econ423hw6

econ423hw6 - Econ 423, Summer 2009 Lauren Heller Homework...

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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? A) $30.24 B) $27.74 C) $26.09 D) $26.30 E) $29.03 2) 3) In the one - period valuation model, a stock's value falls if the _________ rises. A) dividend B) current price C) required return on equity D) expected future price E) both (b) and (c) are correct. 3) 4) According to the Gordon growth model, what is an investor's valuation of a stock whose curren 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? A) $110 B) $11 C) $10 D) $5.24 E) $100 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? A) The dividend growth rate is assumed to be greater than the required return on equity. B) Dividends are assumed to grow at a constant rate forever. C) Both A and B. D) Neither (a) nor (b). 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 A) $12.50. B) $16.67. C) $18. D) $25. 7) 1
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Note: All questions are to be completed on your own, without any assistance from others. 8) Which of the following is not an objective of the Securities and Exchange Commission? A) require firms to provide specific information to investors B) advise investors about which particular stocks are good buys C) maintain integrity of the securities markets D) regulate major participants in securities markets 8) 9) Exchange traded funds (ETFs) have which of the following features? A) Their value is based on the underlying net asset value of the stocks held in the index basket.
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This note was uploaded on 08/31/2009 for the course ECON 423 taught by Professor Vd during the Summer '08 term at UNC.

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econ423hw6 - Econ 423, Summer 2009 Lauren Heller Homework...

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