Question 1

Medtronic Company has an expected ROE of 16%.The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends.

Accepted Answer

A) 3.0% 
B) 6.0% 
C) 7.2% 
D) 4.8% 16% * 0.30 = 4.8%. 
A) 3.0% 
B) 6.0% 
C) 7.2% 
D) 4.8% 16% * 0.30 = 4.8%.

Question 2

_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.

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

Question 3

Low Fly 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 Low Fly Airline has a beta of 3.00.The intrinsic value of the stock is

Accepted Answer

A) $46.67. 
B) $50.00. 
C) $56.00. 
D) $62.50. 
A) $46.67. 
B) $50.00. 
C) $56.00. 
D) $62.50.

Question 4

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $2.50 in dividends and $28 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 15% return.

Accepted Answer

A) $23.91 
B) $24.11 
C) $26.52 
D) $27.50 
A) $23.91 
B) $24.11 
C) $26.52 
D) $27.50

Question 5

Suppose that the average P/E multiple in the oil industry is 20.Dominion Oil is expected to have an EPS of $3.00 in the coming year.The intrinsic value of Dominion Oil stock should be

Accepted Answer

A) $28.12. 
B) $35.55. 
C) $60.00. 
D) $72.00. 
A) $28.12. 
B) $35.55. 
C) $60.00. 
D) $72.00.

Question 6

Since 1955, Treasury bond yields and earnings yields on stocks have been

Accepted Answer

A) identical. 
B) negatively correlated. 
C) positively correlated. 
D) uncorrelated. 
A) identical. 
B) negatively correlated. 
C) positively correlated. 
D) uncorrelated.

Question 7

GAAP allows

Accepted Answer

A) no leeway to manage earnings. 
B) minimal leeway to manage earnings. 
C) considerable leeway to manage earnings. 
D) earnings management if it is beneficial in increasing stock price. 
A) no leeway to manage earnings. 
B) minimal leeway to manage earnings. 
C) considerable leeway to manage earnings. 
D) earnings management if it is beneficial in increasing stock price.

Question 8

Investors want high plowback ratios

Accepted Answer

A) for all firms. 
B) Whenever ROE >k. 
C) Whenever k>ROE. 
D) only when they are in low tax brackets. 
A) for all firms. 
B) Whenever ROE >k. 
C) Whenever k>ROE. 
D) only when they are in low tax brackets.

Question 9

High Speed Company has an expected ROE of 15%.The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

Accepted Answer

A) 3.0% 
B) 4.8% 
C) 7.5% 
D) 6.0% 15% *0.50 = 7.5%. 
A) 3.0% 
B) 4.8% 
C) 7.5% 
D) 6.0% 15% *0.50 = 7.5%.

Question 10

A preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 12% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Accepted Answer

A) $11.56 
B) $9.65 
C) $11.82 
D) $10.42 1.25/.12 = 10.42. 
A) $11.56 
B) $9.65 
C) $11.82 
D) $10.42 1.25/.12 = 10.42.

Question 11

Antiquated Products Corporation produces goods that are very mature in their product life cycles.Antiquated Products Corporation is expected to pay a dividend in year 1 of $1.00, a dividend of $0.90 in year 2, and a dividend of $0.85 in year 3.After year 3, dividends are expected to decline at a rate of 2% per year.An appropriate required rate of return for the stock is 8%.The stock should be worth

Accepted Answer

A) $8.98. 
B) $10.57. 
C) $20.00. 
D) $22.22. 
A) $8.98. 
B) $10.57. 
C) $20.00. 
D) $22.22.

Question 12

The present value of growth opportunities (PVGO) is equal to I) the difference between a stock's price and its no-growth value per share.
II) the stock's price.
III) zero if its return on equity equals the discount rate.
IV) the net present value of favorable investment opportunities.

Accepted Answer

A) I and IV 
B) II and IV 
C) I, III, and IV 
D) II, III, and IV 
A) I and IV 
B) II and IV 
C) I, III, and IV 
D) II, III, and IV

Question 13

Historically, P/E ratios have tended to be

Accepted Answer

A) higher when inflation has been high. 
B) lower when inflation has been high. 
C) uncorrelated with inflation rates but correlated with other macroeconomic variables. 
D) uncorrelated with any macroeconomic variables, including inflation rates. 
A) higher when inflation has been high. 
B) lower when inflation has been high. 
C) uncorrelated with inflation rates but correlated with other macroeconomic variables. 
D) uncorrelated with any macroeconomic variables, including inflation rates.

