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Financial Management 2017 - Quiz and Case Study Guides - Financial Management: Core Concepts, 3e (Brooks) - Quiz - Chapter 7

Financial Management 2016 - 2017

FINANCIAL MANAGEMENT 2017 - QUIZ AND CASE STUDY GUIDES

Financial Management: Core Concepts, 3e (Brooks)

Chapter 7   Stocks and Stock Valuation

 

 

Financial Management: Core Concepts, 3e (Brooks)

Chapter 7   Stocks and Stock Valuation

 

7.1   Characteristics of Common Stock

 

1) Stocks are different from bonds because ________.

  1. A) stocks, unlike bonds, are major sources of funds
  2. B) stocks, unlike bonds, represent residual ownership
  3. C) stocks, unlike bonds, give owners legal claims to payments
  4. D) bonds, unlike stocks, represent voting ownership

Answer:  B

Explanation:  B) Stocks and bonds are both major sources of funds. Bonds do not represent residual ownership. Bonds, unlike stocks, give owners legal claims to payments. Stocks, unlike bonds, represent voting ownership.

Diff: 2

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

 

2) Stocks differ from bonds because:

  1. A) bond cash flows are known while stock cash flows are uncertain.
  2. B) firms pay bond cash flows prior to paying taxes while stock cash flows are after tax.
  3. C) the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase.
  4. D) All of the above

Answer:  D

Diff: 1

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

3) Bonds are different from stocks because ________.

  1. A) bonds promise fixed payments for the length of their maturity
  2. B) bonds give payments only after other owners are paid
  3. C) bonds do not have maturity dates
  4. D) bonds promise growth in earnings

Answer:  A

Explanation:  A) Bonds give payments before equity owners are paid. Bonds mature while stock have no maturity date. Bond payments are fixed by the coupon payment and do not promise growth in payments.

Diff: 1

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

 

4) Which of the statements below is FALSE?

  1. A) The profits for common stock owners come before payment to employees, suppliers, government, and creditors.
  2. B) Shareholders elect the board of directors, which ultimately selects the management team that runs the day-to-day operations of the company.
  3. C) Stock is a major financing source for public companies.
  4. D) Common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim.

Answer:  A

Explanation:  A) The profits for common stock owners come AFTER payment to the employees, suppliers, government, and creditors.

Diff: 2

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

5) Which of the statements below is FALSE?

  1. A) For common stock, there is no maturity date and the promised cash flow is not stated on the asset, but is determined at a later date by the board of directors.
  2. B) An equity claim is a claim to all the assets and cash flows of a company once debt claimants have been paid.
  3. C) Like a bond, common stock entitles the owner to some of the cash flow of a company.
  4. D) Bond ownership gives the right to participate in the management of the company.

Answer:  D

Explanation:  D) STOCK ownership gives the right to participate in the management of the company.

Diff: 2

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

6) Which of the statements below is TRUE?

  1. A) The profits for common stock owners come after payment to the employees, suppliers, government, and creditors.
  2. B) Shareholders elect the board of directors, which ultimately selects the bondholder team that runs the day-to-day operations of the company.
  3. C) Stock is a minor financing source for public companies.
  4. D) Stockholders are paid before debt holders (bondholders) if a company fails.

Answer:  A

Explanation:  A) Shareholders elect the board of directors that ultimately selects the MANAGEMENT team that runs the day-to-day operations of the company. Stock is a MAJOR financing source for public companies. Common stockholders are low in terms of priority of claims to assets in the case of company failure. Debt holders will be paid first.

Diff: 2

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

7) Which of the statements below is FALSE?

  1. A) Common stock usually carries the right to participate in the management of the firm through the right to vote for the members of the Board of Directors and for changes to the charter and bylaws of the company.
  2. B) Shareholders with super voting right shares have multiple votes per share – a fact that increases their influence and control over the company.
  3. C) Some firms issue several classes of common stock, and these classes may have unequal voting rights.
  4. D) The standard of one vote for each share cannot be altered.

Answer:  D

Explanation:  D) Although it is usually the standard of one vote for each share of stock owned, this standard CAN BE ALTERED.

Diff: 2

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

8) There are two typical ways to alter the one vote-one share standard. One way is ________.

  1. A) to have companies buy back nonvoting common stock
  2. B) to not have companies pay dividends
  3. C) to have companies issue classes of stock whereby one or more classes have super voting rights
  4. D) to not have companies issue bonds

Answer:  C

Explanation:  C) There are two typical ways to alter the one vote-one share standard. First, companies may issue nonvoting common stock. Often these nonvoting rights are temporary and thus can alter the one vote-one share standard; however, these shares turn into fully participating shares after a period of time. Second, companies may issue classes of stock whereby one or more classes have super voting rights. Shareholders with super voting rights have multiple votes per share—a fact that increases their influence and control over the company.

Diff: 2

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

9) A typical practice of many companies is to distribute part of the earnings to shareholders through ________.

  1. A) quarterly stock splits
  2. B) quarterly cash dividends
  3. C) semiannual cash dividends
  4. D) annual stock dividends

Answer:  B

Diff: 2

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

 

10) Which of the statements below is FALSE?

  1. A) The payment of cash dividends to shareholders is a deductible expense for the company.
  2. B) Unlike coupon payments on bonds, which are treated as an interest expense of the firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm.
  3. C) For the shareholder, receipt of dividends is a taxable event.
  4. D) A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends.

Answer:  A

Explanation:  A) The payment of cash dividends to shareholders is NOT a deductible expense for the company.

Diff: 2

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

11) Which of the statements below is FALSE?

  1. A) If an investor purchases 20% of the initial issue of the company, the investor then owns 20% of the company, given the one vote-one share norm.
  2. B) After an initial offering, the company can sell more shares to the public at a later date. If the investor who originally purchased 20% does not purchase 20% of the subsequent issue, his or her ownership is diluted below 20%.
  3. C) A preemptive right enables one to maintain one's proportional level of ownership.
  4. D) A preemptive right is never particularly valuable to shareholders with large ownership percentages.

Answer:  D

Explanation:  D) A preemptive right may not be particularly valuable to shareholders with very small ownership percentages, but it may be critical to owners with a large or controlling interest in the company who want to maintain control to support their own interests.

Diff: 2

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

12) Common stock is a vehicle for selling ownership and another way to raise money for operations, expansion, or other business needs.

Answer:  TRUE

Diff: 1

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

13) Like a bond, common stock provides no specific promise of when and how much you will receive.

Answer:  FALSE

Explanation:  UNLIKE a bond, there is no specific promise of when and how much you will receive.

Diff: 1

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

14) A privilege that allows current shareholders to buy a fixed percentage of all futures issues before they are offered to the public is called a primary right.

Answer:  FALSE

Explanation:  This privilege is called a preemptive right.

Diff: 1

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

15) Even though a company sets a limit on the number of shares it will sell, before selling any of them, the company must receive authorization to market the shares from the Securities and Exchange Commission (SEC).

Answer:  TRUE

Diff: 1

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

16) The shares that are available for public purchase and subsequent trading in a secondary market such as the NYSE or NASDAQ are the issued shares of the company.

Answer:  TRUE

Diff: 1

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

17) Describe two basic rights that stock ownership gives.

Answer:  First, common stock ownership gives the shareholder the right to claim cash flows. These claims are referred to as residual ownership claims because they come after payment to the employees, suppliers, government, and creditors. Second, common stock ownership also provides the right to participate in the management of the company. Shareholders elect the board of directors, which ultimately selects the management team that runs the day-to-day operations of the company. The size of one's voice in the company is proportional to the percentage of common shares owned.

Diff: 3

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

 

18) Define treasury shares, distinguishing between treasury shares and outstanding shares. Is a company limited in treasury shares that it may own? Briefly explain.

Answer:  Treasury shares are shares that have been repurchased by the company and are being held for future disbursement, or that were created when the company first issued stock and kept some shares for future needs. Outstanding shares are shares that are sold and remain in the public domain. The most important distinction between treasury shares and outstanding shares is that treasury shares have no voting rights or claims to declared dividends. A company is limited in its treasury shares, as it cannot buy up all its outstanding shares.

Diff: 3

Topic:  7.1 Characteristics of Common Stock

AACSB:  3 Analytical Thinking

LO:  7.1 Explain the basic characteristics of common stock.

7.2   Stock Markets

 

1) The ________ is the market of first sale in which companies first sell their authorized shares to the public.

