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FFM (Ch.9 &10) Stocks and WACC

Total questions: 60

Worksheet time: 30mins

Name
Class
Date
1.

The intrinsic value of a stock represents:

a)

Its book value

b)

Its market price

c)

The present value of expected future cash flows

d)

The total assets of the firm

e)

The net income per share

2.

Common stockholders have the right to:

a)

Receive fixed interest payments

b)

Elect the board of directors

c)

Set company policy

d)

Approve dividends

e)

Demand buybacks

3.

The preemptive right allows existing shareholders to:

a)

Block mergers

b)

Sell shares at a premium

c)

Maintain their proportionate ownership

d)

Demand dividends

e)

Convert shares to bonds

4.

In the constant growth DDM, the stock value is:

a)

D₁ × (1 + g) ÷ (r - g)

b)

D₀ ÷ r

c)

D₁ ÷ (r - g)

d)

D₀ × r

e)

D₁ ÷ g

5.

If g = r in the constant growth model, the valuation:

a)

Becomes zero

b)

Goes to infinity

c)

Is undefined

d)

Matches book value

e)

Reflects net income

6.

The dividend yield is calculated as:

a)

D₁ / P₀

b)

g / r

c)

P₀ / D₁

d)

r - g

e)

P₁ - P₀

7.

The capital gains yield is equal to:

a)

r - D₁

b)

g

c)

r + g

d)

D₀ / P₀

e)

Dividend payout ratio

8.

If a firm pays no dividends, its value under DDM is:

a)

Zero

b)

Infinity

c)

Cannot be determined

d)

Equal to EPS

e)

Based on expected capital gains

9.

What does g represent in the dividend discount model?

a)

Risk-free rate

b)

Capital structure

c)

Expected dividend growth rate

d)

Cost of capital

e)

Beta

10.

The required rate of return for a stock depends on:

a)

Net income and book value

b)

Past dividend levels

c)

Beta and risk premium

d)

Dividend policy

e)

Return on assets

11.

What will happen to stock price if required return increases?

a)

Increase

b)

Decrease

c)

Stay the same

d)

Become zero

e)

Increase then decrease

12.

The corporate valuation model estimates stock value based on:

a)

Book equity

b)

Operating income

c)

Free cash flows to the firm

d)

Retained earnings

e)

Net working capital

13.

Which valuation method is used for non-dividend-paying firms?

a)

DDM

b)

CAPM

c)

Residual income model

d)

Corporate valuation model

e)

Market-to-book ratio

14.

The total return on a stock equals:

a)

Dividend yield

b)

Capital gains yield

c)

Dividend yield + capital gains yield

d)

EPS × ROE

e)

r - g

15.

Preferred stock is similar to a:

a)

Perpetuity

b)

Growth stock

c)

Bond with maturity

d)

Callable stock

e)

Treasury bill

16.

The value of preferred stock is:

a)

D / r

b)

EPS / g

c)

D / (r - g)

d)

ROE × EPS

e)

BVPS / market rate

17.

If dividends grow faster than required return:

a)

Model breaks down

b)

Value increases

c)

Price = D / r

d)

Constant growth model applies

e)

Return exceeds beta

18.

A firm with nonconstant growth requires:

a)

A constant dividend assumption

b)

Adjusted bond valuation

c)

Two-stage or multistage model

d)

CAPM only

e)

Perpetuity approach

19.

Stock valuation models are sensitive to:

a)

Debt ratio

b)

Dividend payout

c)

Growth rate and discount rate

d)

ROA

e)

Cash flow statement

20.

What does the market price of a stock reflect?

a)

Its par value

b)

Its net income

c)

Supply and demand forces

d)

Intrinsic value

e)

Coupon rate

21.

The P/E ratio reflects:

a)

Dividends paid

b)

Risk-adjusted return

c)

Market's view of future growth

d)

Book value

e)

Equity multiplier

22.

Which statement about common stock is FALSE?

a)

Dividends are guaranteed

b)

It represents ownership

c)

Shareholders elect directors

d)

Residual claim on assets

e)

May receive dividends

23.

A stock is considered undervalued when:

a)

Its price equals its intrinsic value

b)

Its price is above the P/E average

c)

Intrinsic value > market price

d)

Dividend yield is high

e)

It pays no dividend

24.

A firm's horizon value is:

a)

The final dividend

b)

The PV of expected stock returns

c)

The value beyond the forecast period

d)

The book value

e)

Earnings × ROE

25.

Which factor has the LEAST direct effect on intrinsic stock value?

a)

Cost of capital

b)

Dividend policy

c)

Market sentiment

d)

Growth in earnings

e)

Free cash flows

26.

If a firm increases its payout ratio, assuming all else equal:

a)

Growth increases

b)

Stock value falls

c)

Beta rises

d)

Dividends decrease

e)

Retained earnings increase

27.

The residual income model focuses on:

a)

Net income

b)

EVA

c)

Excess return on equity

d)

Cash flows

e)

ROA

28.

Stock repurchases typically:

a)

Dilute EPS

b)

Reduce the stock price

c)

Increase earnings per share

d)

Increase firm equity

e)

Lower firm value

29.

The dividend payout ratio equals:

a)

EPS ÷ DPS

b)

DPS ÷ EPS

c)

Net income ÷ dividends

d)

Retained earnings ÷ EPS

e)

DPS ÷ ROE

30.

When valuing growth stocks, analysts focus on:

a)

Book value

b)

Past dividends

c)

Projected earnings and reinvestment

d)

Capital structure

e)

Liquidation value

31.

