Question 1

In the dividend discount model, which of the following are not incorporated into the discount rate?

Accepted Answer

A) Real risk-free rate 
B) Risk premium for stocks 
C) Return on assets 
D) Expected inflation rate 
A) Real risk-free rate 
B) Risk premium for stocks 
C) Return on assets 
D) Expected inflation rate

Question 2

Sales Company paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of earnings as dividends for the foreseeable future.If the firm is expected to generate a 10% return on equity in the future, and if you require a 12% return on the stock, the value of the stock is

Accepted Answer

A) $17.67. 
B) $13.00. 
C) $16.67. 
D) $18.67. g = 10% * 0.6 = 6%; P = 1 (1.06)/(.12 - .06) = $17.67. 
A) $17.67. 
B) $13.00. 
C) $16.67. 
D) $18.67. g = 10% * 0.6 = 6%; P = 1 (1.06)/(.12 - .06) = $17.67.

Question 3

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

Accepted Answer

A) Credit analysts 
B) Fundamental analysts 
C) Systems analysts 
D) Technical analysts 
A) Credit analysts 
B) Fundamental analysts 
C) Systems analysts 
D) Technical analysts

Question 4

The growth in dividends of XYZ, 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 dividends is expected to be 2% per year, indefinitely.The required rate of return on XYZ, Inc.is 12%.Last year's dividends per share were $2.00.What should the stock sell for today?

Accepted Answer

A) $8.99 
B) $25.21 
C) $40.00 
D) $110.00 
A) $8.99 
B) $25.21 
C) $40.00 
D) $110.00

Question 5

Low P/E ratios tend to indicate that a company will _______, ceteris paribus.

Accepted Answer

A) grow quickly 
B) grow at the same speed as the average company 
C) grow slowly 
D) P/E ratios are unrelated to growth. 
A) grow quickly 
B) grow at the same speed as the average company 
C) grow slowly 
D) P/E ratios are unrelated to growth.

Question 6

SI International had a FCFE of $122.1M last year and has 12.43M shares outstanding.SI's required return on equity is 11.3%, and WACC is 9.8%.If FCFE is expected to grow at 7.0% forever, the intrinsic value of SI's shares is

Accepted Answer

A) $108.00. 
B) $68.29. 
C) $244.43. 
D) $14.76. 
A) $108.00. 
B) $68.29. 
C) $244.43. 
D) $14.76.

Question 7

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.

Accepted Answer

A) technical analysts 
B) statistical analysts 
C) fundamental analysts 
D) dividend analysts 
A) technical analysts 
B) statistical analysts 
C) fundamental analysts 
D) dividend analysts

Question 8

According to Peter Lynch, a rough rule of thumb for security analysis is that

Accepted Answer

A) the growth rate should be equal to the plowback rate. 
B) the growth rate should be equal to the dividend-payout rate. 
C) the growth rate should be low for emerging industries. 
D) the growth rate should be equal to the P/E ratio. 
A) the growth rate should be equal to the plowback rate. 
B) the growth rate should be equal to the dividend-payout rate. 
C) the growth rate should be low for emerging industries. 
D) the growth rate should be equal to the P/E ratio.

Question 9

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

Accepted Answer

A) required rate of return on equity. 
B) WACC. 
C) risk-free rate. 
D) None of the options are correct. 
A) required rate of return on equity. 
B) WACC. 
C) risk-free rate. 
D) None of the options are correct.

Question 10

Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year.Dividends are expected to decline at the rate of 2% per year.The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%.The stock of Old Quartz Gold Mining Company has a beta of -0.25.The intrinsic value of the stock is

Accepted Answer

A) $80.00. 
B) $133.33. 
C) $200.00. 
D) $400.00. 
A) $80.00. 
B) $133.33. 
C) $200.00. 
D) $400.00.

Question 11

According to James Tobin, the long-run value of Tobin's Q should move toward

Accepted Answer

A) 0. 
B) 1. 
C) 2. 
D) infinity. 
A) 0. 
B) 1. 
C) 2. 
D) infinity.

Question 12

Music Doctors Company has an expected ROE of 14%.The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.

Accepted Answer

A) 4.8% 
B) 5.6% 
C) 7.2% 
D) 6.0% 14%* 0.40 = 5.6%. 
A) 4.8% 
B) 5.6% 
C) 7.2% 
D) 6.0% 14%* 0.40 = 5.6%.

