Please note the following chapter is only some sample questions for the EQUITY VALUATI !

" an# PTI !$" chapters an# #oes not inclu#e %A&' E& ! %I& A!( I!(U$T'Y A!ALY$I$") It is not a comprehensi*e test) The following list gives you the list of concept checks (CC) and problems (P) you should definitely go over before the midterm exam. &hapter +,- %acroeconomic an# In#ustry Analysis CC 1 ! " and P1#$ % & ' ( 1) 11 &hapter +.- Equity Valuation CC 1a c ! $ % and P1#$ %#' * !1 &hapter +/- ptions CC 1 ! and P1 ! " +ake sure that you read the chapters especially focusing on the issues,concepts we have discussed in class. -ou will have multiple choice and,or short .uestions on these concepts. 1. The value of a common stock today depends on/ 0. 1umber of shares outstanding and the number of shareholders 2. The expected future dividends and the discount rate C. The 3all 4treet analysts 5. Present value of the future earnings per share !. 5eluxe Company expects to pay a dividend of 6& per share at the end of year one 6( per share at the end of year two and then be sold for 61").'% per share. 7f the re.uired rate on the stock is !%8 what is the current value of the stock9 0. 61) ) 2. 61) % C. 611 ) 5. 61! ) $. The constant dividend growth formula P): 51, (r#g) assumes/ (7) The dividends are growing at a constant rate g forever. (77) r ; g (777) g is never negative. 0. 7 only 2. 77 only C. 7 and 77 only 5. 777 only ". Casino 7nc. is expected to pay a dividend of 6& per share at the end of year one and these dividends are expected to grow at a constant rate of &8 per year forever. 7f the re.uired rate of return on the stock is 1(8 what is current value of the stock today9 0. 6$ ) 2. 6% )

61) ) 5. 6% " %. 3ill Co. is expected to pay a dividend of 6" per share at the end of year one and the dividends are expected to grow at a constant rate of "8 forever. 7f the current price of the stock is 6!% per share calculate the re.uired rate of return or the market capitali<ation rate for the firms= stock. 0. "8 2. 1&8 C. !)8 5. 1one of the above. &. The re.uired rate of return or the market capitali<ation rate is estimated as follows/ 0. 5ividend yield # expected rate of growth in dividends 2. 5ividend yield > expected rate of growth in dividends C. 5ividend yield , expected rate of growth in dividends 5. (5ividend yield) ? (expected rate of growth in dividends) '. +@ Co. pays out '%8 of its earnings as dividends. 7ts return on e.uity is !)8. 3hat is the stable dividend growth rate for the firm9 0. $8 2. %8 C. (8 5. 1!8 (. +ichigan Co. is currently paying a dividend of 6!.!) per share. The dividends are expected to grow at !%8 per year for the next four years and then grow %8 per year thereafter. Calculate the expected dividend in year %. 0. 6%.$ ' 2. 6!.* % C. 6%.& " 5. 6(.$ * *. The 1etTech Co. has Aust paid a dividend of 61 per share. The dividends are expected to grow at !)8 per year for the next three years and at the rate of %8 per year thereafter. 7f the re.uired rate of return on the stock is 1%8(0PB) what is the current value of the stock9 0. 61(.1 " 2. 611.* $ C. 61%.! ) 5. 1one of the above 1). B Technology Corporation has Aust paid a dividend of 6).") per share. The dividends are expected to grow at $)8 per year for the next two years and at %8 per year thereafter. 7f the re.uired rate of return in the stock is 1%8 (0PB) calculate the current value of the stock. 0. 61." ! 2. 6%.$ ' C. 6&.$

C.

$ 5. 1one of the above 11. Company C has a P,D ratio of 1) and a stock price of 6%) per share. Calculate earnings per share of the company. 0. 6& per share 2. 61) per share C. 6).!) per share 5. 6% per share 1!. The growth rate in dividends is a function of two ratios. They are/ 0. BE0 and BED 2. 5ividend yield and growth rate in dividends C. BED and the Betention Batio. 5. 2ook value per share and DP4 1$. 0 high proportion of the value a growth stock comes from/ 0. Past dividend payments 2. Past earnings C. PFGE (Present Falue of the Growth Epportunities) 5. 2oth 0 and 2 1". Parcel Corporation is expected to pay a dividend of 6% per share next year and the dividends pay out ratio is %)8. 7f the dividends are expected to grow at a constant rate of (8 forever and the re.uired rate of return on the stock is 1$8 calculate the present value of the growth opportunity. 0. 61) ) 2. 6'&.* ! C. 6!$.) ( 5. 1one of the above 1%. Hniversal 0ir is a no growth firm and has two million shares outstanding. 7t is expected to earn a constant !) million per year on its assets. 7f all earnings are paid out as dividends and the cost of capital is 1)8 calculate the current price per share for the stock. 0. 6!) ) 2. 61% ) C. 61) ) 5. 6% ) 1&. The return that is expected by investors from a common stock is often called its market capitali<ation rate. True Ialse 1'. The market capitali<ation e.uals the dividend yield minus the growth rate in dividends for a constant dividend growth stock. True Ialse T PI&- PTI !$ 0li has bought an Duropean call option and has only a few hours left to decide whether to exercise this option on 72+ shares. The option has an exercise price of 61) per share and it is valid for one lot of 72+ shares. 0li paid 6$)) for this option two weeks ago. (a) 5raw the profit#loss graph for 0liJs option. 4how every piece of information you need to know on this graph. 0/ points1

(b) Ior what range of stock prices would 0li reali<e a positive flow of cash into his pocket9 0/ points1

(c) 3ould 0li exercise the option if the current 72+ share price is between the exercise price and the break# even price9 Dxplain why. 0/ points1

(d) 3as 0li bearish or bullish about the 72+ stock price performance when he bought the option two weeks ago9 Dxplain why. 0/ points1

!1. 0n option that can be exercised any time before expiration date is called/ 0. an Duropean option 2. an 0merican option C. a call option 5. a put option !$. 0 put gives the owner the right 0. and the obligation to buy an asset at a given price 2. and the obligation to sell an asset at a given price C. but not the obligation to buy an asset at a given price 5. but not the obligation to sell an asset at a given price !". The buyer of a call option has the choice to exercise but the writer of the call option has/ 0. The choice to offset with a put option 2. The obligation to deliver the shares at exercise C. The choice to deliver shares or take a cash payoff 5. The choice of exercising the call or not !%. 4uppose an investor sells (writes) a put option. 3hat will happen if the stock price on the exercise date exceeds the exercise price9 0. The seller will need to deliver stock to the owner of the option 2. The seller will be obliged to buy stock from the owner of the option C. The owner will not exercise his option

1one of the above !'. 0 call options gives its owner the right to buy stock at a fixed strike price. True Ialse !(. 0n Duropean option gives its owner the right to exercise the option at any time before maturity. True Ialse !*. 7f you write a put option you ac.uire the right to buy stock at a fixed strike price. True Ialse $). The writer of a put option loses if the stock price declines. True Ialse $1. 5efine the term Koption.K

5.