FIN 340 Final ACTUAL UPDATED Exam
Questions and CORRECT Answers
Two Ways Stocks are Traded - CORRECT ANSWER - (1) Initial sale by corporation (IPO
or SEO)
(2) Secondary Markets
Initial Public Offering (IPO) - CORRECT ANSWER - the first time a company issues
stock that may be bought by the general public
Seasoned Equity Offering (SEO) - CORRECT ANSWER - the sale of additional stock by
a company whose shares are already publicly traded
Secondary Market Stock Trading - CORRECT ANSWER - who stocks are sold by
existing shareholders - it does not raise capital for the firm
How Stocks Payoff Investors - CORRECT ANSWER - dividends and capital gains
Dividends - CORRECT ANSWER - cash payments made by company to investors
Capital Gains - CORRECT ANSWER - appreciation in stock price
Realized Return Equation - CORRECT ANSWER - r(t+1) = Total Profit/Initial Investment
= (P[t+1]- P[t])/P[t] + (DIV[t+1]/P[t])
Expected Return Required to Invest in a Stock Equation - CORRECT ANSWER - r[e] =
risk-free rate + risk premium
, Risk Premium - CORRECT ANSWER - compensation to investors for taking on the risk
associated with the stock
Dividend-Discount Model Equation - CORRECT ANSWER - Stock Price = PV (expected
future cash flows)
==>
P[0] = Sigmat(E(DIV[t])/((1+r[e])^t)))
Implication of DDM - CORRECT ANSWER - the price at which we value the stock does
not depend on the horizon over which we plan to hold it
Growing Perpetuity Equation (DDM) - CORRECT ANSWER - P[t] = E(DIV[t+1])/(r[e]-
g)
where E(DIV[t+1]) is expected dividend next period, and g is expected growth rate
How Dividends are Paid Out - CORRECT ANSWER - dividends are paid out as a fraction
of earnings
Dividend Payout Ratio - CORRECT ANSWER - fraction of earnings paid as dividends
Dividend Payout Ratio Equation - CORRECT ANSWER - DIV[t] = Earnings[t]/Shares
Outstanding[t] * Dividend payout ratio[t]
Sources of Growth in Dividends - CORRECT ANSWER - (1) Growth in Earnings
(2) Higher Payout Ratio (or reducing number of shares)
Questions and CORRECT Answers
Two Ways Stocks are Traded - CORRECT ANSWER - (1) Initial sale by corporation (IPO
or SEO)
(2) Secondary Markets
Initial Public Offering (IPO) - CORRECT ANSWER - the first time a company issues
stock that may be bought by the general public
Seasoned Equity Offering (SEO) - CORRECT ANSWER - the sale of additional stock by
a company whose shares are already publicly traded
Secondary Market Stock Trading - CORRECT ANSWER - who stocks are sold by
existing shareholders - it does not raise capital for the firm
How Stocks Payoff Investors - CORRECT ANSWER - dividends and capital gains
Dividends - CORRECT ANSWER - cash payments made by company to investors
Capital Gains - CORRECT ANSWER - appreciation in stock price
Realized Return Equation - CORRECT ANSWER - r(t+1) = Total Profit/Initial Investment
= (P[t+1]- P[t])/P[t] + (DIV[t+1]/P[t])
Expected Return Required to Invest in a Stock Equation - CORRECT ANSWER - r[e] =
risk-free rate + risk premium
, Risk Premium - CORRECT ANSWER - compensation to investors for taking on the risk
associated with the stock
Dividend-Discount Model Equation - CORRECT ANSWER - Stock Price = PV (expected
future cash flows)
==>
P[0] = Sigmat(E(DIV[t])/((1+r[e])^t)))
Implication of DDM - CORRECT ANSWER - the price at which we value the stock does
not depend on the horizon over which we plan to hold it
Growing Perpetuity Equation (DDM) - CORRECT ANSWER - P[t] = E(DIV[t+1])/(r[e]-
g)
where E(DIV[t+1]) is expected dividend next period, and g is expected growth rate
How Dividends are Paid Out - CORRECT ANSWER - dividends are paid out as a fraction
of earnings
Dividend Payout Ratio - CORRECT ANSWER - fraction of earnings paid as dividends
Dividend Payout Ratio Equation - CORRECT ANSWER - DIV[t] = Earnings[t]/Shares
Outstanding[t] * Dividend payout ratio[t]
Sources of Growth in Dividends - CORRECT ANSWER - (1) Growth in Earnings
(2) Higher Payout Ratio (or reducing number of shares)