  1. A) primary market
  2. B) secondary market
  3. C) both primary and secondary markets
  4. D) Nasdaq market

Answer:  A

Explanation:  A) There are two major markets for the sale of stock, the primary market and the secondary market. The primary market is the market of first sale, in which companies first sell their authorized shares to the public. The secondary market is the after-sale market of the existing outstanding shares in which individual or institutional owners of stocks sell their shares to other investors.

Diff: 2

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

2) You can think of the ________ as the "used stock" market because these shares have been owned or "used" previously.

  1. A) secondary market
  2. B) primary market
  3. C) NYSE market
  4. D) initial public offering market

Answer:  A

Diff: 2

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

3) Which of the statements below is FALSE?

  1. A) Selling of shares is the selling of ownership in the company.
  2. B) A company is said to go "public" when it opens up its ownership structure to the general public through the sale of common stock.
  3. C) Companies choose to sell stock to attract permanent financing through equity ownership of the company.
  4. D) Most companies have the resident expertise to complete an initial public offering (IPO) or first public equity issue.

Answer:  D

Explanation:  D) Most companies DO NOT HAVE the resident expertise to complete an initial public offering (IPO), or first public equity issue.

Diff: 2

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

 

4) The hiring process for an investment banker can happen in two ways. Which of the below is one of these ways?

  1. A) Randomly choose an investment banking firm from a list of underwriting firms.
  2. B) Pick a desirable investment banking firm, usually basing the choice on the reputation and history of the banker in its particular industry.
  3. C) Have the primary government regulator of your industry choose the best investment banking firm for your company.
  4. D) Solicit advice from a government agency and use it as your primary guide in choosing an investment banker.

Answer:  B

Explanation:  B) A company can simply pick a desirable investment banking firm, usually basing the choice on the reputation and history of the banker in its particular industry, or it can solicit bids from many investment bankers. The most common practice for corporations is the hand-picked selection process, and the most common for government agencies is the multiple-bidder selection process.

Diff: 2

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

5) Part of the negotiation with the investment banker during the selection process has to do with how the investment banker will be compensated for taking the company public. One of these two standard compensation packages involves ________.

  1. A) a firm-commitment approach, in which the investment banker essentially buys the entire stock issue from the company at several prices
  2. B) a best efforts approach, in which the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock
  3. C) a best efforts approach, in which the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue at the auction for a higher price
  4. D) a firm-commitment approach, in which the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock

Answer:  B

Explanation:  B) There are two standard compensation packages. The first is a firm-commitment approach. With firm commitment, the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue for a higher price. A second compensation is a best efforts sale by the investment banker. Here, the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock. The firm, however, is not guaranteed a specific amount from the sale–only the proceeds of the sale minus the commission paid to the investment banker on a per-share basis.

Diff: 2

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

6) Which of the statements below is FALSE?

  1. A) The secondary market, or "used stock" market, provides a place for current common stockholders to sell their stock or acquire more stock or for new stockholders to acquire stock for the first time.
  2. B) Both the NYSE and the NYSE MKT LLC (previously known as the AMEX) are physical trading locations with trading floors. In order to complete a trade (the selling or buying of shares), orders must be processed at trading posts on the floor of the exchange.
  3. C) Immediately after the public auction of common stock, the stock begins trading in the secondary market.
  4. D) Trading on the NYSE is accomplished through a set of registered dealers who are connected by a computer network.

Answer:  D

Explanation:  D) Trading on NASDAQ is accomplished through a set of registered dealers who are connected by a computer network.

Diff: 2

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

7) Which of the statements below is TRUE?

  1. A) Buying of shares is the selling of ownership in the company.
  2. B) A company is said to go "private" when it opens up its ownership structure to the general public through the sale of common stock.
  3. C) Private companies can go public by choosing to sell stock to attract permanent financing through equity ownership of the company.
  4. D) Most companies have the resident expertise to complete an initial public offering (IPO), or first public equity issue.

Answer:  C

Explanation:  C) SELLING of shares is the selling of ownership in the company. A company is said to go "PUBLIC" when it opens up its ownership structure to the general public through the sale of common stock. Most companies DO NOT HAVE the resident expertise to complete an initial public offering (IPO), or first public equity issue.

Diff: 2

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

8) In the United States, there are three well known secondary stock markets. Which of the below is NOT one of these?

  1. A) The New York Stock Exchange (NYSE)
  2. B) The Chicago Stock Exchange (CSE)
  3. C) The National Association of Securities Dealers and their trading system NASDAQ (National Association of Securities Dealers Automated Quotation System)
  4. D) The New York Stock Exchange MKT LLC (formerly the AMEX)

Answer:  B

Diff: 2

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

9) Which of the following statements is TRUE?

  1. A) The dealers of stock are not allowed to make money on the difference between what they buy the stock for and what they sell it for.
  2. B) A bear market is a prolonged rising market, one in which stock prices in general are increasing.
  3. C) The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy.
  4. D) A bull market is a prolonged declining market, one in which stock prices in general are decreasing.

Answer:  C

Explanation:  C) Dealers make money on the difference between what they buy stock for and what they sell it for, much as a car dealer makes money by buying a used car at one price and then selling it later at a higher or marked-up price. A bull market is a prolonged rising market, one in which stock prices in general are increasing. A bear market is a prolonged declining market, one in which stock prices in general are decreasing.

Diff: 2

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

 

10) There are two major markets for the sale of stock: the primary market and the secondary market.

Answer:  TRUE

Diff: 1

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

11) A bull market is a prolonged declining market.

Answer:  FALSE

Explanation:  A BEAR market is a prolonged declining market.

Diff: 1

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

12) With best efforts compensation, the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue at auction for a higher price.

Answer:  FALSE

Explanation:  With FIRM COMMITMENT compensation, the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue at auction for a higher price.

Diff: 1

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

13) Both the NYSE and the NYSE MKT LLC (formerly the AMEX) are physical trading locations with trading floors.

Answer:  TRUE

Diff: 1

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

14) Most companies do not have the resident expertise to complete an initial public offering (IPO), so they hire an investment banker to help accomplish the sale. Describe three significant tasks that an investment banker provides.

Answer:  First, the investment banker provides talent and expertise to structure the sale of the newly issued shares while complying with all SEC regulations. Second, the investment banker prepares the prospectus, a document that provides potential buyers with information about the company and the impending sale. Third, the investment banker makes sure that all relevant information is disclosed prior to the sale. If material information is not disclosed prior to the sale, both the issuing company and the investment banker may be liable if a lawsuit is brought by those who bought the newly issued shares.

Diff: 3

Topic:  7.2 Stock Markets

AACSB:  3 Analytical Thinking

LO:  7.2 Define the primary market and the secondary market.

 

7.3   Stock Valuation

 

1) The value of a financial asset is the ________.

  1. A) present value of all of the future cash flows that will be received
  2. B) sum of all previous cash flows received
  3. C) future value of just the capital gains but not the dividends
  4. D) present value of just the capital gains but not the dividends

Answer:  A

Explanation:  A) The value, or price, of a financial asset is the present value of all of the future cash flows that you will receive while you maintain ownership of the asset. If you sell the asset, then your selling price becomes one of the future cash flows you receive.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

2) You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today?

  1. A) $41.37
  2. B) $40.37
  3. C) $22.75
  4. D) $18.63

Answer:  A

Explanation:  A) The fair price is the present value of the selling price plus the present value of the dividend stream. Thus, today's price (P) = (future price × PVF) + (dividend stream × PVAF)
= ($30 × 0.620921) + ($6 × 3.790787) = $18.628 + $22.745 = $41.372 or about $41.37.

MODE = END

INPUT            5              10          ?             -6             -30

KEY                 N             I/Y         PV         PMT        FV

CPT                 41.37

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

 

3) You want to invest in a stock that pays $5.00 annual cash dividends for the next four years. At the end of the four years, you will sell the stock for $20.00. If you want to earn 12% on this investment, what is a fair price for this stock if you buy it today?

  1. A) $40.00
  2. B) $43.90
  3. C) $27.90
  4. D) $25.42

Answer:  C

Explanation:  C) N = 4, I/Y = 12, PMT = -5, FV = -20, Answer, PV = $27.90

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

4) You want to invest in a stock that pays $3.50 annual cash dividends for the next six years. At the end of the six years, you will sell the stock for $22.50. If you want to earn 12.5% on this investment, what is a fair price for this stock if you buy it today?

  1. A) about $25.94
  2. B) about $25.29
  3. C) about $12.45
  4. D) about $14.25

Answer:  B

Explanation:  B) The fair price is the present value of the selling price plus the present value of the dividend stream. Thus, today's price (P) = (future price × PVIF) + (dividend stream × PVIFA)
= ($22.50 × 0.493270) + ($3.5 × 4.053838) = $11.099 + $14.188 = $25.287, or about $25.29.

