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<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /?> 1) Stocks A and B have the following data
A B
Beta 1.10 0.90
Constant growth rate 7.00% 7.00%
The market risk premium is 6% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are equilibrium, which of the following statements is correct?
>Stock A must have a higher dividend yield than Stock B.
>Stock A must have a higher stock price than Stock B.
>Stock B's dividend yield equals its expected dividend growth rate.
>Stock B mush have a higher required return.
>Stock B could have the higher expected return.
2) Which of the following statement is correct?
>To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital.
>To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital
>To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital
>To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital.
>The corporate valuation model requires the assumption of a constant groth rate in all years.
3) If in the opinion of a given investor, a stock's expected return exceeds its required return, this suggests that the investors thinks:
>The stock should be sold.
>Management is probably not trying to maximize the price per share
>The stock ix experiencing supernormal growth
>Dividends are not likely to be declared
>The stock is a good buy.
4) If in the opinion of a given investor, a stock's expected return exceeds its required return, this suggests that the investors thinks:
>The stock should be sold.
>Management is probably not trying to maximize the price per share
>The stock ix experiencing supernormal growth
>Dividends are not likely to be declared
>The stock is a good buy.
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Explanation / Answer
Stock A must have a higher dividend yield than Stock B.
To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital
The stock should be sold.
The stock should be sold.
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