Question 13

High Tech Chip Company paid a dividend last year of $2.50.The expected ROE for next year is 12.5%.An appropriate required return on the stock is 11%.If the firm has a plowback ratio of 60%, the dividend in the coming year should be

Accepted Answer

A) $1.00. 
B) $2.50. 
C) $2.69. 
D) $2.81. 
A) $1.00. 
B) $2.50. 
C) $2.69. 
D) $2.81.

Question 14

A firm has a return on equity of 20% and a dividend-payout ratio of 30%.The firm's anticipated growth rate is

Accepted Answer

A) 6%. 
B) 10%. 
C) 14%. 
D) 20%. 
A) 6%. 
B) 10%. 
C) 14%. 
D) 20%.

Question 15

The goal of fundamental analysts is to find securities

Accepted Answer

A) whose intrinsic value exceeds market price. 
B) with a positive present value of growth opportunities. 
C) with high market capitalization rates. 
D) All of the options are correct. 
A) whose intrinsic value exceeds market price. 
B) with a positive present value of growth opportunities. 
C) with high market capitalization rates. 
D) All of the options are correct.

Question 16

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year.Dividends are expected to grow at a rate of 10% per year.The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%.The stock is trading in the market today at a price of $90.00. What is the approximate beta of Risk Metrics's stock?

Accepted Answer

A) 0.8 
B) 1.0 
C) 1.1 
D) 1.4 
A) 0.8 
B) 1.0 
C) 1.1 
D) 1.4

Question 17

Bubba Gumm Company has an expected ROE of 9%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 10% of earnings.

Accepted Answer

A) 90% 
B) 10% 
C) 9% 
D) 0.9% 9% * 0.10 = 0.9%. 
A) 90% 
B) 10% 
C) 9% 
D) 0.9% 9% * 0.10 = 0.9%.

Question 18

Low Tech Company has an expected ROE of 10%.The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

Accepted Answer

A) 6.0% 
B) 4.8% 
C) 7.2% 
D) 3.0% 10% *0.60 = 6.0%. 
A) 6.0% 
B) 4.8% 
C) 7.2% 
D) 3.0% 10% *0.60 = 6.0%.

Question 19

Goodie Corporation produces goods that are very mature in their product life cycles.Goodie Corporation is expected to have per share FCFE in year 1 of $2.00, per share FCFE of $1.50 in year 2, and per share FCFE of $1.00 in year 3.After year 3, per share FCFE is 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 __________ today.

Accepted Answer

A) $9.00 
B) $101.57 
C) $10.57 
D) $22.22 
A) $9.00 
B) $101.57 
C) $10.57 
D) $22.22

Question 20

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

Accepted Answer

A) $30.23 
B) $24.11 
C) $26.52 
D) $27.50 
A) $30.23 
B) $24.11 
C) $26.52 
D) $27.50

Exam 18: Equity Valuation Models

In the dividend discount model, which of the following are not incorporated into the discount rate?

Sales Company paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of earnings as dividends for the foreseeable future.If the firm is expected to generate a 10% return on equity in the future, and if you require a 12% return on the stock, the value of the stock is

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

Low P/E ratios tend to indicate that a company will _______, ceteris paribus.

SI International had a FCFE of $122.1M last year and has 12.43M shares outstanding.SI's required return on equity is 11.3%, and WACC is 9.8%.If FCFE is expected to grow at 7.0% forever, the intrinsic value of SI's shares is

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.

According to Peter Lynch, a rough rule of thumb for security analysis is that

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

According to James Tobin, the long-run value of Tobin's Q should move toward

Music Doctors Company has an expected ROE of 14%.The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.

High Tech Chip Company paid a dividend last year of $2.50.The expected ROE for next year is 12.5%.An appropriate required return on the stock is 11%.If the firm has a plowback ratio of 60%, the dividend in the coming year should be

A firm has a return on equity of 20% and a dividend-payout ratio of 30%.The firm's anticipated growth rate is

The goal of fundamental analysts is to find securities

Bubba Gumm Company has an expected ROE of 9%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 10% of earnings.

Low Tech Company has an expected ROE of 10%.The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

The Investment Environment

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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

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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

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