MODE = END

INPUT            6             12.5        ?            -3.5           -22.5

KEY                 N            I/Y          PV         PMT         FV

CPT                 25.29

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

5) If we know the dividend stream, the future price of the stock, the future selling date of the stock, and the required return, we can price stocks just as we priced ________.

  1. A) annuities
  2. B) perpetuities
  3. C) bonds
  4. D) preferred stocks

Answer:  C

Explanation:  C) Stocks can be priced just like bonds because bonds also have an income stream and future price (principal) with a known selling date ( maturity date).

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

6) In regards to the fact that the pricing of stocks is more difficult than the pricing of bonds, which of the below statements is FALSE?

  1. A) Cash dividends, unlike coupons for bonds, typically change from year to year.
  2. B) The ending price of the stock at any point in time is not fixed like the par value of the principal.
  3. C) Because a stock has no maturity date, the number of its payments are unknown.
  4. D) A stock's final sale is fixed in time on its maturity date.

Answer:  D

Explanation:  D) Technically, a stock does not have a "maturity" date like a bond. Thus, the final sale of a stock by an investors is NOT fixed in time on a maturity date. An investor is free to choose his or her own selling point in time, and the point in time is not limited by a maturity date.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

7) Simpson Industries Inc. pays a $1.37 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual return of 12.5% on your investment?

  1. A) $43.84
  2. B) $43.94
  3. C) $44.84
  4. D) $44.94

Answer:  A

Explanation:  A) We use the perpetuity formula to derive the answer. When computing a perpetuity, we have to make sure that both the payment and the discount rate represent the same period. In this problem, let us use a quarter of a year (or three months) as our period. Thus, we restate the annual required rate of 12.5% as a quarterly rate of  = 3.125% (or 0.03125). Applying the constant dividend model with infinite horizon and with the quarterly rate of return and a quarterly dividend of $1.37, we get: Price =  = P =  = $43.84. We can get the same answer using annual data. For example, the annual dividend is 4 × $1.37 = $5.48. Thus, price =  = $43.84.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

8) Western Auto Inc. pays a $1.77 preferred dividend every quarter and will maintain this policy forever. What price should you pay for one share of preferred stock if you want an annual return of 9.25% on your investment?

  1. A) $66.54
  2. B) $70.54
  3. C) $74.54
  4. D) $76.54

Answer:  D

Explanation:  D) We use the perpetuity formula to derive the answer. When computing a perpetuity, we have to make sure that both the payment and the discount rate represent the same period. In this problem, let us use 3 months as our period. Thus, we restate the annual required rate of 9.25% as a quarterly (or three-month) rate of  = 2.3125% (or 0.023125). Applying the constant dividend model with infinite horizon and with the quarterly rate of return and a quarterly dividend of $1.77, we get:  = $76.54. We can get the same answer using annual data. For example, the annual dividend is . Thus, price =  = $76.54.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

 

9) What if the company goes out of business in fifteen years and thus pays an annual dividend of $2.10 for only those fifteen years? What is the present value of a share for this company if we want a 10% return on the stock?

  1. A) $15.97
  2. B) $16.97
  3. C) $17.97
  4. D) $18.97

Answer:  A

Explanation:  A) Keep in mind that the future price in 15 years is zero so that any discounted value is also zero. Thus, we are only concerned with the present value of the annuity from the $2.10 dividend. For this annuity, with r = 10% and n = 15, we get PVIFA = 7.60608, giving the present value of a share = P= $2.10 × 7.60608 = $15.973 or about $15.97.

MODE = END

INPUT            15             10          ?             -2.1          0

KEY                 N             I/Y         PV         PMT       FV

CPT                 15.97

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

10) You buy a stock for which you expect to receive an annual dividend of $2.10 for the fifteen years that you plan on holding it. After 15 years, you expect to sell the stock for $32.25. What is the present value of a share for this company if you want a 10% return?

  1. A) $7.72
  2. B) $15.97
  3. C) $23.69
  4. D) $31.41

Answer:  C

Explanation:  C) Keep in mind that the future price in 15 years in $32.25. Thus, we are not only concerned with the present value of the annuity from the $2.10 dividend, but also the present value of $32.25. With r = 10% and n = 15, we get PVIFA = 7.60608. Thus, for the annuity component we have: $2.10 × 7.60608 = $15.973. For $32.25, with r = 10% and n = 15, we get PVIF = 0.239392. Thus, for the present value of the selling price, we have: $32.25 × 0.239392 = $7.720. Thus, the present value of a share = P = $15.973 + $7.720 = $23.693 or $23.69 to the nearest cent.

 

MODE = END

INPUT            15            10          ?            -2.1           -32.25

KEY                N            I/Y         PV         PMT         FV

CPT                 23.69

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

11) ________ means that the percentage increase in the dividend is the same each year.

  1. A) Constant growth
  2. B) Inconsistent growth
  3. C) No growth
  4. D) A constant cash flow

Answer:  A

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

12) Why would we want to assume a constant growth to dividends if we seldom see a firm with this type of pattern?

  1. A) The answer is that we really want to estimate a series of future dividends and can only do this if we have a growth rate.
  2. B) The answer is that we do not need to estimate future capital gains and can only do this if we have a growth rate.
  3. C) The answer is that we really want to estimate a series of past dividends and can only do this if we have a growth rate.
  4. D) The answer is that we really want to estimate the past capital gains and can only do this if we have a growth rate.

Answer:  A

Explanation:  A) The answer is that we really want to estimate a series of future dividends–not just the very next dividend–and the constant growth pattern allows a simple extrapolation of the future dividend stream from the most recent dividend stream.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

13) Which of the statements below is FALSE?

  1. A) In estimating the current price using the constant growth dividend model, we let g be the growth rate of the dividend stream and r be the rate of return required by the potential buyer of the stock.
  2. B) Constant growth means that the percentage increase in the dividend is the same each year.
  3. C) Div0refers to the dividends that have just been paid to the current owner of the stock.
  4. D) One unlikely dividend pattern is to raise or grow dividends by a fixed amount at fixed intervals.

Answer:  D

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

14) The next dividend (Div1) is $1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock price, according to the constant growth dividend model?

  1. A) $31.80
  2. B) $30.80
  3. C) $30.00
  4. D) $15.00

Answer:  C

Explanation:  C) The Dividend Growth Model states that P0 = .

Inserting our values gives: P0 =  =  = $30.00.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

15) The last dividend (Div0) is $1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock price according to the constant growth dividend model?

  1. A) $31.80
  2. B) $30.80
  3. C) $30.00
  4. D) $15.00

Answer:  A

Explanation:  A) The Dividend Growth Model states that P0 = .

Inserting our values gives: P0 =  =  =  = $31.80.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

 

16) The Commuter Solutions Company just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and have a required rate of return of 13%, what is the current stock price according to the constant growth dividend model?

  1. A) $12.44
  2. B) $12.94
  3. C) $13.46
  4. D) There is not enough information to answer this question.

Answer:  B

Explanation:  B) The Dividend Growth Model states that P0 = .

Inserting our values gives: P0 =  =  =  = $12.94.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

17) The constant growth dividend model requires that ________.

  1. A) the return rate r is greater than the growth rate g of the dividend stream
  2. B) the return rate g is greater than the growth rate r of the dividend stream
  3. C) the return rate r is lesser than the growth rate g of the dividend stream
  4. D) we set g = 0 if the return rate r is greater than the growth rate g of the dividend stream

Answer:  A

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

18) When estimating the annual growth rate of a dividend stream, we can use a short-cut to determining the average growth rate by ________.

  1. A) using just the first dividend in the stream and the time-value of money equation
  2. B) using just the last dividend in the stream and the time-value of money equation
  3. C) using the first and last dividend in the stream and the time-value of money equation
  4. D) using the first and last dividend in the stream and the future value interest factor

Answer:  C

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

19) In a stream of past dividends, the initial dividend is $1.25 and the most recent dividend is $1.80. The number of years between these two dividends (n) is 7 years. What is the average growth rate during this seven-year period? Use a calculator to determine your answer.

  1. A) 4.35%
  2. B) 5.35%
  3. C) 6.35%
  4. D) 7.35%

Answer:  B

Explanation:  B) With N = 7, PV = -1.25, FV = 1.80, and PMT = 0, we get I/Y = 5.3473, or about 5.35%.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

20) In a stream of past dividends, the initial dividend is $0.75 and the most recent dividend is $1.25. The number of years between these two dividends (n) is 8 years. What is the average growth rate during this eight-year period? Use a calculator to determine your answer.

