Homework chp 8 and 5 - Practice Questions Questions from the Textbook Ehrhardt and Brigham 12th edition Chapter 8 page 308 Problems section

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Practice Questions Questions from the Textbook: Ehrhardt and Brigham, 12 th edition, Chapter 8, page 308, Problems section, question 8-3, 8-5, 8-6, 8-7, 8-19. Answers are provided at the end of the textbook. Multiple Choice Questions: 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. Answer: e 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. Answer: c 3. Stock A has a required return of 10% and a price of $25, and its dividend is expected to grow at a constant rate of 7% per year. Stock B has a required return of 12% and a price of $40, and its dividend is expected to grow at a constant rate of 9% per year. Which of the following statements is CORRECT? a. If the stock market were efficient, these two stocks would have the same price. b. The two stocks have the same dividend yield. c. If the stock market were efficient, these two stocks would have the same expected return. d. The two stocks have the same expected capital gains yield. Answer: b 4. Stocks A and B have the same price, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? a. If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B’s. b. Stock B must have a higher dividend yield than Stock A. c. Stock A must have a higher dividend yield than Stock B. d. If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B’s. e. Stock A must have both a higher dividend yield and a higher capital
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gains yield than Stock B. Answer: a 5. Stocks X and Y sell at the same price. Stock X has a required return of 12% while Y's required return is 10%. Stock X’s dividend is expected to grow at a constant rate of 6% a year, while Stock Y’s dividend is expected to grow at a constant rate of 4%. If the market is in equilibrium so that expected returns equal required returns, which of the following statements is CORRECT? a.
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This note was uploaded on 07/27/2010 for the course FINANCE N/A taught by Professor N/a during the Summer '07 term at American Academy of Art.

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Homework chp 8 and 5 - Practice Questions Questions from the Textbook Ehrhardt and Brigham 12th edition Chapter 8 page 308 Problems section

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