1 .A valuation model based on the cash flows that a firmwill have available to pay dividends in the future is best characterized asa(n):
A)free cash flow to thefirm model.
B)free cash flow toequity model.
C)infinite perioddividend discount model.
The correct answer was B
Free cash flow to equityrepresents a firm’s capacity to pay future dividends. A free cash flow toequity model estimates the firm’s FCFE for future periods and values the stockas the present value of the firm’s future FCFE per share.
2 . Private equitysecurities most likely:
A)are illiquid and donot have quoted prices.
B)trade inover-the-counter dealer markets.
C)are issued toindividual investors.
The correct answer was:A
Private equitysecurities are illiquid and do not trade in public securities markets. Holdersof private equity must negotiate with other investors to sell the securities.Private equity securities are typically issued to qualified institutionalinvestors.
3 . During thecontraction phase of the business cycle, how will an active portfolio managerusing an industry rotation strategy treat stocks of companies in a cyclicalindustry?
A)Maintain the targetweight of the industry.
B)Overweight theindustry.
C)Underweight theindustry.
The correct answer was C
A cyclical industry isone that is expected to outperform during an expansion and underperform in acontraction. The industry rotation strategy for a cyclical industry is tooverweight during an expansion and underweight during a contraction.
4 . Assume that at theend of the next year, Company A will pay a $2.00 dividend per share, anincrease from the current dividend of $1.50 per share. After that, the dividendis expected to increase at a constant rate of 5%. If an investor requires a 12%return on the stock, what is the value of the stock?
A)$30.00.
B)$31.78.
C)$28.57.
The correct answer was C
P0 = D1 / k ? g
D1 = $2
g = 0.05
k = 0.12
P0 = 2 / 0.12 ? 0.05 = 2/ 0.07 = $28.57
5 . If a firm’s growthrate is 12% and its dividend payout ratio is 30%, its current return on equity(ROE) is closest to:
A)17.14%.
B)40.00%.
C)36.00%.
The correct answer was:A
g = (RR)(ROE)
g / RR = ROE
0.12 / (1 - 0.30) = 0.12/ 0.70 = 0.1714 or 17.14%
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