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Corporate Finance (Berk/DeMarzo) Chapter 9 - Valuing Stocks

9.1 Stock Prices, Returns, and the Investment Horizon 1) Which of the following statements is false? A) There are two potential sources of cash flows from owning a stock. B) An investor will be willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV. C) An investor might generate cash by choosing to sell the shares at some future date. D) Because the cash flows from stock are known with certainty, we can discount them using the risk-free interest rate. Answer: D Explanation: A) B) C) D) Because these cash flows are risky, we cannot discount them using the risk-free interest rate.
Diff: 1 Topic: 9.1 Stock Prices, Returns, and the
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You expect Von Bora 's stock price to be $25.00 at the end of two years. Von Bora 's equity cost of capital is 10% 9) The price you would be willing to pay today for a share of Von Bora stock, if you plan to hold the stock for two years is closest to: A) $23.15 B) $20.65 C) $21.95 D) $21.90 Answer: A Div1 Div2  P2 Explanation: A) 1.50  25.00 1.40 P0 = + = + = $23.17 1  rE 1  .10 (1  rE )2 (1  .10)2 B) C) D)
Diff: 1 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon S k i l l : A n a l y t i c a l

10) Suppose you plan to hold Von Bora stock for one year. The price would would expect to be able to sell a share of Von Bora stock in one year is closest to: A) $26.50 B) $22.70 C) $23.15 D) $24.

Suppose you plan to hold Von Bora stock for only one year. Your capital gain from holding Von Bora stock for the first year is closest to: A) $0.95 B) $1.40 C) A) Capital Gain = P1 - P0 = 24.10 - 23.17 = $0.93 B) C) D)
Diff: 2 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon Skill: Analytical

12) Suppose you plan to hold Von Bora stock for only one year. Your capital gain rate from holding Von Bora stock for the first year is closest to: A) 3.5% B) 4.0% C) 6.0% D) 4.5% Answer: B Explanation: A) Div2  P2 1.50  25.00 B) P1 = = = $24.10 1 (1  .10) (1  rE ) P0 =

Div1 Div2  P2 1.50  25.00 1.40 + = + = $23.17 2 1  rE 1  .10 (1  rE ) (1  .10)2

Capital Gain = P1 - P0 = 24.10 - 23.17 = $0.93 Capital Gain rate = capital gain/ P0 =

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