1. The marginal investor is the representative investor whose actions reflect the beliefs of those people who are currently trading a stock. It is the marginal investor who determines a stock’s price. True or false?
2. Investors expect Bae Corporation to pay a dividend of D1 = $1.50 and to grow at a constant rate of 7% per year. The stock sells at a price of $25. What is Bae’s expected dividend yield?
3. Shen Computer’s stock sells for $30 per share, the expected dividend for the coming year is D1 = $1.20, and investors expect to realize a total return of 12%, which is also the required rate of return. What is Shen’s expected constant growth rate?
4. Market equilibrium occurs when the stock’s price is greater than its intrinsic value. If the stock market is reasonably efficient, gaps between the stock price and intrinsic value should be quite large and should persist for long periods of time. True or false?
5. If Shen’s managers released information that caused investors to change their expectations to a growth rate of g = 5% from the originally expected 8% growth rate, what would the new stock price be? Assume that rs remains at 12% and D1 = $1.20.
6. Unless a firm is liquidated or sold to another concern, the cash flows it provides to its stockholders will consist only of a stream of dividends. Therefore, the value of a share of stock must be established as the present value of the stock’s expected dividend stream. True or false?
7. The term poison pill refers to a provision in a firm’s charter that gives stockholders the right to buy shares of the firm at a greatly reduced price if hostile outsiders buy a specified percentage of the shares. Such provisions are designed to make it difficult for outsiders to oust a firm’s current managers. Poison pills are often opposed by institutional investors because they may help incompetent managers retain control and thus prevent stockholders from obtaining as high a return on their investment as they could earn if the firm were acquired by another firm. True or false?
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8. If a firm is planning to sell one of its divisions to another firm, it would be more logical to use the corporate valuation model than the discounted dividend model to help set the sale price. It would also be logical for the buying firm to use the corporate model to help determine how much it should pay for the division it was acquiring. True or false?
9. Silva Motors just paid a dividend of $2, i.e., D0 = $2.00. The dividend is expected to grow by 100% during Year 1, by 50% during Year 2, and then at a constant rate of 5% thereafter. If Silva’s required rate of return is rs = 12%, what is the value of the stock today?
10.Typically, the dividend paid on a share of preferred stock will be increased if the firm’s earnings increase. In that sense, preferred stocks are similar to common stocks. True or false?
11. Proxy fights are attempts by a person or group that wants to take over control of a firm by getting the firms’ stockholders to give their voting proxies to the new group. True or false?
12. Vara Technologies’ is expected to pay a dividend of $2 per share one year from today. Vara’s required rate of return is rs = 11%. If the expected growth rate is 5%, at what price should the stock sell?
13. The nonconstant growth approach can be used to value a firm that has never paid a dividend, but to do so one must forecast when the firm will begin paying dividends, the size of the initial dividend, and the dividend growth pattern once payments have begun. True or false?
14. Investors expect Bae Corporation to pay a dividend of D1 = $1.50 and to grow at a constant rate of 7% per year. The stock sells at a price of $25. What is Bae’s expected total rate of return?
15. If a firm goes bankrupt and must be liquidated, and if less money is available than the balance sheet values of the bonds, preferred stock, and common equity, then some security holders will receive less than the book values of their investments. The priority system under our bankruptcy laws allocates funds first to preferred stock because of its preference, then to bonds, and then to common stockholders (only if there are funds left over after paying preferred stockholders and bondholders). True or false?
16. Vara Technologies’ required rate of return is rs = 11%. If the expected growth rate is 5%, what would Vara’s price be if it had just paid a $2.00 dividend, so D0 = $2, g = 5%, and rs = 11%?
17. Security analysts differ in their ability to predict firms’ future earnings, growth rates, and stock prices. Even the very best analysts make mistakes, and even top corporate managers make errors in their forecasts for their own firms’ earnings because things can occur that no one can anticipate. Therefore, the actual realized returns on stocks will rarely, if ever, be exactly the same as the expected returns. This is quite different from the situation for bonds, where the actual realized return on a high-grade, noncallable bond that is held to maturity is very likely to be exactly the same as the expected return. True or false?
18. Firms can use different classes of common stock to meet specific needs of the company. Founders’ shares are one such class used. They are shares owned by the firm’s founders that enable them to maintain control over the company without having to own a majority of stock. True or false?
19. Under the assumptions set forth in the preceding question, Shen’s investors would suffer an immediate capital loss of $12.86, or 42.87%. However, the expected dividend yield would rise to 7%, the capital gains yield going forward would be 5%, and the expected future total return would still be 12%. True or false?
20. Vara Technologies’ is expected to pay a dividend of $2 per share one year from today. Vara’s required rate of return is rs = 11%. What would Vara’s price be if the expected growth rate were g = 0%?
21. Investors expect Bae Corporation to pay a dividend of D1 = $1.50 and to grow at a constant rate of 7% per year. The stock sells at a price of $25. What is Bae’s expected capital gains yield?