When using the free-cash flow model, cash flows are discounted at the weighted average cost of capital (WACC) and when using the dividend discount model, dividends are discounted at the required rate of return of the stock.

Question 1 options:TrueFalse

**Question 2** (1 point)

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Heinlein group’s stock has a required rate of return that exceeds its expected return. Which of the following might be good investment strategies? More than one answer may be correct.

Question 2 options:

Purchase the stock

Short sell the stock

Sell the stock

Buy call options on the stock

There is not enough information to solve this problem.

**Question 3** (1 point)

Vinge Inc’s stock is in equilibrium and the company’s dividends are expected to grow at a constant rate of 7% each year. Which of the following statements are correct? More than one answer is possible.

Question 3 options:

The company’s dividend yield is 7%.

Vinge’s stock price is expected to increase by 7% each year.

The expected rate of return on Vinge’s stock is 7%.

The capital gains yield of Vinge’s stock is 7%.

Vinge’s stock price should drop next year

**Question 4** (1 point)

What is the dividend yield of a stock which just paid a dividend of $4, has an expected growth rate of 0.05 and a current price of $39?

Your Answer:Question 4 options:Answer

**Question 5** (1 point)

What is the capital gains yield of a constant growth stock with an expected growth rate of 0.13. The stock just paid a dividend of $8.83 and according to the Capital Asset Pricing Model the stock should return 0.16?

Your Answer:Question 5 options:Answer

**Question 6** (1 point)

Based on the constant growth stock model, what is the value of a security with an expected growth rate of 0.05, if the stock just paid a dividend of $3.4 and according to the Capital Asset Pricing Model the stock should return 0.09?

Your Answer:Question 6 options:Answer

**Question 7** (1 point)

You are considering selling your family’s auto parts company. If the average P/E ratio of a company in the auto-parts industry is 11 and last year your company had earnings of $17m, what is an estimate for the value of your company?

Your Answer:Question 7 options:Answer

**Question 8** (1 point)

MacLeod Inc.’s stock has a beta of 1.2 and a required rate of return of 0.13. If the expected rate of return of the U.S. government T-bill is 0.06, what is the expected rate of return of the market index according to the Capital Asset Pricing Model?

Your Answer:Question 8 options:Answer

**Question 9** (1 point)

Koman company’s stock just paid a dividend of $5. The company’s dividend is expected to grow at a rate of 0.28 this year, 0.15, next year, 0.07 for every year after that. If Koman has a required rate of return of 0.11, what is terminal value of the stock or what is the value of the stock when it first becomes a constant growth stock?

Your Answer:Question 9 options:Answer

**Question 10** (1 point)

Walton Inc.’s stock just paid a dividend of $1. The company’s dividend is expected to grow at a rate of 0.21 this year, 0.15, next year, and 0.08 for every year after that. If Walton has a required rate of return of 0.11, what is the value of Walton’s the stock?

Your Answer:Question 10 options:Answer