  1. A) 6.59%
  2. B) 6.62%
  3. C) 6.69%
  4. D) 6.72%

Answer:  A

Explanation:  A) With N = 8, PV = -0.75, FV = 1.25, and PMT = 0, we get I/Y = 6.5936, or about 6.59%.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

21) Plimpton Inc. just paid a dividend of $1.33. Its stock has a dividend growth rate of 7.6% and a required return of 12.21%. What is the current stock price if we anticipate dividends stopping in 10 years?

  1. A) $31.04
  2. B) $21.03
  3. C) $11.92
  4. D) $10.64

Answer:  D

Explanation:  D) The price is given by multiplying two components (see Equation 7.8 in the text).

The first component is  =  =  = $31.043.

The second component is 1 -  = 1 -  = 1 - 0.95891610 = 0.342634.

Thus, price = $31.043 × 0.342634 = $10.6364, or about $10.64.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

22) Korver Inc. just paid a dividend of $0.73. Its stock has a dividend growth rate of 5.62% and a required return of 10.21%. What is the current stock price if we anticipate dividends stopping in 20 years?

  1. A) $8.62
  2. B) $9.62
  3. C) $10.62
  4. D) $11.62

Answer:  B

Explanation:  B) The price is given by multiplying two components (see Equation 7.8 in the text).

The first component is  =  =  = $16.798.

The second component is 1 -  = 1 -  = 1 - 0.95835220 = 0.572926.

Thus, price = $16.798 × 0.572926 = $9.624 or about $9.62.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

23) Martian Airways Inc. has a 12% required rate of return. It does not expect to initiate dividends for 15 years, at which time it will pay $2.00 per share in dividends. At that time, Martian Airways expects its dividends to grow at 7% forever. What is an estimate of Martian Airways' price in 15 years (P15) if its dividend at the end of year 15 is $2.00?

  1. A) $42.80
  2. B) $33.40
  3. C) $31.20
  4. D) $30.00

Answer:  A

Explanation:  A) We use the formula: P15 = . Inserting our values, we get:

P15 =  =  = $42.80.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

 

24) Crosby Inc. has an 11% required rate of return. It does not expect to initiate dividends for 20 years, at which time it will pay $4.00 per share in dividends. At that time, Crosby expects its dividends to grow at 6% forever. What is an estimate of Crosby's price in 20 years (P20) if its dividend at the end of year 20 is $4.00?

  1. A) $34.80
  2. B) $55.00
  3. C) $57.50
  4. D) $84.80

Answer:  D

Explanation:  D) We use the formula: P20 = . Inserting our values, we get:

P20 =  =  = $84.80.

Diff: 2

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

25) If we assume that a company will be in business forever and that it continues to pay dividends during its existence, then we have an annuity dividend stream.

Answer:  FALSE

Explanation:  If we assume that the company will be in business forever, then we have a PERPETUAL dividend stream.

Diff: 1

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

26) The dividend stream we would have legal claim to is for only that period of the company's life during which we own the stock or until the company goes out of business and stops paying dividends.

Answer:  TRUE

Diff: 1

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

27) If we believe that a company is following a constant dividend policy, we can then use the current dividend to predict all future dividends because they are the same.

Answer:  TRUE

Diff: 1

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

 

28) In applying the constant dividend model with infinite horizon to price a stock for purchase, we assume the company will pay dividends forever and that we will hold onto our stock forever.

Answer:  TRUE

Diff: 1

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

29) Maris Motors Co. pays a $2.15 dividend every quarter for its perpetual stock. If you expect an annual return of 8.75% on your investment, compute the stock price that you would be willing to pay, using quarterly data. Now compute the value using annual data. Explain your two answers. What would you be willing to pay for 100 preferred shares?

Answer:  When computing a perpetuity, we have to make sure that both the payment and the discount rate represent the same period. In this problem, we first use 3 months as our period. Thus, we restate the annual required rate of 8.75% as a quarterly (or three-month) rate of  = 2.1875% (or 0.028175). Applying the constant dividend model with infinite horizon model, with the quarterly rate of return and a quarterly dividend of $2.15, we get: Price =  =  = $98.2857. We can get the same answer using annual data. For example, the annual dividend is 4 × $2.15 = $8.60. Thus, Price =  =  = $98.2857. The answer is the same because the equations are mathematically equivalent. For example, if we divide the numerator and denominator of  by four we get . With a price of $98.2857, we get 100 × $98.2857 = $9,828.57 as the cost to purchase 100 preferred shares.

Diff: 3

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

30) Central Inc. has an 11.5% required rate of return. It does not expect to initiate dividends for 20 years, at which time it will pay $3.75 per share in dividends. At that time, Central expects its dividends to grow at 6% forever. What is an estimate of Central's price in 20 years (P20) if its dividend at the end of year 20 is $3.75? What is its price in today's dollars if you desire a rate of return of 12%?

Answer:  We use the formula: Price = Div20 × . Inserting our values, we get: Price = P20 = $3.75 ×  =  = $72.2727 or about $72.27. To get today's price, we use the PVIF of  with r = 0.12 and n =20 to get P0 =  = $7.4923 or about $7.49.

Diff: 3

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

31) Pinecrest Inc. has a 13% required rate of return. It does not expect to initiate dividends for 10 years, at which time it will pay $5 per share in dividends. At that time Pinecrest expects its dividends to grow at 5% forever. What is an estimate of Pinecrest's price in 10 years (P10) if its dividend at the end of year 10 is $5.00? What is its price in today's dollars if you desire a rate of return of 13%? Repeat the problem, but replace the 10 years with 30 years and compare the two sets of prices. Describe the relationship between the number of years before you receive dividends and today's price.

Answer:  We use the formula: Price = Div10 × . Inserting in our values using 10 years, we get:
Price = P10 = $5 ×  =  = $65.625 or about $65.63. To get today's price, we use the PVIF of  with r = 0.13 and n = 10 to get: P0 =  = $19.33236 or about $19.33.For 30 years, we get the same value since the number of years have no effect if prior dividends were not paid. For example, we still have: Price = P30 = $5 ×  =  = $65.625 or about $65.63. To get today's price we use the PVIF of  with r = 0.13 and n = 30 to get: P0 =  = $1.67771 or about $1.68. We see that the longer it takes to begin dividends, the less today's price will be. By waiting an additional 20 years beyond the first 10 years, today's value fell from $19.33 to $1.68. Thus, the relationship between the number of years before you receive dividends and today's price is a negative relationship that tells us that firms that do not pay dividends or have to delay dividends are less valuable.

Diff: 3

Topic:  7.3 Stock Valuation

AACSB:  3 Analytical Thinking

LO:  7.3 Calculate the value of a stock given a history of dividend payments.

 

7.4   Dividend Model Shortcomings

 

1) Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however, in that future cash flows may be difficult to predict as to ________ of these cash flows.

  1. A) both the timing and the amount
  2. B) the timing but not the amount
  3. C) the amount but not the timing
  4. D) neither the timing nor the amount

Answer:  A

Diff: 2

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

 

2) Which of the statements below is TRUE?

  1. A) A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks.
  2. B) A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts dividends.
  3. C) A problem with using the dividend growth model is that it produces a positive expected return whenever a firm cuts dividends.
  4. D) A problem with using the dividend growth model is that it produces a negative expected return whenever a firm increases its dividends.

Answer:  B

Explanation:  B) One problem with using the dividend growth model is that it appears to underestimate the expected return for SOME stocks. Another problem is that it produces a NEGATIVE expected return whenever a firm CUTS its dividends.

Diff: 2

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

 

3) Which of the statements below is FALSE?

  1. A) The dividend model requires that a firm have a cash dividend history and that the dividend history shows a constant dividend or a positive growth in dividends.
  2. B) A problem with using the dividend growth model is that it appears to underestimate the expected return for some stocks
  3. C) A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts its dividends.
  4. D) A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks.

Answer:  D

Explanation:  D) A problem with using the dividend growth model is that it appears to underestimate the expected return for SOME stocks.

Diff: 2

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

 

4) Dividend models suggest that the value of a financial asset is determined by the ________ the owner is entitled to while holding the asset.

  1. A) present cash flows
  2. B) past cash flows
  3. C) future cash flows
  4. D) past and present cash flows

Answer:  C

Explanation:  C) Dividend models do not focus on past and present cash flows but future cash flows, which are discounted by a required rate of return.

Diff: 2

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

5) The dividend model requires that a firm has a cash dividend history and that the dividend history shows a ________.

