $ 2. If not. but one could use trial and error. so they are inserted in the time line.00 8. PTS: 1 DIF: Hard TOP: Nonconstant growth rate MSC: Problem OBJ: 7.0000 1 30.0% 6. then our growth rate would be correct.89% NAT: AACSB: C.1970 4 30.3000 OBJ: 7.00 $1.1970 $1.00 $45. We then find the PV of the forecasted CFs and sum them. which we insert in the forecast cell. ANS: E Stock price Paid dividend (D0) Short-run growth rate Required return Forecasted LR growth rate.8561 53.3000 PV of CFs $1. we need to substitute in different g's until we find the one that works.3473 $2. We begin with a guess of say 5.

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