Question 1 - 104128 In its most recent quarterly earnings report, Smith Brothers Garden Supplies said it planned to increase its dividend at an annualized rate of 13% over the next five years. Analyst Clinton Spears has an annual return target of 15.5% for Smith Brothers stock. He decides to use the dividend-growth rate to back out another return estimate to test against his. Smith Brothers stock trades for $55 per share and earned $3.01 per share over the last 12 months. The company paid a dividend of $2.15 per share during the 12-month period, and its dividend-growth rate for the last five years was 9.2%. Using the Gordon Growth model, the required annual return for Smith Brothers stock is closest to: A) 13.47%. B) 17.42%. C) 19.18%. -------------------------------------------------------------------------------- Question 2 - 88545 Which of the following statements about multifactor models is FALSE? A) Beta measures the sensitivity of the returns to each factor. B) The momentum, size, and value effects can easily be adapted to a global context. C) The random term in the equation represents diversifiable risk. -------------------------------------------------------------------------------- Question 3 - 87762 Given that a firm’s current dividend is $2.00, the forecasted growth is 7% for the next two years and 5% thereafter, and the current value of the firm’s shares is $54.50, what is the required rate of return? A) Can’t be determined. B) 9%. C) 10%. -------------------------------------------------------------------------------- Question 4 - 88490 Wavington Enterprises is headquartered in an emerging market nation that is expected to have 27% inflation over the next year. Charleston Johnson expects the local government to be successful in bringing inflation under control, and anticipates that it will fall to 20% in the second year and 10% in the third year, where he expects inflation to stabilize. Johnson is considering an investment in Wavington, and has calculated the real weighted average cost of capital (WACC) for Wavington at 8%. Johnson states: Statement 1: The nominal WACC for Wavington next year is 35%. Statement 2: The firm value will be approximately the same using either the real or nominal approach to valuation. With respect to these statements: A) only one is correct. B) both are incorrect. C) both are correct. -------------------------------------------------------------------------------- Question 5 - 87833 Supergro has current dividends of $1, current earnings of $3, and a return on equity of 16%, what is its sustainable growth rate? A) 10.7%. B) 12.2%. C) 8.9%. -------------------------------------------------------------------------------- Question 6 - 104118 Joel Mason, owner of a ball-bearing factory in Cleveland, finds two interesting stories while reading The Wall Street Journal at breakfast. He reads that the government instituted a tariff on imported bearings, and that overall sales of ball bearings in the region rose 18% over the last year. Of the two changes mentioned above, which are likely to have a positive effect on Mason’s company over the long run? A) The newly passed tariff. B) The higher industry growth rate. C) Neither of them. -------------------------------------------------------------------------------- Question 7 - 87859 Applying the Gordon growth model to value a firm experiencing supernormal growth would result in: A) a zero value. B) overstating the value of the firm. C) understating the value of the firm. -------------------------------------------------------------------------------- Question 8 - 104011 While having lunch with a group of friends, Francine Lenser, CFA, was overheard saying the following: “The recent boom in technological advances should keep the economy growing. Whenever the economy slows, someone will come along with a bold new idea that kick-starts it.” Lenser’s statement most accurately reflects the: A) exogenous growth theory. B) neoclassical growth theory. C) new growth theory. -------------------------------------------------------------------------------- Question 9 - 88638 There are five firms in an industry. The market shares for firms one through five are 10%, 15%, 20%, 25%, and 30%, respectively. The Herfindahl index for the: A) industry is low, suggesting intense competition. B) two largest firms in the industry is 0.152. C) industry is 0.225. -------------------------------------------------------------------------------- Question 10 - 88647 Outside forces impact industries in various ways. Analysts need to concentrate on how these outside forces might affect an industry over a three- to five-year horizon. Which of the following is NOT a force that can have an industry-specific impact? A) Technology. B) Business Cycle. C) Demographics. -------------------------------------------------------------------------------- Question 11 - 89461 An analyst has forecasted dividend growth for Triple Crown, Inc., to be 8% for the next two years, declining to 5% over the following three years, and then remaining at 5% thereafter. If the current dividend is $4.00, and the required return is 10%, what is the current value of Triple Crown shares based on a three-stage model? A) $73.68. B) $91.11. C) $92.23. -------------------------------------------------------------------------------- Question 12 - 104130 Zephraim Axelrod, CFA, is trying to determine whether Allegheny Mining is a good investment. He decides to use the Gordon Growth model to calculate how much dividend growth shareholders can expect. To that end, he determines the following: Share price: $18.12. Dividend: $0.32 per share. Beta: 1.94. Industry average estimated returns: 15%. Risk-free rate: 5.5%. Equity risk premium: 6.3% Based only on the information above, the implied dividend growth rate is closest to: A) 15.68%. B) 10.27%. C) 19.89%. -------------------------------------------------------------------------------- Question 13 - 88653 Which of the following is NOT a factor that affects industry pricing practices? A) Ease of industry entry. B) Product convexity. C) Product segmentation. -------------------------------------------------------------------------------- Question 14 - 88644 According to Porter, there are two fundamental questions that determine competitive strategy. Of these two questions, the one that the firm has the most control over is whether the: A) firm can position itself to have a competitive advantage. B) industry is profitable. C) industry is attractive. -------------------------------------------------------------------------------- Question 15 - 87852 GreenGrow, Inc., has current dividends of $2.00, current earnings of $4.00 and a return on equity of 16%. What is GreenGrow’s sustainable growth rate? A) 9%. B) 6%. C) 8%.