  1. A) constant dividend or a constant growth in price where constant growth can be either positive or negative
  2. B) positive dividend or a negative growth in dividends
  3. C) constant dividend or a positive growth in dividends
  4. D) constant price or a positive growth in dividends

Answer:  C

Explanation:  C) The dividend model requires that a firm has a cash dividend history and that the dividend history shows a constant dividend or a positive growth in dividends. The requirements of a constant dividend and positive growth are essential in deriving the Dividend Growth Model.

Diff: 2

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

 

6) Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive than the dividend models and provides expected returns for companies based on aspects besides their historical dividend patterns. Which of the below is NOT one of these aspects?

  1. A) The company's risk
  2. B) The premium for taking on risk
  3. C) The reward for waiting
  4. D) Stable dividends

Answer:  D

Explanation:  D) What we need is a pricing model that is more inclusive than the dividend model in that it can estimate expected returns for stocks without the need for a stable dividend history. The capital asset pricing model (CAPM) is more inclusive and provides expected returns for companies based on (1) their risk, (2) the premium for taking on risk, and (3) the reward for waiting, and not on their historical dividend patterns.

Diff: 2

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

7) Which of the statements below is FALSE?

  1. A) Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive and that can estimate expected returns for stocks without the need for a stable dividend history.
  2. B) A firm's dividend in 2008 was less than its dividend in 2003. This means that the estimated growth rate is negative, and this produces a negative expected return.
  3. C) The dividend models (growth or constant dividend) appeal to a fundamental concept of financial assets, that is, the value of the financial asset is determined by the future cash flow the owner is entitled to while holding the asset.
  4. D) Lack of a dividend pattern is not a problem for the dividend models to work.

Answer:  D

Explanation:  D) Lack of a dividend pattern means that the model CANNOT produce an expected return.

Diff: 2

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

 

8) The dividend models appeal to a fundamental concept of asset pricing—that the value of an asset is determined by the future cash flow to which the owner is entitled while holding the asset, and the required rate of return for the cash flow.

Answer:  TRUE

Diff: 1

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

 

9) The dividend growth model has a limitation due to the necessity to have a non-growing dividend pattern in order for it to work.

Answer:  FALSE

Explanation:  The dividend growth model has a limitation due to the necessity to have a GROWING dividend pattern in order for it to work.

Diff: 1

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

 

10) An application of the capital asset pricing model, called the security market line, is more inclusive than the dividend growth model for pricing stocks and provides expected returns for companies based on their risk, the premium for taking on risk, and the reward for waiting and not on their historical pattern of dividends.

Answer:  TRUE

Diff: 1

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

11) Mind-The-Gap Corp. is selling for $30 a share. In looking at the stream of dividends over the past ten years, you find out that the first dividend was $1.00 and the last dividend was $2.00. What is the firm's growth rate of dividends? What is the firm's expected return?

Answer: 

Using the formula g =  - 1, where FV = $2 is the most recent dividend and PV = $1 is the initial dividend and n = 10, we get g =  - 1 =  - 1 = 1.071773 - 1 = 0.071773, or about 7.18%. OR: One could use the TVM keys with N = 10, PV = -$1, FV = $2, and PMT = 0 to get I/Y = 7.1773% or about 7.18%. To get the expected return (r), we use the formula: r =  + g. Inserting our values, we get: r =  + 0.071773 = 0.143225, or about 14.32%.

Diff: 3

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

 

 

12) Famous Antiquities Inc. is selling for $48 per share. In looking at the stream of dividends over the past seven years, you find out that the first dividend was $0.50 and the last dividend was $3.85. What is the firm's growth rate of dividends? What is the firm's expected return?

Answer: 

Using the formula g =  - 1, where FV = $3.85 is the most recent dividend and PV = $0.50 is the initial dividend and n = 7, we get g =  - 1 = ($3.85/$0.50)^(1/7) - 1 = 1.3385714 - 1 = 0.3385714, or about 33.86%. OR: One could use the TVM keys with N = 7, PV = -$0.50, FV = $3.85, and PMT = 0 to get I/Y = 33.8571% or about 33.86%. To get the expected return (r), we use the formula: r =  + g. Inserting our values, we get: r = ($3.85 * 1.3386)/$48 + 0.3386 = 0.10737 + 0.3386 = 0.44597, or about 44.60%.

Diff: 3

Topic:  7.4 Dividend Model Shortcomings

AACSB:  3 Analytical Thinking

LO:  7.4 Explain the shortcomings of the dividend pricing models.

7.5   Preferred Stock

 

1) Preferred stock ________.

  1. A) reflects residual ownership of a company
  2. B) represents a preferential claim on dividends
  3. C) will be "paid" before the bondholders
  4. D) always has a legal and specific claim to a fixed amount (listed as a liability)

Answer:  B

Explanation:  B) COMMON STOCK reflects residual ownership of a company. Preferred stock will be "paid" AFTER the bondholders. A BOND always has a legal and specific claim to a fixed amount (listed as a liability).

Diff: 2

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

2) Which of the statements below is FALSE?

  1. A) It is common for companies to issue preferred stock with the right to convert to common shares after a specific waiting period.
  2. B) Preferred stock does not have a maturity date.
  3. C) Preferred stock cannot be converted into common stock.
  4. D) Preferred shareholders' dividend claims take precedence over common shareholders' dividend claims.

Answer:  C

Explanation:  C) Preferred stock can be converted into common stock at a preset time in the future.

Diff: 2

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

 

3) The holder of preferred stock is entitled to a constant dividend ________.

  1. A) every period
  2. B) only when earnings are positive
  3. C) only when the stock price increases
  4. D) only when earnings are positive and only when the stock price increases

Answer:  A

Diff: 2

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

4) Which of the following statements is TRUE?

  1. A) Preferred stock usually has a stated or par value and, like bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date.
  2. B) The par value for preferred stock, unlike bonds, is never paid back.
  3. C) A preferred stock's cash dividend due each year is based on the stated dividend rate times the market value of the stock.
  4. D) Some preferred stocks are cumulative with respect to dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future.

Answer:  D

Explanation:  D) Preferred stock usually has a stated or par value BUT UNLIKE bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date. The only time this par value would be paid to the shareholder is if the company ceases operations or retires the preferred stock. The cash dividend due each year is based on the stated dividend rate times the PAR VALUE of the stock.

Diff: 2

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

Hmwrk Questions:  * Taken from "Prepping for Exams" questions at the end of the chapter.

 

5) Which of the following statements is FALSE?

  1. A) Preferred stock usually has a stated or par value but unlike bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date.
  2. B) The only time the par value of preferred stock would be paid to the shareholder is if the company ceases operations or retires the preferred stock.
  3. C) Skipped preferred dividends become a liability of the company.
  4. D) Preferred stock cannot be converted into common stock.

Answer:  D

Explanation:  D) Preferred stock can be converted into common stock at a preset point in the future.

Diff: 2

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

6) Gap Inc. has outstanding nonconvertible preferred stock (cumulative) that pays a quarterly dividend of $1.25. If your required rate of return is 9.5%, what should you be willing to pay for 1000 shares of the firm?

  1. A) $52,631.58
  2. B) $52,621.58
  3. C) $52,611.58
  4. D) $52,601.58

Answer:  A

Explanation:  A) This situation is that of a perpetuity without growth that has a quarterly required rate of return of  = 0.02375. Thus, you should be willing to pay per share: P0 =  = $52.631579. For 1000 shares, you should be willing to pay 1000 times this, or $52,631.58.

Diff: 2

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

7) Puckett Corp. has just issued nonconvertible preferred stock (cumulative) with a par value of $50 and an annual dividend rate of 7.25%. The preferred stock is currently selling for $38.75 per share. What is the yield or return (r) on this preferred stock?

  1. A) 9.341%
  2. B) 9.345%
  3. C) 9.351%
  4. D) 9.355%

Answer:  D

Explanation:  D) We first determine the annual dividend by multiplying the par value by the dividend rate. We have: $50 × 0.0725 = $3.625. Now, using the equation r =  and dividing the $3.625 annual dividend by the current price of $38.75, we have: r = 0.093548, or about 9.355%.

Diff: 2

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

8) Caldwell Corp. has outstanding borrowings. One of these borrowings is nonconvertible preferred stock (cumulative) with a par value of $75 and an annual dividend rate of 8.25%. This preferred stock is currently selling for $56.46 per share. What is the yield or return (r) on this preferred stock?

  1. A) 10.395%
  2. B) 10.432%
  3. C) 10.959%
  4. D) 10.623%

Answer:  C

Explanation:  C) We first determine the annual dividend by multiplying the dividend rate against the par value: $75 × 0.0825 = $6.1875. Now, using the equation r =  and dividing the $6.1875 annual dividend by the current price of $56.46, we get r = 0.109591, or about 10.959%.

