Econ 423, Summer 2009
Lauren Heller
Homework #6,
Due 7

16

09
Name___________________________________
MULTIPLE CHOICE.
Choose the one alternative that best completes the statement or answers the question
1) A basic principle of finance is that the value of any investment is
A) the undiscounted sum of all future net cash flows generated by the investment.
B) unrelated to the degree of risk associated with the future net cash flows generated by the
investment.
C) the present value of all future net cash flows generated by the investment.
D) unrelated to the future net cash flows generated by the investment.
1)
2) A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's
valuation of this stock if she expects it to be selling for $30 in one year and requires 15 percent
return on equity investments?
2)
3) In the one

period valuation model, a stock's value falls if the _________ rises.
3)
4) According to the Gordon growth model, what is an investor's valuation of a stock whose current
dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a
long period of time and the investor's required return is 11 percent?
4)
5) Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of
Auto Zone stock if the retailer's earnings per share are projected to be $1.85?
A) $10.81
B) $37
C) $9.25
D) $21.85
5)
6) Which of the following is true regarding the Gordon growth model?
6)
7) A firm is expected to pay a dividend of $1.00 next year and the dividend is expected to grow at
constant rate of 4 percent over time. Some investors have required returns on investments in equity
of 12 percent, some 10 percent, and some 8 percent. The market price of this firm's stock will be
slightly above
7)
1
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 Summer '08
 VD
 Interest, Mortgage loan, Gordon Growth Model, future net cash

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