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A share of common stock has just paid a dividend of $2. If the expected long-run growth rate for this stock is 15%, and if investors require a 19% rate of return, what is the price of the stock? 

  1. $57.50
  2. $62.25
  3. $71.86
  4. $64.00
  5. $44.92



A common source of error in estimating dividend growth rates is 

  1. Mathematical errors committed by stock analysts.
  2. The erratic earnings records of many firms.
  3. The fact that growth rate predictions must be based on historical information.
  4. Analysts' lack of training in modern forecasting techniques.
  5. The fact that the Gordon growth model cannot be applied to 'real world' situations.


If the average PE ratio for the construction industry is 15 and earnings per share for Lincoln Builders is $2.35, what is the current price of Lincoln's stock? 

  1. $17.35
  2. $ 6.38
  3. $35.25
  4. $ 0.16
  5. $17.63


Preferred stock is valued as if it were 

  1. a fixed-income obligation.
  2. a bond.
  3. a perpetuity.
  4. a common stock.


As risk aversion increases 

  1. A firm's beta will increase.
  2. Investors' required rate of return will increase.
  3. A firm’s beta will decrease.
  4. Investors' required rate of return will decrease.


The graph of the Capital Asset Pricing Model (CAPM) that relates the beta of a stock to its required return is called the 

  1. Characteristic line.
  2. Capital market line.
  3. Risk/return profile.
  4. Line of least resistance.
  5. Security market line.



War, inflation, and the condition of the foreign markets are all examples of 

  1. Diversifiable risk.
  2. Non-diversifiable risk.
  3. Economic risk.
  4. Unsystematic.


The _________________ standardizes the standard deviation to make assets with different returns comparable. 

  1. standard deviation
  2. variance
  3. coefficient of determination
  4. coefficient of variation
  5. None of the above.



Inflation, recession, and high interest rates are economic events which are characterized as 

  1. Company specific risk that can be diversified away.
  2. Market risk.
  3. Systematic risk that can be diversified away.
  4. Diversifiable risk.
  5. Unsystematic risk that can be diversified away.


Which of the following statements is true? 

  1. Risk-averse investors prefer securities with high standard deviations.
  2. If the returns from a security are normally distributed, 86% of the observations fall within one standard deviation of the expected value.
  3. Standard deviations should not be used to compare the risk of two securities that have different expected returns.
  4. Calculus of variations (CV) adjusts standard deviations to compare the risk of securities with different expected returns.
  5. Standard deviations can be computed for stock returns, but not for bond yields.


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