conceptual questions (1)
.docx
keyboard_arrow_up
School
University of Washington *
*We aren’t endorsed by this school
Course
350
Subject
Finance
Date
Jan 9, 2024
Type
docx
Pages
6
Uploaded by MateMouse1766
Stock
1. What rights come with a share of stock?
2. Which two components make up the total return to an investor in a share of stock?
3. What does the dividend
discount
‐
model say about valuing shares of stock?
4. What is the relationship between the return from reinvesting cash flows and the change in the price
of the stock?
5. How can the dividend
discount
‐
model be used with changing growth rates in future dividends?
6. What are some of the drawbacks of the dividend
discount
‐
model?
7. What are the advantages of valuing a stock based on discounted free cash flows?
8. Explain the connection between the FCF valuation model and capital budgeting.
9. What is the intuition behind valuation by multiples and what are the major assumptions?
10. What are the limitations of valuation by multiples?
11. What is an efficient market?
12. How do interactions in a market lead to information being incorporated into stock prices?
13. Why does market efficiency lead a manager to focus on NPV and free cash flow?
Risk and Return
1. What does the historical relation between volatility and return tell us about investors’ attitude toward
risk?
2. What are the components of a stock’s realized return?
3. What is the intuition behind using the average annual return as a measure of expected return?
4. How does standard deviation relate to the general concept of risk?
5. How does the relationship between the average return and the historical volatility of individual stocks
differ from the relationship between the average return and the historical volatility of large, well
‐
diversified, portfolios?
6. Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything.
The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding that it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Assuming you are averse to risk, which bank would you prefer to own?
7. What is meant by diversification and how does it relate to common versus independent risk?
8. Which of the following risks of a stock are likely to be unsystematic, diversifiable risks and which are
likely to be systematic risks? Which risks will affect the risk premium that investors will demand?
a. The risk that the founder and CEO retires.
b. The risk that oil prices rise, increasing production costs.
c. The risk that a product design is faulty and the product must be recalled.
d. The risk that the economy slows, reducing demand for the firm’s products.
e. The risk that your best employees will be hired away.
f. The risk that the new product you expect your R&D division to produce will not materialize.
9. What is the difference between systematic and unsystematic risk?
10. There are three companies working on a new approach to customer tracking
‐
software. You work for a software company that thinks this could be a good addition to its software line. If you invest in one
of them versus all three of them:
a. Is your systematic risk likely to be very different?
b. Is your unsystematic risk likely to be very different?
11. If you randomly select 10 stocks for a portfolio and 20 other stocks for a different portfolio, which
portfolio is likely to have the lower standard deviation? Why?
12. Why doesn’t the risk premium of a stock depend on its diversifiable risk?
13. Your spouse works for Southwest Airlines and you work for a grocery store. Is your company or your spouse’s company likely to be more exposed to systematic risk?
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Related Questions
How will the change in required return influence the price of a stock? How will the dividend growth rate influence the price of a stock?
arrow_forward
Which of the following will increase the price of a stock?
Group of answer choices:
A. Decrease in the required rate of return
B. Decrease in the dividend growth rate
C. Delay in the payment of dividends
D. Decrease in earnings growth
arrow_forward
1. Is stock bonus a real dividend payment in principle?
2. Briefly describe the information signaling effect caused by dividend reduction announcement (in terms of assumption and market reaction)
arrow_forward
how do the upward trend and downward trend of share price(stock price changes) relates to the market efficiency (weak,semistrong,strong form)
chapter : market efficiency and behavioral finance
arrow_forward
Which of the following statements is true of the dividend growth model?
Multiple choice question.
It determines the current price of a stock as its current dividend, divided by the discount rate, less the dividend growth rate.
It determines the current price of a stock as its dividend next period, divided by the discount rate, less the dividend growth rate.
It determines the current price of a stock as its dividend next period, divided by the discount rate, plus the dividend growth rate.
It determines the current price of a stock as its current dividend, divided by the discount rate, plus the dividend growth rate.
arrow_forward
Which of the following statements is true of the dividend growth model?
Multiple choice question.
It determines the current price of a stock as its dividend next period, divided by the discount rate, less the dividend growth rate.
It determines the current price of a stock as its current dividend, divided by the discount rate, less the dividend growth rate.
It determines the current price of a stock as its dividend next period, divided by the discount rate, plus the dividend growth rate.
It determines the current price of a stock as its current dividend, divided by the discount rate, plus the dividend growth rate.
arrow_forward
Which of the following statements is true of the dividend growth model?
Multiple choice question.
It determines the current price of a stock as its current dividend, divided by the discount rate, plus the dividend growth rate.
It determines the current price of a stock as its dividend next period, divided by the discount rate, plus the dividend growth rate.
It determines the current price of a stock as its dividend next period, divided by the discount rate, less the dividend growth rate.
It determines the current price of a stock as its current dividend, divided by the discount rate, less the dividend growth rate.
arrow_forward
Which of the following statements is true of the dividend growth model?
Multiple choice question.
It determines the current price of a stock as its dividend next period, divided by the discount rate, plus the dividend growth rate.
It determines the current price of a stock as its current dividend, divided by the discount rate, plus the dividend growth rate.
It determines the current price of a stock as its dividend next period, divided by the discount rate, less the dividend growth rate.
It determines the current price of a stock as its current dividend, divided by the discount rate, less the dividend growth rate.
arrow_forward
Which one of the following is an underlying assumption of the dividend growth model?
- A stock's value changes in direct relation to the required return.