- A 2) A 3) B 4) A 5) A 6) C 7) B 8) A 9) B 10) C 11) C 12) A 13) B 14) A 15) C These were harder. Medium level?
Question 1 - 104128 A) 13.47 2.15 * 1.092 / 55 + 0.092 = 13.47 -------------------------------------------------------------------------------- Question 2 - 88545 C) The random term in the equation represents diversifiable risk. -------------------------------------------------------------------------------- Question 3 - 87762 B) 9%. D0=2 D1 = 2.14 D2 = 2.29 P3 onwards = 2.29 * 1.05 / (r-0.05) = 2.40 / (r-0.05) 2.14/(1+r) + 2.29 / (1+r)^2 + 2.4/(r-0.05) ( 1+r)^2 = 54.5 Substitute 9% -> 1.96 + 1.93 + 50.5 -> 54.39 ->> so 9% Choice B -------------------------------------------------------------------------------- Question 4 - 88490 A) only one is correct. Nominal wacc = (1+.08)(1.27) -1 = 37.16% so Statement 1 is false. Statement 2 is correct. -------------------------------------------------------------------------------- Question 5 - 87833 A) 10.7%. DPR=1/3 = 33% Retention Ratio=67% ROE=16% G = 16% * 67% = 10.72% Choice A -------------------------------------------------------------------------------- Question 6 - 104118 C) Neither of them. -------------------------------------------------------------------------------- Question 7 - 87859 B) overstating the value of the firm. -------------------------------------------------------------------------------- Question 8 - 104011 B) neoclassical growth theory. -------------------------------------------------------------------------------- Question 9 - 88638 C) industry is 0.225. -------------------------------------------------------------------------------- Question 10 - 88647 C) Demographics. -------------------------------------------------------------------------------- Question 11 - 89461 C) $92.23. D0=4 D1=4.32 D2=4.67 + 102.27 (from below). Use H-Model for next 3 + beyond years: 4.67 * (0.08 - 0.05) * 1.5 / (0.10 - 0.05) + 4.67 * 1.05 / (0.10 - 0.05) = 4.20 + 98.07 = 102.27 -> at P2 Now apply the regular model: 92.30 -> Choice C -------------------------------------------------------------------------------- Question 12 - 104130 A) 15.68%. rce = 5.5 + 1.94 * 6.3 = 17.72% 0.32 * (1+g) / (0.1772 ¡V g) = 18.12 Solve for g: 15.735 -> Choice A -------------------------------------------------------------------------------- Question 13 - 88653 A) Ease of industry entry. -------------------------------------------------------------------------------- Question 14 - 88644 A) firm can position itself to have a competitive advantage. -------------------------------------------------------------------------------- Question 15 - 87852 C) 8%. 50% RR * 16% ROE = 8%
crap… I think they were hard. Q1. A 0.13468727 Q2.C Q3.B Q4.A S1: is it WACC(nominal) = 10.160? S2:TRUE; though ‘approximately’ makes me doubtful - ideally they should be ‘exactly’ same Q5. A 0.666667*0.16 = 0.10666672 Q6.A (tariff helps the domestic industry on which the tariff is levied) Q7.B Q8.C Q9.C HHI(all 5) = 0.225 Q10. B Q11.C 92.22664463 Q12.A Q13.A Q14.A Q15.C 0.08
These are all still easy.