Diff: 2

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

9) The term "preferred" comes from the fact that preferred shareholders receive all past (if cumulative) and present dividends before common shareholders can receive any cash dividends—in other words, their dividend claims are preferred over common stock dividend claims.

Answer:  TRUE

Diff: 1

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

10) The term "preferred" comes from the fact that preferred shareholders receive, on average, a higher rate of return than common shareholders even though they have less risk.

Answer:  FALSE

Explanation:  Preferred shareholders do have less risk than common shareholders, but on average their returns are LOWER.

Diff: 1

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

11) In valuing preferred stock, we can use either the constant dividend model or the growth model with a positive growth rate.

Answer:  FALSE

Explanation:  In valuing preferred stock, we can use either the constant dividend model or the growth model with a ZERO growth rate.

Diff: 1

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

12) Crane Industries Inc. has outstanding borrowings that include preferred stock. One of these borrowings is (nonconvertible) preferred stock (cumulative) with a par value of $250 and an annual dividend rate of 8.25%. This preferred stock is currently selling for $260 per share. What is the yield or return on this nonconvertible preferred stock?

Answer:  We first determine the annual dividend by multiplying the dividend rate against the par value: $250 × 0.0825 = $20.625. Now, dividing this $20.625 annual dividend by the current price of $260.00, we get 0.079327, or about 7.93%.

Diff: 3

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

13) Sampson Supply Inc. has outstanding borrowings that include preferred stock. One of these borrowings is (nonconvertible) preferred stock (cumulative) with a par value of $150 and an annual dividend rate of 4.50%. This preferred stock is currently selling for $175 per share. What is the yield or return on this nonconvertible preferred stock?

Answer:  We first determine the annual dividend by multiplying the dividend rate against the par value: $150 × 0.045 = $6.75. Now, dividing this $6.75 annual dividend by the current price of $175.00, we get 0.03857, or about 3.86%.

Diff: 3

Topic:  7.5 Preferred Stock

AACSB:  3 Analytical Thinking

LO:  7.5 Calculate the price of preferred stock.

 

7.6   Efficient Markets

 

1) Strong-form efficient markets theory proclaims that ________.

  1. A) one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market
  2. B) one can exploit publicly available news or financial statement information to routinely outperform the market
  3. C) current prices reflect the price and volume history of the stock, all publicly available information, and all private information
  4. D) current prices reflect the price and volume history of the stock, all publicly available information, but no private information

Answer:  C

Explanation:  C) Strong-form efficient markets theory proclaims that one CANNOT chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market. Strong-form efficient markets theory proclaims that one CANNOT exploit publicly available news or financial statement information to routinely outperform the market. Strong-form efficient markets theory proclaims that current prices reflect the price and volume history of the stock, all publicly available information, and ALL private information.

Diff: 2

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

2) ________ has to do with the speed and accuracy of processing a buy or sell order at the best available price.

  1. A) Market efficiency
  2. B) Mechanical efficiency
  3. C) Informational efficiency
  4. D) Operational efficiency

Answer:  D

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

3) ________ refers to how quickly information is reflected in the available prices for trading.

  1. A) Market efficiency
  2. B) Mechanical efficiency
  3. C) Informational efficiency
  4. D) Operational efficiency

Answer:  C

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

4) In ________, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.

  1. A) weak-form efficient markets
  2. B) strong-form efficient markets
  3. C) semi-strong-form efficient markets
  4. D) operational efficient markets

Answer:  A

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

5) In ________, current prices already reflect the price history and volume of the stock as well as all available public information.

  1. A) weak-form efficient markets
  2. B) strong-form efficient markets
  3. C) semi-strong-form efficient markets
  4. D) operationally efficient markets

Answer:  C

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

6) The ________ are quite dynamic in terms of processing trades and incorporating information in prices and thus are considered very efficient markets.

  1. A) domestic bond markets
  2. B) equity markets
  3. C) fixed income markets
  4. D) foreign bond markets

Answer:  B

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

7) Most academic research supports markets as ________ efficient.

  1. A) weak-form
  2. B) semi-strong-form
  3. C) strong-form
  4. D) not at all

Answer:  B

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

8) The NYSE uses a designated-order turnaround computer system (SuperDOT) that matches buyers and sellers so that trades can be executed within seconds, with buyers and sellers getting the best available price.

Answer:  TRUE

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

9) Most academic research supports markets as semi-strong efficient.

Answer:  TRUE

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

10) Informational efficiency has to do with the speed and accuracy of processing a buy or sell order at the best available price.

Answer:  FALSE

Explanation:  OPERATIONAL efficiency has to do with the speed and accuracy of processing a buy or sell order at the best available price.

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

11) In weak-form efficient markets, current prices already reflect the price history and volume of the stock, as well as all available public information.

Answer:  FALSE

Explanation:  In SEMI-STRONG-FORM efficient markets, current prices already reflect the price history and volume of the stock as well as all available public information.

Diff: 1

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

12) Describe the three forms of market efficiency.

Answer:  WEAK-FORM MARKET EFFICIENCY: In weak-form efficient markets, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.

SEMI-STRONG-FORM MARKET EFFICIENCY: In semi-strong-form efficient markets, current prices already reflect the price history and volume of the stock, as well as all available public information. It is therefore of no use to try to exploit publicly available news or financial statement information to routinely outperform the market.

STRONG-FORM MARKET EFFICIENCY: In strong-form efficient markets, current prices reflect the price and volume history of the stock, all publicly available information, and all private information. All information is already embedded in the price, and there is no advantage even to insiders who might wish to exploit their private information.

Diff: 3

Topic:  7.6 Efficient Markets

AACSB:  3 Analytical Thinking

LO:  7.6 Understand the concept of efficient markets.

 

 

 

 

 

 

 

 

 

 

 -----

Key Contents: Financial Management and Corporate Finance
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Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business, University of Western Ontario
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick, Columbia University
------
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University, Jarrad Harford, University of Washington

-----

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, Virginia Polytechnic Instit. and State University
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
------
Part 1: Fundamental Concepts and Basic Tools of Finance
1. Financial Management
2. Financial Statements
3. The Time Value of Money (Part 1)
4. The Time Value of Money (Part 2)
5. Interest Rates
Part 2: Valuing Stocks and Bonds and Understanding Risk and Return
6. Financial Management Bonds and Bond Valuation
7. Stocks and Stock Valuation
8. Risk and Return
Part 3: Capital Budgeting
9: Capital Budgeting Decision Models
10: Cash Flow Estimation
11: The Cost of Capital
Part 4: Financial Planning and Evaluating Performance
12. Forecasting and Short-Term Financial Planning
13. Working Capital Management
14. Financial Ratios and Firm Performance
Part 5: Other Selected Finance Topics
15. Raising Capital
16. Capital Structure
17. Dividends, Dividend Policy, and Stock Splits
18. International Financial Management
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
------
1. Overview of Financial Management
2. Sizing Up a Business: A Non-Financial Perspective
3. Understanding Financial Statements
4. Measuring Financial Performance
5. Managing Day-To-Day Cash Flow
6. Projecting Financial Requirements and Managing Growth
7. Time Value of Money Basics and Applications
8. Making Investment Decisions
9. Overview of Capital Markets: Long-Term Financing Instruments
10. Assessing the Cost of Capital: What Investors Require
11. Understanding Financing and Payout Decisions
12. Designing an Optimal Capital Structure
13. Measuring and Creating Value
14. Comprehensive Case Study: Wal-Mart Stores, Inc.