Question 14

Suppose that the average P/E multiple in the oil industry is 16.Shell Oil is expected to have an EPS of $4.50 in the coming year.The intrinsic value of Shell Oil stock should be

Accepted Answer

A) $28.12. 
B) $35.55. 
C) $63.00. 
D) $72.00. 
A) $28.12. 
B) $35.55. 
C) $63.00. 
D) $72.00.

Question 15

Fly Boy Corporation is expected have EBIT of $800k this year.Fly Boy Corporation is in the 30% tax bracket, will report $52,000 in depreciation, will make $86,000 in capital expenditures, and will have a $16,000 increase in net working capital this year.What is Fly Boy's FCFF?

Accepted Answer

A) 510,000 
B) 406,000 
C) 542,000 
D) 596,000 
A) 510,000 
B) 406,000 
C) 542,000 
D) 596,000

Question 16

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding.Siri's required return on equity is 12%, and WACC is 9.8%.If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is

Accepted Answer

A) $68.13. 
B) $18.17. 
C) $26.35. 
D) $14.76. 
A) $68.13. 
B) $18.17. 
C) $26.35. 
D) $14.76.

Question 17

If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to

Accepted Answer

A) V0 = (Expected dividend yield in year 1)/k. 
B) V0 = (Expected EPS in year 1)/k. 
C) V0 = (Treasury bond yield in year 1)/k. 
D) V0 = (Market return in year 1)/k. If ROE = k, no growth is occurring; b = 0; EPS = DPS. 
A) V0 = (Expected dividend yield in year 1)/k. 
B) V0 = (Expected EPS in year 1)/k. 
C) V0 = (Treasury bond yield in year 1)/k. 
D) V0 = (Market return in year 1)/k. If ROE = k, no growth is occurring; b = 0; EPS = DPS.

Question 18

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 projected free cash flow of F&G Manufacturing Company for the coming year is

Accepted Answer

A) $250,000. 
B) $180,000. 
C) $300,000. 
D) $380,000. 
A) $250,000. 
B) $180,000. 
C) $300,000. 
D) $380,000.

Question 19

The growth in dividends of ABC, 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 dividends is expected to be 3% per year, indefinitely.The required rate of return on ABC, Inc.is 13%.Last year's dividends per share were $1.85.What should the stock sell for today?

Accepted Answer

A) $8.99 
B) $25.21 
C) $40.00 
D) $27.74 
A) $8.99 
B) $25.21 
C) $40.00 
D) $27.74

Question 20

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year.The expected ROE is 14%.An appropriate required return on the stock is 11%.If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

Accepted Answer

A) $22.73. 
B) $27.50. 
C) $28.57. 
D) $38.46. g = 14% *0.6 = 8.4%; Expected DPS = $2.50(0.4) = $1.00; P = 1/(.11 - .084) = $38.46. 
A) $22.73. 
B) $27.50. 
C) $28.57. 
D) $38.46. g = 14% *0.6 = 8.4%; Expected DPS = $2.50(0.4) = $1.00; P = 1/(.11 - .084) = $38.46.

Exam 18: Equity Valuation Models

Medtronic Company has an expected ROE of 16%.The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends.

_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $2.50 in dividends and $28 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 15% return.

Suppose that the average P/E multiple in the oil industry is 20.Dominion Oil is expected to have an EPS of $3.00 in the coming year.The intrinsic value of Dominion Oil stock should be

Since 1955, Treasury bond yields and earnings yields on stocks have been

GAAP allows

Investors want high plowback ratios

High Speed Company has an expected ROE of 15%.The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

A preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 12% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

The present value of growth opportunities (PVGO) is equal to I) the difference between a stock's price and its no-growth value per share. II) the stock's price. III) zero if its return on equity equals the discount rate. IV) the net present value of favorable investment opportunities.

Historically, P/E ratios have tended to be

Suppose that the average P/E multiple in the oil industry is 16.Shell Oil is expected to have an EPS of $4.50 in the coming year.The intrinsic value of Shell Oil stock should be

Fly Boy Corporation is expected have EBIT of $800k this year.Fly Boy Corporation is in the 30% tax bracket, will report $52,000 in depreciation, will make $86,000 in capital expenditures, and will have a $16,000 increase in net working capital this year.What is Fly Boy's FCFF?

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding.Siri's required return on equity is 12%, and WACC is 9.8%.If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is

If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year.The expected ROE is 14%.An appropriate required return on the stock is 11%.If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

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