1 B 2 B 3 B 4 C 5 A 6 B 7 C 8 C 9 C 10 B 11 C 12 A 13 B 14 A 15 C
Question 1 - #104128 Your answer: B was correct! The Gordon Growth model is as follows: Price = [dividend × (1 + dividend growth rate)] / [required return − growth rate] 55 = [2.15 × 1.13] / [required return − 0.13] 55 = 2.4295 / [required return − 0.13] 22.6384 = 1 / [required return − 0.13] [Required return − 0.13] = 0.04417 Required return = 0.17417 = 17.42% This question tested from Session 11, Reading 41, LOS e. -------------------------------------------------------------------------------- Question 2 - #88545 Your answer: B was correct! Extreme caution must be taken with modeling the momentum, size, and value effects since different countries use different criteria in assessing variables such as size. This question tested from Session 11, Reading 37, LOS g. -------------------------------------------------------------------------------- Question 3 - #87762 Your answer: B was correct! The equation to determine the required rate of return is solved through iteration. $54.50 = $2(1.07) / (1 + r) + $2(1.07)2 / (1 + r)2 + {[$2(1.07)2(1.05)] / (r - 0.05)} / [(1 + r)2 Through iteration, r = 9% This question tested from Session 11, Reading 41, LOS n, (Part 2). -------------------------------------------------------------------------------- Question 4 - #88490 Your answer: C was incorrect. The correct answer was A) only one is correct. The nominal WACC for Wavington next year is (1.27 × 1.08) – 1 = 37.2%, not 35%. Johnson is incorrect regarding Statement 1. He is correct regarding Statement 2 that the nominal and real valuation approaches will produce approximately the same result. This question tested from Session 11, Reading 40, LOS b. -------------------------------------------------------------------------------- Question 5 - #87833 Your answer: A was correct! g = (1 – 1/3)(0.16) = 0.107 This question tested from Session 11, Reading 41, LOS o, (Part 1). -------------------------------------------------------------------------------- Question 6 - #104118 Your answer: B was incorrect. The correct answer was C) Neither of them. Neither of the issues presented are likely to have any long-term effect on the company, as the market generally responds to such changes and finds a new equilibrium. High growth rates tend to attract more competitors, and the effectiveness of tariffs is questionable even in the short term. This question tested from Session 11, Reading 38, LOS c. -------------------------------------------------------------------------------- Question 7 - #87859 Your answer: C was incorrect. The correct answer was B) overstating the value of the firm. Applying the Gordon growth model to such a firm would result in an estimate of value based on the assumption that the supernormal growth would continue indefinitely. This would overstate the value of the firm. This question tested from Session 11, Reading 41, LOS i. -------------------------------------------------------------------------------- Question 8 - #104011 Your answer: C was correct! Lenser’s statement is a decent layman’s description of the new growth theory, also known as the endogenous growth theory. This theory argues that economic growth can continue indefinitely as long as technological advances are made. This question tested from Session 11, Reading 37, LOS b. -------------------------------------------------------------------------------- Question 9 - #88638 Your answer: C was correct! A Herfindahl index of more than 0.18 is an indication of low competition (concentrated industry players) in the industry. A Herfindahl index of less than 0.1 is an indication of intense competition in the industry. This question tested from Session 11, Reading 37, LOS c. -------------------------------------------------------------------------------- Question 10 - #88647 Your answer: B was correct! The outside forces that have an impact on industries include technology, government, social changes, demographics and foreign influences. The business cycle can have a differing effect across industries, but it is not industry-specific. This question tested from Session 11, Reading 39, LOS d. -------------------------------------------------------------------------------- Question 11 - #89461 Your answer: C was correct! V0 = $4(1.08) / 1.10 + $4(1.08)2 / (1.10)2 + [$4(1 + 0.08)2(3/2)(0.08 – 0.05) + $4(1.08)2(1.05)] / [(1.10)2(0.10 – 0.05)] = $92.23 This question tested from Session 11, Reading 41, LOS m. -------------------------------------------------------------------------------- Question 12 - #104130 Your answer: A was correct! We have the price and dividend. We need the required rate of return