1. Overview of Financial Management
• 1.1: Financial Management and the Cash Flow Cycle
• 1.2: The Role of Financial Managers
• 1.3: A Non-Financial Perspective of Financial Management
• 1.4: Financial Management’s Relationship with Accounting and Other Disciplines
• 1.5: Types of Firms
• 1.6: A Financial Management Framework
• 1.7: Relevance for Managers
• 1.8: Summary
• 1.9: Additional Readings
• 1.10: End of Chapter Problems
2. Sizing Up a Business: A Non-Financial Perspective
• 2.1: Sizing Up The Overall Economy
o 2.1.1: GDP Components
o 2.1.2: Sector-Related Fluctuations
o 2.1.3: Inflation and Interest Rates
o 2.1.4: Capital Markets
o 2.1.5: Economic Size-Up Checklist
• 2.2: Sizing Up the Industry
o 2.2.1: Industry Life Cycles
o 2.2.2: The Competitive Environment
o 2.2.3: Opportunities and Risks
o 2.2.4: Industry Size-up Checklist
• 2.3: Sizing Up Operations Management and Supply Risk
• 2.4: Sizing Up Marketing Management and Demand Risk
• 2.5: Sizing Up Human Resource Management and Strategy
• 2.6: Sizing Up Home Depot: An Example
• 2.7: Relevance for Managers
• 2.8 Summary
• 2.9: Additional Readings and Information
• 2.10: End of Chapter Problems
3. Understanding Financial Statements
• 3.1: Understanding Balance Sheets
o 3.1.1: Understanding Assets
o 3.1.2: Understanding Liabilities
o 3.1.3: Understanding Equity
• 3.2: Understanding Income Statements
o 3.2.1: Understanding Revenues, Costs, Expenses, and Profits
o 3.2.2: Connecting a Firm’s Income Statement and Balance Sheet
• 3.3: Understanding Cash Flow Statements
o 3.3.1: Cash Flows Related to Operating Activities
o 3.3.2: Cash Flows from Investing Activities
o 3.3.3: Cash Flows from Financing Activities
• 3.4: Relevance for Managers
• 3.5: Summary
• 3.6: Additional Readings and Sources of Information
• 3.7: End of Chapter Problems
4. Measuring Financial Performance
• 4.1: Performance Measures
o 4.1.1: Return on Equity
o 4.1.2: Profitability Measures
o 4.1.3: Resource Management Measures
o 4.1.4: Liquidity Measures
o 4.1.5: Leverage Measures
o 4.1.6: Application: Home Depot
• 4.2: Reading Annual Reports
• 4.3: Relevance for Managers
• 4.4: Summary
• 4.5: Additional Readings and Sources of Information
• 4.6: End of Chapter Problems
5. Managing Day-To-Day Cash Flow
• 5.1: Cash Flow Cycles
• 5.2: Working Capital Management
o 5.2.1: Managing Inventory
o 5.2.2: Managing Accounts Receivable
o 5.2.3: Managing Accounts Payable
o 5.2.4: Application: Home Depot
• 5.2.4.1: Orange Computers and Little Orange Computers
• 5.2.4.2: Home Depot
• 5.3: Short-Term Financing
o 5.3.1: Bank Loans
o 5.3.2: Commercial Paper
o 5.3.3: Banker’s Acceptance
• 5.4: Relevance for Managers
• 5.5: Summary
• 5.6: Additional Readings
• 5.7: End of Chapter Problems

6. Projecting Financial Requirements and Managing Growth
• 6.1: Generating Pro Forma Income Statements
o 6.1.1: Establishing the Cost of Goods Sold and Gross Profit
o 6.1.2: Establishing Expenses
o 6.1.3: Establishing Earnings
• 6.2: Generating Pro Forma Balance Sheets
o 6.2.1: Establishing Assets
o 6.2.2: Establishing Liabilities and Equity
• 6.3: Generating Pro Forma Cash Budgets
o 6.3.1: Establishing Cash Inflows
o 6.3.2: Establishing Cash Outflows
o 6.3.3: Establishing Net Cash Flows
• 6.4: Performing Sensitivity Analysis
o 6.4.1: Sales Sensitivity
o 6.4.1: Interest Rate Sensitivity
o 6.4.3: Working Capital Sensitivity
• 6.5: Understanding Sustainable Growth and Managing Growth
• 6.6: Relevance for Managers
• 6.7: Summary
• 6.8: Additional Readings and Resources
• 6.9: Problems

7. Time Value of Money Basics and Applications
• 7.1: Exploring Time Value of Money Concepts
o 7.1.1: Future Values
o 7.1.2: Present Values
o 7.1.3: Annuities
o 7.1.4: Perpetuities
• 7.2: Applying Time Value of Money Concepts to Financial Securities
o 7.2.1: Bonds
o 7.2.2: Preferred Shares
o 7.2.3: Common Equity
• 7.3: Relevance for Managers
• 7.4: Summary
• 7.5: Additional Readings
• 7.6: End of Chapter Problems

8. Making Investment Decisions
• 8.1: Understanding the Decision-Making Process
• 8.2: Capital Budgeting Techniques
o 8.2.1: Payback
• 8.2.1.1: Strengths and Weaknesses of the Payback Method
o 8.2.2: Net Present Value
• 8.2.2.1: Strengths and Weaknesses of the Net Present Value Method
o 8.2.3: Internal Rate of Return
• 8.2.3.1: Strengths and Weaknesses of the Internal Rate of Return Method
• 8.2.3.2: Modified Internal Rate of Return
• 8.3: Capital Budgeting Extensions
o 8.3.1: Profitability Index
o 8.3.2: Equivalent Annual Cost and Project Lengths
o 8.3.3: Mutually Exclusive Projects and Capital Rationing
• 8.4: Relevance for Managers
• 8.5: Summary
• 8.6: Additional Readings
• 8.7: End of Chapter Problems

9. Overview of Capital Markets: Long-Term Financing Instruments
• 9.1: Bonds
o 9.1.1: Changing Bond Yields
o 9.1.2: Bond Features
o 9.1.3: Bond Ratings
• 9.2: Preferred Shares
• 9.3: Common Shares
o 9.3.1: Historical Returns
• 9.4: Capital Markets Overview
o 9.4.1: Private versus Public Markets
o 9.4.2: Venture Capital and Private Equity
o 9.4.3: Initial Offerings versus Seasoned Issues
o 9.4.4: Organized Exchanges versus Over-The-Counter Markets
o 9.4.5: Role of Intermediaries
• 9.5: Market Efficiency
o 9.5.1: Weak Form
o 9.5.2: Semi-strong Form
o 9.5.3: Strong Form
o 9.5.4: U.S. Stock Market Efficiency
• 9.6: Relevance for Managers
• Appendix: Understanding Bond and Stock Investment Information
• 9.7: Summary
• 9.8: Additional Readings
• 9.9: End of Chapter Problems

10. Assessing the Cost of Capital: What Investors Require
• 10.1: Understanding the Cost of Capital: An Example
• 10.2: Understanding the Implications of the Cost of Capital
• 10.3: Defining Risk
• 10.4: Estimating the Cost of Debt
• 10.5: Estimating the Cost of Preferred Shares
• 10.6: Estimating the Cost of Equity
o 10.6.1: Dividend Model Approach
o 10.6.2: Capital Asset Pricing Model
• 10.6.2.1: Risk-Free Rate
• 10.6.2.2: Market Risk Premium
• 10.6.2.3: Beta
• 10.7: Estimating Component Weights
• 10.8: Home Depot Application
• 10.9: Hurdle Rates
• 10.10: Relevance for Managers
• 10.11: Summary
• 10.12: Additional Readings
• 10.13: Problems
11. Understanding Financing and Payout Decisions
• 11.1: Capital Structure Overview
• 11.2: Understanding the Modigliani-Miller Argument: Why Capital Structure Does Not Matter
• 11.3: Relaxing the Assumptions: Why Capital Structure Does Matter
o 11.3.1: Understanding the Impact of Corporate Taxes
o 11.3.2: Understanding the Impact of Financial Distress
o 11.3.3: Combining Corporate Taxes and Financial Distress Costs
o 11.3.4: Impact of Asymmetric Information
• 11.4: Understanding Payout Policies
o 11.4.1: Paying Dividends
o 11.4.2: Repurchasing Shares
o 11.4.3: Do Dividend Policies Matter?
• 11.5: Relevance for Managers
• 11.6: Summary
• 11.7: Additional Resources
• 11.8: End of Chapter Problems
• Appendix: Why Dividend Policy Doesn’t Matter: Example

12. Designing an Optimal Capital Structure
• 12.1: Factor Affecting Financing Decisions: The FIRST Approach
o 12.1.1: Maximizing Flexibility
o 12.1.2: Impact on EPS: Minimizing Cost
• 12.1.2.1: A Simple Valuation Model
• 12.1.2.2: Earnings before Interest and Taxes Break-Even: What Leverage Really Means
• 12.1.2.3: Does Issuing Equity Dilute the Value of Existing Shares?
o 12.1.3: Minimizing Risk
o 12.1.4: Maintaining Shareholder Control
o 12.1.5: Optimal Training
• 12.2: Tradeoff Assessment: Evaluating FIRST Criteria
• 12.3: Relevance for Managers
• 12.4: Summary
• 12.5: Additional Resource
• 12.6: End of Chapter Problems

