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ECON 2I03 (10)


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Usman Hannan

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Ch 6: Valuing Stocks Spider Gold Mine is increasing next year’s dividend to $5 per share. The forecast stock price next year is $105. Equally risky stocks of other companies offer expected rats of return of 10%. Next 2 questions. 1) What should Spider’s common stock sell for? a) $100 b) $105 c) $110 d) $5 e)$101 Ans: a) 100 Checkpoint: 6.3 2) Batman is trying to out-beat the market. He has done a ‘fundamental analysis’ of Spider Stock and thinks the stock is undervalued. Batman can reasonably expect to out-beat the market if: a) Spider stocks have shown ‘new-issue puzzle’ previously. b) Behavioral finance is taken into account. c) Gold Mine stocks are showing signs of overconfidence by shareholders right now. d) The gold mine stock market has weak form efficiency. Ans: d) The gold mine stock market is having weak form efficiency. Leture 3) TSX stock prices follow random walk. This means: a) Successive stock prices are not related. b) Stock prices fluctuate above and below a normal long-run price. c) The history of stock prices can be used to predict future returns to investors. d) Successive stock price changes are not related. Ans: d) Successive stock price changes are not related. Checkpoint 6.9 4) Lion Stock will pay a dividend this year of $2.40 per share. Its dividend yield is 8 percent. At what price is the stock selling? a) $2.4 b) $24 c) $30 1 d) $31 e) $32 Ans: c) $30 Problem 2 5) BMM Industries pays a dividend of $2 per quarter. The dividend yield on its stock is reported at 4.8 percent. What price is the stock selling at? a) $8 b) $166.7 c) $165.8 d) $177.7 e) $ 178.7 Ans: b) $166.7 Problem 7 6) Kangaroo is a financial manager at the Dinosaur corp, whose shares are traded publicly. Why might he need to learn how to value stocks as a manager? a) All publicly traded stock prices are posted regularly on major newspapers and financial websites. What if they are posted wrongly? b) Dinosaur corp’s stock price reflects the corp’s market value. c) Dinosaur corp’s stock price is a substantial representative of the corp’s book value. d) Manager’s should know some accounting, and learning how to value the market price of stocks is an essential prerequisite for it. Ans: b) Dinosaur corp’s stock price reflects the corp’s market value. Lecture 7) Chakku Inc. (specialist in making knives) will pay a dividend of $5 per share in 1 year. It sells at $50 a share, and firms in the same industry provide an expected rate of return of 14 percent. What must be the expected growth rate of the company’s dividends? a) 4% b) 14% c) 2.5% d) 4.5% e) 5% Ans: a) 4% Problem 14 Donkey & Donkey Inc. is a declining industry. Its sales, earnings and dividends are shrinking at a rate of 10% per year. r = 15% and Di1 = $3. Next 3 questions. 2 8) What is the present value of a share? a) $8 b) $9 c) $10 d) $11 e) $12 Ans: e) $12 Problem 17 9) What is the approximated forecasted price for the stock next year? (ignore decimals by rounding up) a) $8 b) $9 c) $10 d) $11 e) $12 Ans: d) $11 Problem 17 10) Which one is most sound? a) Investing in Donkey will yield a negative expected rate of return. b) If the stock market truly exhibits random walk, then Donkey stock price would ultimately become negative. c) Investing in Donkey will yield a fair rate of return if the market is having weak- form efficiency. d) Ultimately Donkey will become bankrupt. Ans: c) Investing in Donkey will yield a fair rate of return if the market is having weak-form efficiency. Problem 17 and lecture 11) While attending a shareholder meeting , James heard the following five comments from five of his fellow-shareholders . Which one do you think James ought to take as a true statement? a) Investors may obtain the same securities at the same time in either the primary or secondary markets. b) Cash dividends are offered to shareholders in lieu of increasing the stock's price. c) The dividend discount model does not hold for investors who have a preference for capital gains. d) The dividend discount model should not be used to value stocks in which the dividend does not grow. e) Holding risk constant, an increase in dividend yield will tend to decrease a firm's rate of growth. 3 Ans: e) Holding risk constant, an increase in dividend yield will tend to decrease a firm's rate of growth. Lecture Ch 7: Net Present Value and Other Investment Criteria Egg is thinking of investing in a computer project that costs $3,000, but will generate $660 cash flows annually for 7 years. The opportunity cost of capital is 6%. Next 4 questions. 12) Payback period is: a) 3.6 years b) 4.6 years c) 5.6 years d) 6.6 years e) 7.6 years Ans: b) 4.6 years Checkpoint 7.2 13) Discounted payback period is: a) 3.5 years b) 4.5 years c) 5.5 years d) 6.5 years e) 7.5 years Ans: c) 5.5 years Checkpoint 7.2 14) NPV is: a) $3684 b) $3000 c) $584 d) $684 e) $784 Ans: d) $684 Checkpoint 7.2 15) Best one? : If Egg’s cutoff period for the investment is 5 years, then he should accept the project a) if payback criteria is used. b) if discounted payback criteria is used. c) if either of payback or discounted payb
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