to use the Gordon Growth model to calculate implied dividend growth. Using the capital asset pricing model, the required return = risk-free rate + (beta × equity risk premium) = 17.72%. Price = [dividend × (1 + dividend growth rate)] / [required return − growth rate] 18.12 = [0.32 × (1 + dividend growth rate)] / [0.1772 − dividend growth rate] 18.12 × [0.1772 − dividend growth rate] = 0.32 + 0.32 × dividend growth rate 3.2112 − 18.12 × dividend growth rate = 0.32 + 0.32 × dividend growth rate 2.8912 = 18.44 × dividend growth rate 1 = 6.3779 × dividend growth rate Dividend growth rate = 15.68% This question tested from Session 11, Reading 41, LOS e. -------------------------------------------------------------------------------- Question 13 - #88653 Your answer: B was correct! Product convexity is not a factor that affects industry pricing practices. The four factors that affect industry pricing practices include product segmentation, the degree of industry concentration, the ease of industry entry, and price changes in key supply inputs. This question tested from Session 11, Reading 39, LOS f. -------------------------------------------------------------------------------- Question 14 - #88644 Your answer: A was correct! The firm typically has little control over the industry’s long-term attractiveness, but it has a great deal of control over its choice of competitive position. This question tested from Session 11, Reading 38, LOS e. -------------------------------------------------------------------------------- Question 15 - #87852 Your answer: C was correct! GreenGrow’s sustainable growth rate is 8%. g = 1 – ($2/$4) = 8% This question tested from Session 11, Reading 41, LOS o, (Part 1).
10/15 … OUCH!!! Stuff I got wrong: Question 1 - 104128 A) 13.47 2.15 * 1.092 / 55 + 0.092 = 13.47 WRONG … .should have used the new rate of 13% for g instead… 17.42% B is the right answer. -------------------------------------------------------------------------------- Question 2 - 88545 WRONG C) The random term in the equation represents diversifiable risk. Momentum, Value, Size effects. Extreme caution must be taken with modeling the momentum, size, and value effects since different countries use different criteria in assessing variables such as size. Question 8 - 104011 WRONG B) neoclassical growth theory. New growth theory is the right answer. Question 10 - 88647 WRONG C) Demographics. Business Cycle is the right answer. Question 13 - 88653 WRONG A) Ease of industry entry. Product Convexity Product convexity is not a factor that affects industry pricing practices. The four factors that affect industry pricing practices include product segmentation, the degree of industry concentration, the ease of industry entry, and price changes in key supply inputs.
If easy questions are getting me this kind of score (11/15), then I think I should do a favour for myself and show-up for the exam.
swap atleast you got over 70%. I bet BlueCollarHero is going to be the only one who passes this thing.
BiPolarBoyBoston Wrote: ------------------------------------------------------- > swap atleast you got over 70%. > > I bet BlueCollarHero is going to be the only one > who passes this thing. Yeah I don’t know about that BPB…I guesses on some… on another note are you going to the stalla thing tomorrow?
I’m long on the following AFers passing; CPK, Swap, Banni, Bluecollar, Bipolar, Ali, projectp, tvPM,
please remove me from this list immediately.
word
Yeah I’m going to the Stella thing. Hopefully learn a thing or two. I understand the basic stuff of everything but once you go deep I helpless as a kid w/ADD in english class.
BiPolarBoyBoston Wrote: ------------------------------------------------------- > Yeah I’m going to the Stella thing. Hopefully > learn a thing or two. > > I understand the basic stuff of everything but > once you go deep I helpless as a kid w/ADD in > english class. yeah same here…I will be there as well. I will be the 6’2 construction worker with a hard hat, old jeans, work boots and a flannel shirt.
O Blue, ya from Boston? I’m the nerdy looking guy. O yea i’m also Bipolar but undiagnosed.
That Stalla class is tonight for me. I’ll reply regarding how good it is.
BiPolarBoyBoston Wrote: ------------------------------------------------------- > O Blue, ya from Boston? > > I’m the nerdy looking guy. O yea i’m also Bipolar > but undiagnosed. yes in Boston the nerdy looking guy, that should be easy to spot in Boston… DD, I will appreciate the low down on the class…
Reporting live via mobile. Class is worthwhile. 30 min pitch for stalla stuff. I’m impressed. But, a there is a total db in the class who had to ask about porter.