13. Measuring and Creating Value
• 13.1: An Overview of Measuring and Creating Value
• 13.2: Measuring Value: The Book Value Plus Adjustments Method
o 13.2.1: Pros and Cons of the Book Value of Equity Plus Adjustments Method
• 13.3: Measuring Value: The Discount Cash Flow Analysis Method
o 13.3.1: Estimating Free Cash Flows
o 13.3.2: Estimating the Cost of Capital
o 13.3.3: Estimating the Present Value of Free Cash Flows
o 13.3.4: Estimating the Terminal Value
o 13.3.5: Estimating the Value of Equity
o 13.3.6: Pros and Cons of the Free Cash Flow to the Firm Approach
• 13.4: Measuring Value: Relative Valuations and Comparable Analysis
o 13.4.1: The Price-Earnings Method
• 13.4.1.1: Pros and Cons of the Price-Earnings Approach
o 13.4.2: The Enterprise Value-to-EBITDA Method
• 13.4.2.1: Pros and Cons of the EV/EBITDA Approach
• 13.5: Creating Value and Value-Based Management
• 13.6: Valuing Mergers and Acquisitions
o 13.6.1: Valuing Comparable M&A Transactions
• 13.7: Relevance for Managers
• 13.8: Summary
• 13.9: Additional Readings
• 13.10: End of Chapter Problems

14. Comprehensive Case Study: Wal-Mart Stores, Inc.
• 14.1: Sizing Up Wal-Mart
o 14.1.1: Analyzing the Economy
o 14.1.2: Analyzing the Industry
o 14.1.3: Analyzing Walmart’s Strengths and Weaknesses in Operations, Marketing, Management, and Strategy
• 14.1.3.1: Analyzing Walmart’s Operations
• 14.1.3.2: Analyzing Walmart’s Marketing
• 14.1.3.3: Analyzing Walmart’s Management and Strategy
o 14.1.4: Analyzing Walmart’s Financial Health
• 14.2: Projecting Walmart’s Future Performance
o 14.2.1: Projecting Walmart’s Income Statement
o 14.2.2: Projecting Walmart’s Balance Sheet
o 14.2.3: Examining Alternate Scenarios
• 14.3: Assessing Walmart’s Long-Term Investing and Financing
o 14.3.1: Assessing Walmart’s Investments
o 14.3.2: Assessing Walmart’s Capital Raising and the Cost of Capital
• 14.4: Valuing Walmart
o 14.4.1: Measuring Walmart’s Economic Value Added
o 14.4.2: Estimating Walmart’s Intrinsic Value: The DCF Approach
o 14.4.3: Estimating Walmart’s Intrinsic Value: Comparable Analysis
o 14.4.4: Creating Value and Overall Assessment of Walmart
• 14.5: Relevance for Managers and Final Comments
• 14.6: Additional Readings and Sources of Information
• 14.7: End of Chapter Problems
------
Part 1: Introduction to Financial Management
Chapter 1: Getting Started - Principles of Finance
Chapter 2: Firms and the Financial Market
Chapter 3: Understanding Financial Statements, Taxes, and Cash Flows
Chapter 4: Financial Analysis - Sizing Up Firm Performance
Part 2: Valuation of Financial Assets
Chapter 5: Time Value of Money - The Basics
Chapter 6: The Time Value of Money - Annuities and Other Topics
Chapter 7: An Introduction to Risk and Return - History of Financial Market Returns
Chapter 8: Risk and Return - Capital Market Theory
Chapter 9: Debt Valuation and Interest Rates
Chapter 10: Stock Valuation
Part 3: Capital Budgeting
Chapter 11: Investment Decision Criteria
Chapter 12: Analyzing Project Cash Flows
Chapter 13: Risk Analysis and Project Evaluation
Chapter 14: The Cost of Capital
Part 4: Capital Structure & Dividend Policy
Chapter 15: Capital Structure Policy
Chapter 16: Dividend Policy
Part 5: Liquidity Management & Special Topics in Finance
Chapter 17: Financial Forecasting and Planning
Chapter 18: Working Capital Management
Chapter 19: International Business Finance
Chapter 20: Corporate Risk Management
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PART I: INTRODUCTION TO FOREIGN EXCHANGE MARKETS AND RISKS
Chapter 1: Globalization and the Multinational Corporation
Chapter 2: The Foreign Exchange Market
Chapter 3: Forward Markets and Transaction Exchange Risk
Chapter 4: The Balance of Payments
Chapter 5: Exchange Rate Systems
PART II: INTERNATIONAL PARITY CONDITIONS AND EXCHANGE RATE DETERMINATION
Chapter 6: Interest Rate Parity
Chapter 7: Speculation and Risk in the Foreign Exchange Market
Chapter 8: Purchasing Power Parity and Real Exchange Rates
Chapter 9: Measuring and Managing Real Exchange Risk
Chapter 10: Exchange Rate Determination and Forecasting

PART III: INTERNATIONAL CAPITAL MARKETS
Chapter 11: International Debt Financing
Chapter 12: International Equity Financing
Chapter 13: International Capital Market Equilibrium
Chapter 14: Political and Country Risk

PART IV: INTERNATIONAL CORPORATE FINANCE
Chapter 15: International Capital Budgeting
Chapter 16: Additional Topics in International Capital Budgeting
Chapter 17: Risk Management and the Foreign Currency Hedging Decision
Chapter 18: Financing International Trade
Chapter 19: Managing Net Working Capital

PART V: FOREIGN CURRENCY DERIVATIVES
Chapter 20: Foreign Currency Futures and Options
Chapter 21: Interest Rate and Foreign Currency Swaps
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
PART 7: OPTIONS
20. Financial Options
21. Option Valuation
22. Real Options

PART 8: LONG-TERM FINANCING
23. Raising Equity Capital
24. Debt Financing
25. Leasing
PART 9: SHORT-TERM FINANCING
26. Working Capital Management
27. Short-Term Financial Planning
PART 10: SPECIAL TOPICS
28. Mergers and Acquisitions
29. Corporate Governance
30. Risk Management
31. International Corporate Finance
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
------
------
PART 1 INTRODUCTION
Chapter 1 Corporate Finance and the Financial Manager
Chapter 2 Introduction to Financial Statement Analysis
PART 2 INTEREST RATES AND VALUING CASH FLOWS
Chapter 3 Time Value of Money: An Introduction
Chapter 4 Time Value of Money: Valuing Cash Flow Streams
Chapter 5 Interest Rates
Chapter 6 Bonds
Chapter 7 Stock Valuation
PART 3 VALUATION AND THE FIRM
Chapter 8 Investment Decision Rules
Chapter 9 Fundamentals of Capital Budgeting
Chapter 10 Stock Valuation: A Second Look
PART 4 RISK AND RETURN
Chapter 11 Risk and Return in Capital Markets
Chapter 12 Systematic Risk and the Equity Risk Premium
Chapter 13 The Cost of Capital
PART 5 LONG-TERM FINANCING
Chapter 14 Raising Equity Capital
Chapter 15 Debt Financing
PART 6 CAPITAL STRUCTURE AND PAYOUT POLICY
Chapter 16 Capital Structure
Chapter 17 Payout Policy
PART 7 FINANCIAL PLANNING AND FORECASTING
Chapter 18 Financial Modeling and Pro Forma Analysis
Chapter 19 Working Capital Management
Chapter 20 Short-Term Financial Planning
PART 8 Special Topics
Chapter 21 Option Applications and Corporate Finance
Chapter 22 Mergers and Acquisitions
Chapter 23 International Corporate Finance  

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FINANCIAL MANAGEMENT AND CORPORATE FINANCE - COLLECTION 2017 (FREE DOWNLOAD)

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Free download - PPT - Link
Free donwload - PPT - Link


Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business
Free download - PPT - Link

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick
Free download - PPT 1 - Link
Free download - PPT 2 - Link

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Free download - PPT 1 - Link
Free download - PPT 2 - Link
Free download - PPT 3 - Link

Free download Link - Core 4

Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, 
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown

 

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Free download - PPT  - Link


Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Free download - PPT  - Link


Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Free download - PPT  - Link


Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, 
Free download - PPT  - Link


Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Free download - PPT  - Link


Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
 Free download - PPT  - Link

 

DOWNLOAD ALL TEST BANKs & CASE STUDY GUIDES - 2017

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University - Test bank

Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business - Test bank

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University - Test bank

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick - Test bank

Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown - Test bank

Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo - Test bank

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017 - Test bank

Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016 - Test bank

Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University - Test bank

Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown - Test bank

Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin - Test bank

Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter - Test bank

------

For Test Bankz, Quiz Answers and Case study Guides, email to: This email address is being protected from spambots. You need JavaScript enabled to view it.

All Free downloads - LINK

 

Good Luck and Success, Enjoy Your Study !

 

 

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