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Question:
A well‐functioning securities market is likely to be relatively liquid.
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Ian Goode, CFA, is analyzing the price of the preferred stock of MegaGym. Goode estimates that MegaGym's earnings growth rate over the next five years will be 20%, and that MegaGym's earnings will then grow at a sustainable rate of 5%. The most appropriate method for Goode to value MegaGym's preferred stock is to:
divide the preferred dividend by the required rate of return on MegaGym’s preferred stock.
An analyst classifies Mettler, Inc., an operator of retail grocery stores, in the same industry group as Powell Corporation, a manufacturer of industrial machinery. This analyst’s classification system is most likely based on:
statistical methods.
Under which of the following conditions are market values of securities most likely to be persistently greater than their intrinsic values?
Short selling is restricted.
Evelyn Stram, CFA, places a good-till-cancelled limit buy order at 86 for a stock. Strain’s order specifies:
validity and execution instructions.
A firm has a constant growth rate of 7% and just paid a dividend of $6.25. If the required rate of return is 12%, what will the stock sell for two years from now based on the dividend discount model?
$153.13.
An electronic crossing network is best described as:
an order-driven market.
Consider the following statements: Statement 1: Commercial industry classification systems are reviewed and updated less frequently than government industry classification systems. Statement 2: Commercial industry classification systems do not distinguish between for-profit and not‐for‐profit organizations. Which of the following is most likely?
Both statements are incorrect.
A contract that requires one party to pay $ 100,000 each quarter to another company that will make a variable quarterly payment based on the market value of an equities portfolio is referred to as:
a swap.
Sacco Inc. has nine directors on its board. Board members serve 3-year terms, and three seats are elected annually using a cumulative voting system. If an investor owns 1,000 shares of Sacco common stock, what is the maximum number of votes the investor may cast for one board candidate?
3,000.
Robert Higgins is estimating the price-earnings (P/E) ratio that will be appropriate for an index at the end of next year. He has estimated that:•Expected annual dividends will increase by 10% compared to this year. Expected earnings per share will increase by 10% compared to this year.The expected growth rate of dividends will be the same as the current estimate of 5%.• The required rate of return will rise from 8% to 11%.Compared to the current P/E, the end-of-the-year P/E will be:
50% lower.
An analyst determines that a company has a return on equity of 16% and pays 40% of its earnings in dividends. If the firm recently paid a $1.50 dividend and the stock is selling for $40, what is the required rate of return on the stock if it is priced according to the dividend discount model?
13.7%.
Ron Egan, CFA, classifies firms in the transportation industry in peer groups that include airlines and bus operators. Egan learns that one of the airlines, Acme, derives half its revenue from its Acme Bus Lines subsidiary. Egan adds Acme to his peer group for bus operators while continuing to include Acme in his peer group for airlines. Is Egan’s treatment of Acme appropriate?
Yes.
If the analyst estimates that the selling price of the company’s stock after one year will be $43, the value of the company’s common stock today is closest to:
$41.
Archer Products is in an industry that has experienced low levels of price competition but recently excess capacity has led to aggressive price cutting. An analyst would be least likely to describe Archer’s industry as:
in the maturity stage with high barriers to entry.
Kate Johnson, CFA, owns shares of a stock that currently trades at $15. If Johnson wants to buy more shares if the price increases to $17, she should enter a:
stop buy order at $17.
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