- A stock has the same value to every investor.
- The dividend growth rate is inversely related to a stock's market price.
- A stock's value is equal to the discounted present value of the future cash flows that it generates.
- Stocks that pay the same annual dividend have equal market values.
arrow_forward
Explain how to find the value of a stock given itslast dividend, its expected growth rate, and itsrequired rate of return.
arrow_forward
When liabilites increase and stock holder equity decreases, what is the total assets?
shouldn't it be total liabilites plus total stock holder equity=total assets?
arrow_forward
Which of the following represents the value of a stock calculated using the zero-growth model?
Multiple choice question.
(Dividends)Discount rate
Dividends / Discount rate
Dividends × Discount rate
Discount rate / Dividends
arrow_forward
Based on the dividend growth model, what are the two components of a stock’s rate of return?
arrow_forward
Dividend Policy and Retained Earnings
The year is 2002 and you are an investor in a company called
"Amazon." You are attending an annual shareholder meeting, where
their founder Jeff is talking about building warehouses all around the
country. The meeting progresses to the Q&A section and it's clear the
shareholders are not pleased with the lack of dividends so far. Listen
to their concerns and offer advice on Amazon's dividend policy.
arrow_forward
When is it appropriate to use the dividend valuation models, such as the Zero Growth Model, constant growth model and variable growth model, in estimating the price of a stock?
arrow_forward
Illustrate the impact of changes in the dividend, the growth rate, the expected return on the market, and the beta on the value of a stock.
arrow_forward
"The dividend discount model is used to find the price of a stock based on the expected dividends received by the shareholder and the discount rate. Therefore, all else constant, the price of a share of stock will increase if the discount rate decreases."
A) True
B) False
arrow_forward
How does one calculate the capital gains yield and the dividendyield of a stock?
arrow_forward
Which of the following best describes what investors in shares seek compensation for?
The risk-free rate of return plus time value of money
OA.
O B.
The loss of interest on a building society account plus the dividend yield on shares
Inflation and risk only
OC
Sacrifice of immediate use of cash otherwise available for consumption, inflation and risk
OD.
arrow_forward
SEE MORE QUESTIONS
Recommended textbooks for you
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Related Questions
- How will the change in required return influence the price of a stock? How will the dividend growth rate influence the price of a stock?arrow_forwardWhich of the following will increase the price of a stock? Group of answer choices: A. Decrease in the required rate of return B. Decrease in the dividend growth rate C. Delay in the payment of dividends D. Decrease in earnings growtharrow_forward1. Is stock bonus a real dividend payment in principle? 2. Briefly describe the information signaling effect caused by dividend reduction announcement (in terms of assumption and market reaction)arrow_forward
- how do the upward trend and downward trend of share price(stock price changes) relates to the market efficiency (weak,semistrong,strong form) chapter : market efficiency and behavioral financearrow_forwardWhich of the following statements is true of the dividend growth model? Multiple choice question. It determines the current price of a stock as its current dividend, divided by the discount rate, less the dividend growth rate. It determines the current price of a stock as its dividend next period, divided by the discount rate, less the dividend growth rate. It determines the current price of a stock as its dividend next period, divided by the discount rate, plus the dividend growth rate. It determines the current price of a stock as its current dividend, divided by the discount rate, plus the dividend growth rate.arrow_forwardWhich of the following statements is true of the dividend growth model? Multiple choice question. It determines the current price of a stock as its dividend next period, divided by the discount rate, less the dividend growth rate. It determines the current price of a stock as its current dividend, divided by the discount rate, less the dividend growth rate. It determines the current price of a stock as its dividend next period, divided by the discount rate, plus the dividend growth rate. It determines the current price of a stock as its current dividend, divided by the discount rate, plus the dividend growth rate.arrow_forward
- Which of the following statements is true of the dividend growth model? Multiple choice question. It determines the current price of a stock as its current dividend, divided by the discount rate, plus the dividend growth rate. It determines the current price of a stock as its dividend next period, divided by the discount rate, plus the dividend growth rate. It determines the current price of a stock as its dividend next period, divided by the discount rate, less the dividend growth rate. It determines the current price of a stock as its current dividend, divided by the discount rate, less the dividend growth rate.arrow_forwardWhich of the following statements is true of the dividend growth model? Multiple choice question. It determines the current price of a stock as its dividend next period, divided by the discount rate, plus the dividend growth rate. It determines the current price of a stock as its current dividend, divided by the discount rate, plus the dividend growth rate. It determines the current price of a stock as its dividend next period, divided by the discount rate, less the dividend growth rate. It determines the current price of a stock as its current dividend, divided by the discount rate, less the dividend growth rate.arrow_forwardWhich one of the following is an underlying assumption of the dividend growth model? - A stock's value changes in direct relation to the required return. - A stock has the same value to every investor. - The dividend growth rate is inversely related to a stock's market price. - A stock's value is equal to the discounted present value of the future cash flows that it generates. - Stocks that pay the same annual dividend have equal market values.arrow_forward
- Explain how to find the value of a stock given itslast dividend, its expected growth rate, and itsrequired rate of return.arrow_forwardWhen liabilites increase and stock holder equity decreases, what is the total assets? shouldn't it be total liabilites plus total stock holder equity=total assets?arrow_forwardWhich of the following represents the value of a stock calculated using the zero-growth model? Multiple choice question. (Dividends)Discount rate Dividends / Discount rate Dividends × Discount rate Discount rate / Dividendsarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub