1 . An aggressive pricereduction to gain market share is most likely to be associated with a:
A)cost leadershipstrategy.
B)productdifferentiation strategy.
C)servicedifferentiation strategy.
The correct answer was:A
Michael Porteridentified two competitive strategies: cost leadership and product or servicedifferentiation. A firm that uses a cost leadership or low-cost strategy seeksto have low production costs that will enable it to offer lower prices than itscompetitors to protect or gain market share. A product or servicedifferentiation strategy seeks to gain a price premium for its products bymaking them distinctive to the consumer.
2 . Use the followinginformation to determine the value of River Gardens’ common stock:
§ Expected dividend payout ratio is 45%.
§ Expected dividend growth rate is 6.5%.
§ River Gardens’ required return is 12.4%.
§ Expected earnings per share next year are$3.25.
A)$30.12.
B)$24.80.
C)$27.25.
The correct answer wasB
First, estimate theprice to earnings (P/E) ratio as: (0.45) / (0.124 – 0.065) = 7.63. Then,multiply the expected earnings by the estimated P/E ratio: ($3.25)(7.63) =$24.80.
3 . Assume that astock paid a dividend of $1.50 last year. Next year, an investor believes thatthe dividend will be 20% higher and that the stock will be selling for $50 atyear-end. Assume a beta of 2.0, a risk-free rate of 6%, and an expected marketreturn of 15%. What is the value of the stock?
A)$45.00.
B)$41.77.
C)$40.32.
The correct answer wasB
Using the CapitalAsset Pricing Model, we can determine the discount rate equal to 0.06 + 2(0.15– 0.06) = 0.24. The dividends next year are expected to be $1.50 × 1.2 = $1.80.The present value of the future stock price and the future dividend are determinedby discounting the expected cash flows at the discount rate of 24%: (50 + 1.8)/ 1.24 = $41.77.
4 . Hodges Fundprovides mezzanine stage financing to private companies. In which type ofprivate equity investing is Hodges Fund most likely involved?
A)Venture capital.
B)Leveraged buyout.
C)Private investmentin public equity.
The correct answer was:A
Venture capitalproviders invest in firms that are early in their life cycles. Stages ofventure capital financing include seed stage, early stage, and mezzaninefinancing. In a leveraged buyout, an investor purchases all of a public firm’sequity, taking the firm private. In a private investment in public equity(PIPE), an investor purchases private equity issued by a public firm.
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