Investment Analysis and Portfolio
Management Exam Correctly Verified
You wish to earn a return of 10% on each of two stocks, C and D. Each of the stocks is expected to pay a
dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock C and 10%
for stock D. The intrinsic value of stock C
A. will be greater than the intrinsic value of stock D.
B. will be the same as the intrinsic value of stock D.
C. will be less than the intrinsic value of stock
D. will be the same or greater than the intrinsic value of stock D.
E. None of the options are correct. - Answer PV0 = D1/(k - g); given that dividends are equal, the stock
with the higher growth rate will have the higher value.
C. will be less than the intrinsic value of stock
You are considering acquiring a common stock that you would like to hold for one year. You expect to
receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum
price you would pay for the stock today is _____ if you wanted to earn a 10% return.
A. $30.23
B. $24.11
C. $26.52
D. $27.50
E. None of the options are correct. - Answer .10 = (32P + 1.25)/P
.10P = 32 - P + 1.25
1.10P = 33.25
P = 30.23
A. $30.23
Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to
have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate
,is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets.
Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6%
per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm
has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be
A. $1,000,000.
B. $2,000,000.
C. $3,000,000.
D. $4,000,000. - Answer Before Tax OpCF 500,000
-Depreciation 100,000
Taxable Income 400,000
-Taxes (30%) 120,000
After Tax Income 280,000
After Tax Inc. + Dep 380,000
-New Investment 200,000
FCF 180,000
V0 = 180,000/(.15-.06) = 2,000,000
B. 2,000,000
Boaters World is expected to have per share FCFE in year 1 of $1.65, per share FCFE in year 2 of $1.97,
and per share FCFE in year 3 of $2.54. After year 3, per share FCFE is expected to grow at the rate of 8%
per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.
A. $77.53
B. $40.67
C. $82.16
D. $71.80
E. None of the options are correct. - Answer 1. FCFE $1.65
, PV = 1.65/1.11 = 1.4865
2. FCFE $1.97
PV = 1.97/(1.11)^2 = 1.5989
3. FCFE $2.54
PV = 2.54/(1.11)^3 = 1.8572
Sum of PV = 4.94
P3 = $2.54 (1.08)/(.11-.08) = $91.44
PV = $91.44/(1.11)^3 = $66.86
P0 = 4.94 + 66.86 = $71.80
D. $71.80
Which of the following is the best measure of the floor for a stock price?
A. Book value
B. Liquidation value
C. Replacement cost
D. Market value
E. Tobin's Q - Answer If the firm's market value drops below the liquidation value the firm will be a
possible takeover target. It would be worth more liquidated than as a going concern.
B. Liquidation Value
If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to
A. V0 = (Expected dividend yield in year 1)/k.
B. V0 = (Expected EPS in year 1)/k.
C. V0 = (Treasury bond yield in year 1)/k.
D. V0 = (Market return in year 1)/k. - Answer If ROE = k, no growth is occurring; b = 0; EPS = DPS.
Management Exam Correctly Verified
You wish to earn a return of 10% on each of two stocks, C and D. Each of the stocks is expected to pay a
dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock C and 10%
for stock D. The intrinsic value of stock C
A. will be greater than the intrinsic value of stock D.
B. will be the same as the intrinsic value of stock D.
C. will be less than the intrinsic value of stock
D. will be the same or greater than the intrinsic value of stock D.
E. None of the options are correct. - Answer PV0 = D1/(k - g); given that dividends are equal, the stock
with the higher growth rate will have the higher value.
C. will be less than the intrinsic value of stock
You are considering acquiring a common stock that you would like to hold for one year. You expect to
receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum
price you would pay for the stock today is _____ if you wanted to earn a 10% return.
A. $30.23
B. $24.11
C. $26.52
D. $27.50
E. None of the options are correct. - Answer .10 = (32P + 1.25)/P
.10P = 32 - P + 1.25
1.10P = 33.25
P = 30.23
A. $30.23
Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to
have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate
,is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets.
Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6%
per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm
has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be
A. $1,000,000.
B. $2,000,000.
C. $3,000,000.
D. $4,000,000. - Answer Before Tax OpCF 500,000
-Depreciation 100,000
Taxable Income 400,000
-Taxes (30%) 120,000
After Tax Income 280,000
After Tax Inc. + Dep 380,000
-New Investment 200,000
FCF 180,000
V0 = 180,000/(.15-.06) = 2,000,000
B. 2,000,000
Boaters World is expected to have per share FCFE in year 1 of $1.65, per share FCFE in year 2 of $1.97,
and per share FCFE in year 3 of $2.54. After year 3, per share FCFE is expected to grow at the rate of 8%
per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.
A. $77.53
B. $40.67
C. $82.16
D. $71.80
E. None of the options are correct. - Answer 1. FCFE $1.65
, PV = 1.65/1.11 = 1.4865
2. FCFE $1.97
PV = 1.97/(1.11)^2 = 1.5989
3. FCFE $2.54
PV = 2.54/(1.11)^3 = 1.8572
Sum of PV = 4.94
P3 = $2.54 (1.08)/(.11-.08) = $91.44
PV = $91.44/(1.11)^3 = $66.86
P0 = 4.94 + 66.86 = $71.80
D. $71.80
Which of the following is the best measure of the floor for a stock price?
A. Book value
B. Liquidation value
C. Replacement cost
D. Market value
E. Tobin's Q - Answer If the firm's market value drops below the liquidation value the firm will be a
possible takeover target. It would be worth more liquidated than as a going concern.
B. Liquidation Value
If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to
A. V0 = (Expected dividend yield in year 1)/k.
B. V0 = (Expected EPS in year 1)/k.
C. V0 = (Treasury bond yield in year 1)/k.
D. V0 = (Market return in year 1)/k. - Answer If ROE = k, no growth is occurring; b = 0; EPS = DPS.
