Financial Management Exam 2 Multiple Choice

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%? a. 60% b. 80% c. 20% d. 40% - correct answer d. 40% 8% = 20% × plowback; Plowback = 40% A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8, and $648,200 in free cash flows. What value would you place on a share of this firm's stock if you require a 14% rate of return? a. $61.58 b. $48.09 c. $52.96 d. $54.02 - correct answer c. $52.96 Price = [$648,200/(.14 - .038)]/120,000 = $52.96 What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50? a. $27.55 b. $30.28 c. $26.60 d. $31.37 - correct answer a. $27.55 Price = ($2.50 × 1.036)/(.13 - .036) = $27.55 Which one of the following is more likely to be responsible for a firm having a low PVGO? a. Book value of equity is low. b. ROE exceeds required return. c. Payout is very high. d. Plowback is very high. - correct answer c. Payout is very high. A firm's liquidation value is the amount: a. realized from selling all assets and paying off all creditors. b. necessary to repurchase all outstanding shares of common stock. c. shown on the balance sheet as total owners' equity. d. a purchaser would pay to acquire all of the firm's assets. - correct answer a. realized from selling all assets and paying off all creditors. What is the expected constant-growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18%? a. 9.26% b. 3.41% c. 12.5% d. 5.50% - correct answer a. 9.26% $50 = $4(1 + g)/(.18 - g); g = 9.26% What can be expected to happen when stocks having the same expected risk do not have the same expected return? a. This is a common occurrence indicating that one stock has more PVGO. b. At least one of the stocks becomes temporarily mispriced. c. This cannot happen if the shares are traded in an auction market. d. The expected risk levels will change until the expected returns are equal. - correct answer b. At least one of the stocks becomes temporarily mispriced. The sustainable growth rate represents the ____ rate at which a firm can grow: a. minimum; while maintaining a constant debt-equity ratio. b. maximum; based solely on internal financing. c. maximum; while maintaining a constant debt-equity ratio. d. minimum; based solely on internal financing. - correct answer c. maximum; while maintaining a constant debt-equity ratio. What is the plowback ratio for a firm that has earnings per share of $2.68 and pays out $1.75 per share in dividends? a. 34.70% b. 28.20% c. 71.80% d. 66.67% - correct answer a. 34.70% Plowback ratio = ($2.68 - 1.75)/$2.68 = .3470, or 34.70% What is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation? a. Shareholders may be required to pay to be liquidated. b. Market value of equity c. Book value of equity d. Zero - correct answer d. Zero In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______. a. not guaranteed; guaranteed b. not guaranteed; not guaranteed c. guaranteed; guaranteed d. guaranteed; not guaranteed - correct answer b. not guaranteed; not guaranteed The value of common stock will likely decrease if: a. the investment horizon decreases. b. dividends are discounted back to the present. c. the growth rate of dividends increases. d. the discount rate increases. - correct answer d. the discount rate increases. Dani's just paid an annual dividend of $6 per share. What is the dividend expected to be in five years if the growth rate is 4.2%? a. $7.14 b. $7.44 c. $7.37 d. $7.07 - correct answer c. $7.37 DIV3 = $6 × 1.0425 = $7.37 What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth, and has a required return of 12.5%? a. $30.24 b. $4.86 c. $34.56 d. $0 - correct answer c. $34.56 P = $4.32/.125 = $34.56 It is possible to ignore cash dividends that occur far into the future when using a dividend discount model because those dividends: a. have an insignificant present value. b. will most likely not be paid. c. will most likely be paid to a different investor. d. have a minimal, if any, potential rate of growth. - correct answer a. have an insignificant present value. Which of the following is inconsistent with a firm that sells for very near book value? a. Low current earnings b. Few, if