Thug Life

Only available on StudyMode
  • Download(s) : 54
  • Published : October 18, 2012
Open Document
Text Preview
Corporate Finance (Berk/DeMarzo) Chapter 9 - Valuing Stocks

9.1 Stock Prices, Returns, and the Investment Horizon 1) Which of the following statements is false? A) There are two potential sources of cash flows from owning a stock. B) An investor will be willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV. C) An investor might generate cash by choosing to sell the shares at some future date. D) Because the cash flows from stock are known with certainty, we can discount them using the risk-free interest rate. Answer: D Explanation: A) B) C) D) Because these cash flows are risky, we cannot discount them using the risk-free interest rate. Diff: 1 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon Skill: Conceptual

2) When discounting dividends you should use? A) the weighted average cost of capital. B) the after tax weighted average cost of capital. C) the equity cost of capital. D) the before tax cost of debt. Answer: C Explanation: A) B) C) D) Diff: 1 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon Skill: Conceptual

3) Which of the following statements is false? A) The equity cost of capital for a stock is the expected return of other investments available in the market with equivalent risk to the firm’s shares. B) The price of a share of stock is equal to the present value of the expected future dividends it will pay.

C) sa mple a stock, divided by its expected future sale price. Answer: D Explanation: A) B) C) D) The dividend yield is the annual dividend divided by the current price.

Diff: 2 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon S Which of the following statements is false? k i l 5) l : C

5 ) A) Future dividend payments and stock prices are not known with certainty; rather these values are based on the investor’s expectations at the time the stock is purchased. B) The capital gain is the difference between the expected sale price and the purchase price of the stock. C) The sum of the dividend yield and the capital gain rate is called the total return of the stock. D) We divide the capital gain by the expected future stock price to calculate the capital gain rate. Answer: D Explanation: A) B) C) D) The capital gains rate is the capital gain divided by the current stock price. Diff: 2 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon Skill: Conceptual

6) Which of the following statements is false? A) An investor will be willing to pay up to the point at which the current price of a share of stock equals the present value of the expected future dividends an expected future sale price. B) The expected total return of a stock should equal the expected return of other investments available in the market with equivalent risk. C) The total amount received in dividends and from selling the stock will depend on the investor’s investment horizon. Div1  P D) 1 , it would be a positive NPV investment, and If the current stock price were greater than P0 = 1  rE we would expect investors to rush in and buy it, driving up the stocks price. Answer: D Explanation:

A) B) C) D) It would be a negative NPV investment.

Diff: 2 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon Skill: Conceptual

7) Which of the following formulas is incorrect? P P A) Capital Gains Rate = 0 1 P0 B) C) Dividend Yield = P0 =

Div1 P0

Div1 Div2  P2 + 1  rE (1  rE )2

D) rE = Capital Gains Rate + Dividend Yield Answer: A P P Explanation: A) Capital Gains Rate = 1 0 P0 B) C) D) Diff: 2 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon Skill: Conceptual

8) Which of the following formulas is incorrect? Div1 Div2  P2 A) DivN P0 = + + ... + 2 1  rE (1  rE ) (1  rE ) N B) A) P0 = Explanation: B) C) D) Diff: 2 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon Skill: Conceptual

rE =

Div1  P 1 P0

Use the information for the question(s) below. Von Bora Corporation is expected...
tracking img