FIN 4431 FINAL with answers

FIN 4431 FINAL with answers - 1. a. b. c. d. e. An increase...

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1. An increase in a firm’s expected growth rate would normally cause its required rate of return to a. Increase. b. Decrease. c. Fluctuate less than before. d. Remain constant. e. Possibly increase, possibly decrease, or possibly have no effect. 2. If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that a. The investor thinks the stock is experiencing supernormal growth. b. The investor thinks the stock should be sold. c. The investor thinks the stock is a good buy. d. The investor thinks management is probably not trying to maximize the price per share. e. The investor thinks dividends are not likely to be declared. 3. Which of the following statements is CORRECT? a. The constant growth model is often appropriate to evaluate start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next year or so. b. If a stock has a required rate of return r s = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock’s dividend yield is 5%. c. The stock valuation model, P 0 = D 1 /(r s - g), can be used for firms that have expected negative, but constant, growth rates. d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. e. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. 4. Which of the following statements is CORRECT? a. Semistrong-form market efficiency implies that as soon as any public or private information comes into being it is incorporated into stock prices. b. Weak-form market efficiency implies that recent trends in stock prices are of no use in predicting future stock prices. c. Market efficiency implies that all stocks should have the same expected return. d. According to strong-form market efficiency, insiders would find it possible to consistently earn abnormal returns in the stock market even if they have superior knowledge about the company. e. Studies of the Efficient Markets Hypothesis suggest that neither the weak-form nor the semi-strong forms of efficiency hold, especially for larger companies. However, the market appears to be strong-form efficient because institutional traders make abnormal profits. 5. Which of the following statements is CORRECT? a. The Efficient Markets Hypothesis suggests that the market does not price
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stocks fairly; hence, managers should make decisions based on the premise that firms' stocks are undervalued or overvalued. b. An individual who has information about past stock prices would be able to profit from this information if weak-form market efficiency exists. c.
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FIN 4431 FINAL with answers - 1. a. b. c. d. e. An increase...

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