Ch 9 Corporate Finance- Valuing Stocks

Corporate Finance: The Core (Berk/DeMarzo)

Chapter 9 - Valuing Stocks

1)

When discounting dividends you should use?

A)

the weighted average cost of capital.

B)

the after tax weighted average cost of capital.

C)

the equity cost of capital.

D)

the before tax cost of debt.

Answer:

C

Explanation:

A)

B)

C)

D)

2)

Which of the following statements is false?

A)

The equity cost of capital for a stock is the expected return of other investments available in the market with equivalent risk to the firm’s shares.

B)

The price of a share of stock is equal to the present value of the expected future dividends it will pay.

C)

If the current stock price were less than P0 = , it would be a negative NPV investment, and we would expect investors to rush in and sell it, driving down the stocks price.

D)

The law of one price implies that to value any security, we must determine the expected cash flows an investor will receive from owning it.

Answer:

C

Explanation:

A)

B)

C)

In this case the stock would be undervalued and we would expect investors to buy it.

D)

3)

Which of the following statements is false?

A)

We must discount the cash flows from stock based on the equity cost of capital for the stock.

B)

The divided yield is the percentage return the investor expects to earn from the dividend paid by the stock.

C)

The firm might pay out cash to its shareholders in the form of a dividend.

D)

The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price.

Answer:

D

Explanation:

A)

B)

C)

D)

The dividend yield is the annual dividend divided by the current price.

4)

Which of the following statements is false?

A)

Future dividend payments and stock prices are not known with certainty; rather these values are based on the investor’s expectations at...