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Unformatted text preview: Old Exam Questions - Stock Valuation - Solutions Page 1 of 43 Pages Stock Valuation - Solutions 1. The Gordon Growth Model, for evaluating the price of a share of common stock, may also be used to find the price of preferred stock or any other perpetuity. * A. True B. False 2. Because of diversification, a completely diversified portfolio of stocks has no market risk. A. True * B. False 3. In the CAPM, the risk-free rate is multiplied by the stocks beta coefficient to determine the additional risk premium that is required by investors for the risk inherent in the stock. A. True * B. False 4. Dell Corporation would be involved in a spot market transaction if it were to agree today to sell 500 computers, seven months from now at a price of $500 each, to Best Buy. A. True * B. False 5. The degree of investors risk aversion will have no effect on the security market line. A. True * B. False 6. All other factors held constant, the higher a securitys market risk, the higher its required rate of return, and the lower its price. * A. True B. False 7. The Gordon Dividend Growth Model can be defined as [ D 1 / K S- g ]. However, for this model to work, the growth rate (g) must be positive and less than the required rate of return (K S ). A. True * B. False Old Exam Questions - Stock Valuation - Solutions Page 2 of 43 Pages 8. We can define the long-run sustainable growth rate of a firm as a function of the firms retention rate and the firms return on equity. * A. True B. False 9. The retention rate of the firm is equivalent to the dividend payout rate of the firm. A. True * B. False 10. In general, we can say that undiversified stockholders, including the owners of small businesses, are more concerned about corporate risk than market risk. * A. True B. False 11. To use the Gordon, constant growth model to evaluate the price of a firms stock, based on the present value of the dividends to be paid on the stock, we must assume that the long-run sustainable growth rate of dividends is less than the investors required rate of return. If we do not, we may easily get nonsensical results. * A. True B. False 12. No rational investor should be willing to pay for a share of stock where the dividend is expected to decrease constantly over time. A. True * B. False 13. If Stocks J and K are constant growth stocks, and have the same required rate of return, but the price of Stock J is lower than the price of Stock K, then Stock J must have a higher expected dividend yield. A. True * B. False 14. If Stocks J and K are constant growth stocks, and have the same required rate of return, but the price of Stock J is lower than the price of Stock K, then Stock J must have a lower expected dividend yield....
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