The cost of debt is:

a)

The interest rate the firm pays on its equity

b)

The nominal coupon rate on bonds

c)

The after-tax cost of interest payments

d)

Irrelevant in WACC

e)

Equal to the firm's beta

32.

The after-tax cost of debt is calculated as:

a)

rd × (1 + T)

b)

rd - T

c)

rd ÷ (1 - T)

d)

rd × (1 - T)

e)

T ÷ rd

33.

The cost of preferred stock is:

a)

Equal to the dividend growth rate

b)

rp = Dp / Pp

c)

rp = (D1 / P0) + g

d)

Estimated using the CAPM

e)

Ignored in the WACC

34.

The cost of retained earnings (rs) can be estimated using:

a)

CAPM

b)

Bond yield plus risk premium

c)

Discounted cash flow (DCF) method

d)

All of the above

e)

None of the above

35.

In the CAPM approach, rs = ?

a)

rf - β(rm - rf)

b)

rf + β(rm - rf)

c)

rf × (rm - rf)

d)

(rm + rf) ÷ β

e)

rf × β ÷ rm

36.

A higher beta implies:

a)

Lower required return

b)

Higher risk and higher required return

c)

Lower inflation

d)

Greater diversification

e)

Constant WACC

37.

The bond-yield-plus-risk-premium method estimates rs by:

a)

rs = rd + RP

b)

rs = rf + RP

c)

rs = (D1 / P0) + g

d)

rs = EPS / BV

e)

rs = rd × β

38.

The cost of new common stock (re) is:

a)

The same as retained earnings

b)

Less than the cost of debt

c)

rs adjusted for flotation costs

d)

Based on the yield curve

e)

Equal to CAPEX

39.

Flotation costs increase:

a)

WACC

b)

Market value

c)

Net income

d)

Return on equity

e)

Depreciation expense

40.

The market value weights in WACC refer to:

a)

Historical book values

b)

Par values of debt and equity

c)

Market prices of securities

d)

Nominal interest rates

e)

Depreciated cost basis

41.

Which component is adjusted for taxes in WACC?

a)

Cost of equity

b)

Cost of preferred stock

c)

Cost of debt

d)

All components

e)

None

42.

The WACC should be used to:

a)

Evaluate all projects

b)

Evaluate projects of similar risk as the firm

c)

Calculate retained earnings

d)

Forecast future sales

e)

Determine beta

43.

When calculating WACC, the cost of capital is:

a)

Weighted average of liabilities

b)

Opportunity cost of capital

c)

Book value of assets

d)

Tax-adjusted gross income

e)

Total capital divided by debt

44.

As debt increases, the WACC initially:

a)

Increases

b)

Decreases due to tax shield

c)

Remains unchanged

d)

Rises due to higher equity cost

e)

Equals the ROA

45.

If a firm has no debt or preferred stock, its WACC equals:

a)

Cost of preferred equity

b)

Cost of retained earnings

c)

Cost of new equity

d)

Market return

e)

ROE

46.

An increase in flotation costs will:

a)

Lower re

b)

Raise WACC

c)

Lower cost of debt

d)

Not affect the DCF model

e)

Reduce EPS

47.

The WACC formula includes:

a)

rs, rd(1 - T), rp

b)

rD × D/E

c)

CAPM and ROA

d)

Cost of sales and EBITDA

e)

DCF × g

48.

If the risk-free rate increases:

a)

WACC falls

b)

rs increases

c)

Cost of debt remains constant

d)

Beta increases

e)

Preferred stock value rises

49.

Which of the following is typically the lowest cost source?

a)

New common equity

b)

Preferred stock

c)

Retained earnings

d)

Debt

e)

Venture capital

50.

An increase in the firm's marginal tax rate:

a)

Decreases after-tax cost of debt

b)

Increases WACC

c)

Increases cost of retained earnings

d)

Raises flotation costs

e)

Lowers preferred dividend

51.

If a firm uses book value weights instead of market value weights:

a)

WACC is more accurate

b)

It underestimates equity cost

c)

It may distort decision-making

d)

WACC becomes irrelevant

e)

Results in higher NPV

52.

The CAPM is primarily used to estimate:

a)

Cost of debt

b)

Cost of preferred stock

c)

Cost of equity capital

d)

Net income

e)

Weighted average tax

53.

Which factor is NOT controllable by management?

a)

Market interest rates

b)

Capital structure

c)

Dividend policy

d)

Target debt-equity ratio

e)

Retention ratio

54.

The firm's target capital structure should be based on:

a)

Historical weights

b)

Market conditions only

c)

Minimizing WACC

d)

Maximizing debt use

e)

Tax credits

55.

Which component does NOT receive a tax shield?

a)

Debt

b)

Preferred stock

c)

Interest expense

d)

Bank loans

e)

Bonds

56.

Retained earnings are:

a)

Free capital

b)

Equity without flotation costs

c)

Higher cost than debt

d)

Subject to interest tax deduction

e)

Paid before dividends

57.

The DCF approach requires estimating:

a)

Earnings per share

b)

Growth in dividends

c)

ROA

d)

Treasury bond rate

e)

Depreciation rate

58.

A firm's optimal capital structure:

a)

Maximizes debt

b)

Minimizes tax expense

c)

Minimizes WACC and maximizes firm value

d)

Depends only on industry trends

e)

Maximizes EPS

59.

If a firm's WACC exceeds project return:

a)

NPV is zero

b)

Project adds value

c)

Project should be rejected

d)

Project is risk-free

e)

Accept based on IRR

60.

If a firm’s WACC exceeds project return:

a)

  • A. NPV is zero

b)

  • B. Project adds value

c)

  • C. Project should be rejected

d)

  • D. Project is risk-free

e)

  • E. Accept based on IRR

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