Question 1

The most popular approach to forecasting the overall stock market is to use

Accepted Answer

A) the dividend multiplier. 
B) the aggregate return on assets. 
C) the historical ratio of book value to market value. 
D) the aggregate earnings multiplier. 
A) the dividend multiplier. 
B) the aggregate return on assets. 
C) the historical ratio of book value to market value. 
D) the aggregate earnings multiplier. D

Question 2

________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities).

Accepted Answer

A) Book value per share 
B) Liquidation value per share 
C) Market value per share 
D) Tobin's Q 
A) Book value per share 
B) Liquidation value per share 
C) Market value per share 
D) Tobin's Q D

Question 3

The ______ is a common term for the market consensus value of the required return on a stock.

Accepted Answer

A) dividend payout ratio 
B) intrinsic value 
C) market capitalization rate 
D) plowback rate 
A) dividend payout ratio 
B) intrinsic value 
C) market capitalization rate 
D) plowback rate C

Question 4

Midwest Airline is expected to pay a dividend of $7 in the coming year.Dividends are expected to grow at the rate of 15% per year.The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%.The stock of Midwest Airline has a beta of 3.00.The return you should require on the stock is

Accepted Answer

A) 10%. 
B) 18%. 
C) 30%. 
D) 42%. 
A) 10%. 
B) 18%. 
C) 30%. 
D) 42%.

Question 5

The most appropriate discount rate to use when applying a FCFF valuation model is the

Accepted Answer

A) required rate of return on equity. 
B) WACC. 
C) risk-free rate. 
D) required rate of return on equity or risk-free rate, depending on the debt level of the firm. 
A) required rate of return on equity. 
B) WACC. 
C) risk-free rate. 
D) required rate of return on equity or risk-free rate, depending on the debt level of the firm.

Question 6

The growth in per share FCFE of CBS, Inc.is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years.After this five-year period, the growth in per share FCFE is expected to be 2% per year, indefinitely.The required rate of return on CBS, Inc.is 12%.Last year's per share FCFE was $2.00.What should the stock sell for today?

Accepted Answer

A) $8.99 
B) $22.51 
C) $40.00 
D) $25.21 
A) $8.99 
B) $22.51 
C) $40.00 
D) $25.21

Question 7

Which of the following is the best measure of the floor for a stock price?

Accepted Answer

A) Book value 
B) Liquidation value 
C) Replacement cost 
D) Market value 
A) Book value 
B) Liquidation value 
C) Replacement cost 
D) Market value

Question 8

The _______ is defined as the present value of all cash proceeds to the investor in the stock.

Accepted Answer

A) dividend-payout ratio 
B) intrinsic value 
C) market-capitalization rate 
D) plowback ratio 
A) dividend-payout ratio 
B) intrinsic value 
C) market-capitalization rate 
D) plowback ratio

Question 9

Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year.Dividends are expected to grow at the rate of 6% per year.The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%.The stock of Torque Corporation has a beta of 1.2. What is the intrinsic value of Torque's stock?

Accepted Answer

A) $14.29 
B) $14.60 
C) $12.33 
D) $11.62 
A) $14.29 
B) $14.60 
C) $12.33 
D) $11.62

Question 10

Assume that Bolton Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid.After that, the dividend is expected to increase at a constant rate of 5%.If you require a 12% return on the stock, the value of the stock is

Accepted Answer

A) $28.57. 
B) $28.79. 
C) $30.00. 
D) $31.78. 
A) $28.57. 
B) $28.79. 
C) $30.00. 
D) $31.78.

Question 11

The market-capitalization rate on the stock of Flexsteel Company is 12%.The expected ROE is 13%, and the expected EPS are $3.60.If the firm's plowback ratio is 50%, the P/E ratio will be

Accepted Answer

A) 7.69. 
B) 8.33. 
C) 9.09. 
D) 11.11. 
A) 7.69. 
B) 8.33. 
C) 9.09. 
D) 11.11.

Question 12

Consider the free cash flow approach to stock valuation.F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year.The firm's corporate tax rate is 40%.It is expected that $250,000 of operating cash flow will be invested in new fixed assets.Depreciation for the year will be $125,000.After the coming year, cash flows are expected to grow at 7% per year.The appropriate market capitalization rate for unleveraged cash flow is 13% per year.The firm has no outstanding debt.The total value of the equity of F&G Manufacturing Company should be

Accepted Answer

A) $1,615,156.50. 
B) $2,479,168.95. 
C) $3,333,333.33. 
D) $4,166,666.67. 
A) $1,615,156.50. 
B) $2,479,168.95. 
C) $3,333,333.33. 
D) $4,166,666.67.

