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NAME: _____________________________________

Question

Number

Question
1 What does beta represent?

Indiviudal company risk against market risk

Systematic risk for the company

Unsystematic risk of the company

Varabiity of returns for the company

2 The purpose of stock valuation is to:

To set a fair market value (FMV) for a given common stock

To determine whether the vlaue of a common stock is fairly represented by its market price

Of limited value since the efficient market hypothesis proves that all common stock is always fairly priced

More than one of the above

3 What two conditions are necessary to use the constant growth model:

The price must increase over time

The investors required rate of return must be known

Constant growth is necessary

Any growth is necessary

The required rate of return must exceed growth

The two conditions necessary for the constant growth model are:

1 and 2

2 and 3

3 and 4

3 and 5

4 The required rate of return is intended to provide:

Compensation for expected inflation

A premium for risk assumed

A minimum real rate of return

All of the above

5 What is the value of a stock which has a current divident (D0) of $1.50 and is growing at the rate of 7%. The investor’s required rate of return is 12%

$26.75

$30.00

$32.10

None of the above

6 In order for any dividend valuation model to reflect a valid stock price for a company

The dividend growth rate must remain constant

The company must pay dividends

The required rate of return (discount rate) must remain constant

More than one of the above

7 The risk of holding stocks is measured by the:

Likelihood of price jumps

Volaliity and investment time horizon

Standard deviation of the expected return and beta

Macro-economic variable

8 The P/E ratio approach to stock valuation is based on:

A constant yearly range of P/E ratios and an earnings forecast derived from historial growth patterns and market projections

The average yearly P/E ratio relative to the market, a yearly range of P/E ratios, and earnings based on an assumed constant growth rate

An increasing yearly range of P/E ratios and an earnings forecast based on the EPS of previous years

None of the above

9 Which of the following is NOT a characteristic of a growth company?

A relatively high average expenditure on research and development

Growth stocks always outperform the overall market indexes

Consistently stable and high profit margins

All of the above are characteristics

10 Calcualte the expected rate of return (ER) for the following:

Po= purchase price = $50

P1= expected selling price = $75

I = Income = $5

What is the percenage of Exprected Return?

40%

50%

60%

70%

11 Assume D1 = $6.00, Ke = 15% using the Preferred Stock Dividend Valuation Model (the No Growth Model), compute P0

$75.00

$71.43

$44.56

$40.00

12 Assume D1 = $3.00, Ke = 10%, and g = 12 % using the Constant Growth Dividend Valuation Model, compute P0

The Constant Growth Formula can’t be used

$150.00

$15.00

$13.64

Note: Be certain to read the Stock Valuation Handout included in Week 3 Content.

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