1. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

a. All common stocks fall into one of three classes: A, B, and C.

b. All common stocks, regardless of class, must have the same voting rights.

c. All firms have several classes of common stock.

d. All common stock, regardless of class, must pay the same dividend.

e. Some class or classes of common stock are entitled to more votes per share than other classes.

2. Which of the following statements is CORRECT?

a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

b. Two firms with the same expected dividend and growth rates must also have the same stock price.

c. It is appropriate to use the constant growth model to estimate a stock’s value even if its growth rate is never expected to become constant.

d. If a stock has a required rate of return r_{s} = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock’s dividend yield is also 5%.

e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

3. A stock is expected to pay a year-end dividend of $2.00, i.e., D_{1} = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

a. The company’s current stock price is $20.

b. The company’s dividend yield 5 years from now is expected to be 10%.

c. The constant growth model cannot be used because the growth rate is negative.

d. The company’s expected capital gains yield is 5%.

e. The company’s expected stock price at the beginning of next year is $9.50.

4. If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

a. The expected return on the stock is 5% a year.

b. The stock’s dividend yield is 5%.

c. The price of the stock is expected to decline in the future.

d. The stock’s required return must be equal to or less than 5%.

e. The stock’s price one year from now is expected to be 5% above the current price.

5. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Stock | A | B |

Required Return | 10% | 12% |

Market Price | $25 | $40 |

Expected Growth | 7% | 9% |

a. These two stocks should have the same price.

b. These two stocks must have the same dividend yield.

c. These two stocks should have the same expected return.

d. These two stocks must have the same expected capital gains yield.

e. These two stocks must have the same expected year-end dividend.

6. Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Stock | X | Y |

Price | $30 | $30 |

Expected growth (constant) | 6% | 4% |

Required Return | 12% | 10% |

a. Stock X has a higher dividend yield than Stock Y.

b. Stock Y has a higher dividend yield than Stock X.

c. One year from now, Stock X’s price is expected to be higher than Stock Y’s price.

d. Stock X has the higher expected year-end dividend.

e. Stock Y has a higher capital gains yield.

7. Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

a. The two stocks must have the same dividend per share

b. If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

c. If one stock has a higher dividend yield, it must also have a higher dividend growth rate.

d. The two stocks must have the same dividend growth rate.

e. The two stocks must have the same dividend yield.

8. Schnusenberg Corporation just paid a dividend of D_{0} = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company’s beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company’s current stock price?

a. $14.52

b. $14.89

c. $15.26

d. $15.64

e. $16.03

9. Nachman Industries just paid a dividend of D_{0} = $1.32. Analysts expect the company’s dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock’s current market value?

a. $41.59

b. $42.65

c. $43.75

d. $44.87

e. $45.99

10. Ackert Company’s last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm’s required return (r_{s}) is 12.0%. What is the best estimate of the current stock price?

a. $37.05

b. $38.16

c. $39.30

d. $40.48

e. $41.70