Question 13

A company paid a dividend last year of $1.75.The expected ROE for next year is 14.5%.An appropriate required return on the stock is 10%.If the firm has a plowback ratio of 75%, the dividend in the coming year should be

Accepted Answer

A) $1.80. 
B) $2.12. 
C) $1.77. 
D) $1.94. g = .145 *.75 = 10.875%; $1.75(1.10875) = $1.94. 
A) $1.80. 
B) $2.12. 
C) $1.77. 
D) $1.94. g = .145 *.75 = 10.875%; $1.75(1.10875) = $1.94.

Question 14

An analyst has determined that the intrinsic value of HPQ stock is $20 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of HPQ in the coming year is

Accepted Answer

A) $3.63. 
B) $4.44. 
C) $0.80. 
D) $22.50. $20(1/25) = $0.80. 
A) $3.63. 
B) $4.44. 
C) $0.80. 
D) $22.50. $20(1/25) = $0.80.

Question 15

Mature Products Corporation produces goods that are very mature in their product life cycles.Mature Products Corporation is expected to pay a dividend in year 1 of $2.00, a dividend of $1.50 in year 2, and a dividend of $1.00 in year 3.After year 3, dividends are expected to decline at a rate of 1% per year.An appropriate required rate of return for the stock is 10%.The stock should be worth

Accepted Answer

A) $9.00. 
B) $10.57. 
C) $20.00. 
D) $22.22. 
A) $9.00. 
B) $10.57. 
C) $20.00. 
D) $22.22.

Question 16

If a firm has a required rate of return equal to the ROE,

Accepted Answer

A) the firm can increase market price and P/E by retaining more earnings. 
B) the firm can increase market price and P/E by increasing the growth rate. 
C) the amount of earnings retained by the firm does not affect market price or the P/E. 
D) the firm can increase market price and P/E by retaining more earnings and increasing the growth rate. 
A) the firm can increase market price and P/E by retaining more earnings. 
B) the firm can increase market price and P/E by increasing the growth rate. 
C) the amount of earnings retained by the firm does not affect market price or the P/E. 
D) the firm can increase market price and P/E by retaining more earnings and increasing the growth rate.

Question 17

Consider the free cash flow approach to stock valuation.Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year.The firm's corporate tax rate is 30%.It is expected that $200,000 of operating cash flow will be invested in new fixed assets.Depreciation for the year will be $100,000.After the coming year, cash flows are expected to grow at 6% per year.The appropriate market capitalization rate for unleveraged cash flow is 15% per year.The firm has no outstanding debt.The total value of the equity of Utica Manufacturing Company should be

Accepted Answer

A) $1,000,000. 
B) $2,000,000. 
C) $3,000,000. 
D) $4,000,000. 
A) $1,000,000. 
B) $2,000,000. 
C) $3,000,000. 
D) $4,000,000.

Question 18

If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan.

Accepted Answer

A) higher; higher 
B) lower; lower 
C) lower; higher 
D) higher; lower 
A) higher; higher 
B) lower; lower 
C) lower; higher 
D) higher; lower

Question 19

Light Construction Machinery Company has an expected ROE of 11%.The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

Accepted Answer

A) 3.0% 
B) 4.8% 
C) 8.25% 
D) 9.0% 11% * 0.75 = 8.25%. 
A) 3.0% 
B) 4.8% 
C) 8.25% 
D) 9.0% 11% * 0.75 = 8.25%.

Question 20

The growth in per share FCFE of FOX, Inc.is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years.After this five-year period, the growth in per share FCFE is expected to be 3% per year, indefinitely.The required rate of return on FOX, Inc.is 13%.Last year's per share FCFE was $1.85.What should the stock sell for today?

Accepted Answer

A) $28.99 
B) $24.47 
C) $26.84 
D) $27.74 
A) $28.99 
B) $24.47 
C) $26.84 
D) $27.74

Exam 18: Equity Valuation Models

The most popular approach to forecasting the overall stock market is to use

________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities).

The ______ is a common term for the market consensus value of the required return on a stock.

The most appropriate discount rate to use when applying a FCFF valuation model is the

Which of the following is the best measure of the floor for a stock price?

The _______ is defined as the present value of all cash proceeds to the investor in the stock.

Assume that Bolton Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid.After that, the dividend is expected to increase at a constant rate of 5%.If you require a 12% return on the stock, the value of the stock is

The market-capitalization rate on the stock of Flexsteel Company is 12%.The expected ROE is 13%, and the expected EPS are $3.60.If the firm's plowback ratio is 50%, the P/E ratio will be

A company paid a dividend last year of $1.75.The expected ROE for next year is 14.5%.An appropriate required return on the stock is 10%.If the firm has a plowback ratio of 75%, the dividend in the coming year should be

An analyst has determined that the intrinsic value of HPQ stock is $20 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of HPQ in the coming year is

If a firm has a required rate of return equal to the ROE,

If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan.

Light Construction Machinery Company has an expected ROE of 11%.The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

The Investment Environment

Financial Markets, Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioural Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends will be _ now and _ in the future than a firm that follows a high-reinvestment-rate plan.