Corporate Finance Exam 1 Review ACTUAL
Exam Questions and CORRECT Answers
True or false: The total return on a share of stock has two components: the dividend yield and the
capital gains
yield. - CORRECT ANSWER - True
The value of a share of common stock equals the present value of future.............. plus the
present value of the future .................... value of a share. - CORRECT ANSWER -
dividends; market
Unlike the valuation of bonds, the valuation of common stocks is difficult because: - CORRECT
ANSWER - the cash flows from common stocks have more uncertainty and variability
associated with
them.
Which of the following is a reason why the valuation of stocks is harder than the valuation of
bonds:
I- dividend payments are not fixed over time and can change substantially over time
II- a share of common stock has neither a maturity date nor a maturity value
III- common stock markets are relatively less transparent than bond markets
IV- future cash flows on stocks are not known in advance and the valuation is sensitive to
estimates in dividend growth rate. - CORRECT ANSWER - I, II and IV only
The stock valuation method that determines the price of a stock by dividing the next period's
dividend by the discount rate less the dividend growth rate is called the - CORRECT
ANSWER - dividend growth model
A stock that is assumed to pay a constant dividend for ever is called a ......... stock. - CORRECT
ANSWER - zero growth
,Which of the following is true regarding the dividend growth model?
I- the dividend growth model assumes that the dividend growth rate is less than the
stock's required return.
II- the dividend growth model can be used to get the stock price at any point in time
III- the dividend growth model assumes different growth rates - CORRECT ANSWER - I-
the dividend growth model assumes that the dividend growth rate is less than the
stock's required return.
II- the dividend growth model can be used to get the stock price at any point in time
When using the dividend growth model, all else the same:
I- the higher the required rate of return, the lower the stock price
II- the higher the dividend growth rate, the higher the stock price
III- the lower the next year expected dividend, the higher the stock price - CORRECT
ANSWER - I- the higher the required rate of return, the lower the stock price
II- the higher the dividend growth rate, the higher the stock price
The ......... is the next year's expected annual dividend divided by the current
stock price. - CORRECT ANSWER - dividend yield
The ......... is the rate at which the stock price is expected to grow. - CORRECT
ANSWER - capital gains yield
The capital gains yield equals the ...... because the rate at which the price of a constant
growth stock increases equals the dividend growth rate. - CORRECT ANSWER - dividend
growth rate
The shareholders control the firm by electing ....................., the latter are in charge of
hiring the .................... - CORRECT ANSWER - Director, management
, The procedure in which a shareholder may cast all votes for one member of the board of
directors is called - CORRECT ANSWER - Cumulative voting
14- Straight voting is defined as the process where the directors are elected: - CORRECT
ANSWER - for a single year only
The grant of authority by a shareholder allowing another individual to vote that shareholder's
shares is called a: - CORRECT ANSWER - Proxy
The model used for evaluating a perpetual preferred stock or any other perpetuity is also used
to find the price of a: - CORRECT ANSWER - zero growth in dividend stock
A zero growth stock with a constant dividend can be regarded as: - CORRECT ANSWER -
perpetuity
The preemptive right given to shareholders is the right: - CORRECT ANSWER - to
purchase any new shares of stocks that are issues in order to maintain proportional
ownership.
Dividends are paid at the discretion of the: - CORRECT ANSWER - Board of directors
A dealer in the stock market or bond market earns profit from - CORRECT ANSWER -
retaining the spread
The required rate of return - CORRECT ANSWER - provides an estimate of the return an
investor might expect if he or she purchases a stock at
today's market price.
Exam Questions and CORRECT Answers
True or false: The total return on a share of stock has two components: the dividend yield and the
capital gains
yield. - CORRECT ANSWER - True
The value of a share of common stock equals the present value of future.............. plus the
present value of the future .................... value of a share. - CORRECT ANSWER -
dividends; market
Unlike the valuation of bonds, the valuation of common stocks is difficult because: - CORRECT
ANSWER - the cash flows from common stocks have more uncertainty and variability
associated with
them.
Which of the following is a reason why the valuation of stocks is harder than the valuation of
bonds:
I- dividend payments are not fixed over time and can change substantially over time
II- a share of common stock has neither a maturity date nor a maturity value
III- common stock markets are relatively less transparent than bond markets
IV- future cash flows on stocks are not known in advance and the valuation is sensitive to
estimates in dividend growth rate. - CORRECT ANSWER - I, II and IV only
The stock valuation method that determines the price of a stock by dividing the next period's
dividend by the discount rate less the dividend growth rate is called the - CORRECT
ANSWER - dividend growth model
A stock that is assumed to pay a constant dividend for ever is called a ......... stock. - CORRECT
ANSWER - zero growth
,Which of the following is true regarding the dividend growth model?
I- the dividend growth model assumes that the dividend growth rate is less than the
stock's required return.
II- the dividend growth model can be used to get the stock price at any point in time
III- the dividend growth model assumes different growth rates - CORRECT ANSWER - I-
the dividend growth model assumes that the dividend growth rate is less than the
stock's required return.
II- the dividend growth model can be used to get the stock price at any point in time
When using the dividend growth model, all else the same:
I- the higher the required rate of return, the lower the stock price
II- the higher the dividend growth rate, the higher the stock price
III- the lower the next year expected dividend, the higher the stock price - CORRECT
ANSWER - I- the higher the required rate of return, the lower the stock price
II- the higher the dividend growth rate, the higher the stock price
The ......... is the next year's expected annual dividend divided by the current
stock price. - CORRECT ANSWER - dividend yield
The ......... is the rate at which the stock price is expected to grow. - CORRECT
ANSWER - capital gains yield
The capital gains yield equals the ...... because the rate at which the price of a constant
growth stock increases equals the dividend growth rate. - CORRECT ANSWER - dividend
growth rate
The shareholders control the firm by electing ....................., the latter are in charge of
hiring the .................... - CORRECT ANSWER - Director, management
, The procedure in which a shareholder may cast all votes for one member of the board of
directors is called - CORRECT ANSWER - Cumulative voting
14- Straight voting is defined as the process where the directors are elected: - CORRECT
ANSWER - for a single year only
The grant of authority by a shareholder allowing another individual to vote that shareholder's
shares is called a: - CORRECT ANSWER - Proxy
The model used for evaluating a perpetual preferred stock or any other perpetuity is also used
to find the price of a: - CORRECT ANSWER - zero growth in dividend stock
A zero growth stock with a constant dividend can be regarded as: - CORRECT ANSWER -
perpetuity
The preemptive right given to shareholders is the right: - CORRECT ANSWER - to
purchase any new shares of stocks that are issues in order to maintain proportional
ownership.
Dividends are paid at the discretion of the: - CORRECT ANSWER - Board of directors
A dealer in the stock market or bond market earns profit from - CORRECT ANSWER -
retaining the spread
The required rate of return - CORRECT ANSWER - provides an estimate of the return an
investor might expect if he or she purchases a stock at
today's market price.
