Question

1) An investor should purchase a stock when A) the market price exceeds the intrinsic value B) the expected rate of rectum equals or exceeds the required turn C) the capital gains rate is less than the required rumande dividends are paid D) the market price is greater than the justified price Answer 2) Which of the following variables used in determining a stock's intrinsic als can be known with the greatest level of confidence A] future carmings B) expected return on the market C) the risk free rate of retum D) future dividends Answer: 3) The most uncertain value used in the Capital Asset Pricing Model is Albea B) the risk-fresate C) expected return on the market D) all we equally uncertain Answer: 4) Michelak's Maritime Industrias relatively stable caring and as an audividend of $3.00 per share. This dividend has remained constant over the past few years and is expected to emain constant for some time to come. If you want to cam 11on meat in the common stock of Michalak's, how much should you pay to purchase cach share of stock A) SI250 B) $18.88 C) $20.83 D) 522 Answer 5) What is the required of return on a mo ck that is t ed to pay $0.75 dividend next year if dividends are expected to grow a 2 percent annually and the current stock price is $8 597 A)X.73% B) 9196 C) 10.7395 D 1138% Answer 6) Which of the following statements concerning the const-growth dividend valuation model is are correct? 1. One simple method of estimating the dividend growth rate is to analyze the historical patie of dividends IL The expected to return equals the return from capital gains plus the return from dividends d er if III. The model is applicable to growth firms with initially high growth rates IV. The intrinsic value akulated using this method can change from ce investe their risk return puyodis differ Aland IV only B) II and I'll only C) I, II and IV only Dlland Illy List the key variables that affect the Period explain the relationship between each variable and the P rato (a) growth rate in carings the higher the growth rate the higher the PE ratio (b) generals of the economy, the better the economic outlook, the higher the PE (e) amount of debt in a companys capital structure the lower the debeat, the higher the (d) current and projected rate of inflation the lower the inflation the higher the PE

Answer 1

1. Option (B) is the correct option. When the expected rate of return on a stock is greater than on equal to the required rate of return the investor gets rewarded in accordance to the riskiness of the stock (ie the required returns 10 1 - 12 12 Option (A) is incorrect since a market value greater than intrinsic value implies that the stock is overvalued. Option (A) is incorrect for the same reason as above wherein a market price greater than the justified price implies the stock is overvalued 2 Option () is incorred be cause Capital gains and 'dividend payments are dependent on individual investor preferences