Question 1

Explain the relationships among the earnings-price (E/P)ratio,required rate of return,and present value of growth opportunities.

Accepted Answer

The inverse of the price-earnings (P/E)r

Question 2

Which of the following is true for a firm having a stock price of $42,an expected dividend of $3,and a sustainable growth rate of 8%?

Accepted Answer

A)  It has a required return of 15.14%. 
B)  It has a dividend payout ratio of 37.5%. 
C)  It has an ROE of 7.14%. 
D)  It has a plowback rate of 7.14%. 
A)  It has a required return of 15.14%. 
B)  It has a dividend payout ratio of 37.5%. 
C)  It has an ROE of 7.14%. 
D)  It has a plowback rate of 7.14%.

Question 3

How does competition among investors lead to efficient markets?

Accepted Answer

The search for information and insightfu

Question 4

Which of the following is least likely to account for an excess of market value over book value of equity?

Accepted Answer

A)  Inaccurate depreciation methods 
B)  High rate of return on assets 
C)  The presence of growth opportunities 
D)  Valuable off-balance sheet assets 
A)  Inaccurate depreciation methods 
B)  High rate of return on assets 
C)  The presence of growth opportunities 
D)  Valuable off-balance sheet assets

Question 5

The rise of the dot-coms in the late 1990s is probably due to:

Accepted Answer

A)  investors reducing their expectations from common stocks. 
B)  investors being reluctant to incur losses and being overconfident. 
C)  a sharp improvement in the prospects for dividend growth. 
D)  the efficiency of the markets. 
A)  investors reducing their expectations from common stocks. 
B)  investors being reluctant to incur losses and being overconfident. 
C)  a sharp improvement in the prospects for dividend growth. 
D)  the efficiency of the markets.

Question 6

If security prices follow a random walk,then on any particular day the odds are that an increase or decrease in price is equally likely.

Accepted Answer

A) True 
 B)False

Question 7

According to random-walk theory,what are the odds that a stock will increase in price after having increased on 2 consecutive days of trading?

Accepted Answer

A)  0.0% 
B)  12.5% 
C)  50.0% 
D)  100.0% 
A)  0.0% 
B)  12.5% 
C)  50.0% 
D)  100.0%

Question 8

The intent of technical analysis is to discover patterns in past stock prices.

Accepted Answer

A) True 
 B)False

Question 9

The expected return on a common stock is composed of:

Accepted Answer

A)  dividend yield. 
B)  capital appreciation. 
C)  both dividend yield and capital appreciation. 
D)  capital appreciation minus the dividend yield. 
A)  dividend yield. 
B)  capital appreciation. 
C)  both dividend yield and capital appreciation. 
D)  capital appreciation minus the dividend yield.

Question 10

Google's stock price tripling after the IPO suggests that valuing growth stocks is an exact science.

Accepted Answer

A) True 
 B)False

Question 11

The terminal value of a share of stock:

Accepted Answer

A)  is similar to the maturity value of a bond. 
B)  refers to the share value at the end of the investor's holding period. 
C)  is the value received by investors upon liquidation of the firm. 
D)  is the price for shares traded through a dealers' market. 
A)  is similar to the maturity value of a bond. 
B)  refers to the share value at the end of the investor's holding period. 
C)  is the value received by investors upon liquidation of the firm. 
D)  is the price for shares traded through a dealers' market.

Question 12

Which of the following situations accurately describes a growth stock,assuming that each firm has a required return of 12%?

Accepted Answer

A)  A firm with PVGO = $0. 
B)  A firm with investment opportunities yielding 10%. 
C)  A firm with investment opportunities yielding 15%. 
D)  All of these firms represent growth stocks. 
A)  A firm with PVGO = $0. 
B)  A firm with investment opportunities yielding 10%. 
C)  A firm with investment opportunities yielding 15%. 
D)  All of these firms represent growth stocks.

Question 13

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share,has an expected dividend of $2.50,and a required return of 20%?

Accepted Answer

A)  $0 
B)  $6.00 
C)  $8.00 
D)  $10.00 
A)  $0 
B)  $6.00 
C)  $8.00 
D)  $10.00

Question 14

What is the most likely value of the PVGO for a stock with current price of $50,expected earnings of $6 per share,and a required return of 20%?

Accepted Answer

A)  $10 
B)  $20 
C)  $25 
D)  $30 
A)  $10 
B)  $20 
C)  $25 
D)  $30

Question 15

An excess of market value over the book value of equity can be attributed to going concern value.

Accepted Answer

A) True 
 B)False

Question 16

In the calculation of rates of return on common stock,dividends are _______ and capital gains are _____.

Accepted Answer

A)  guaranteed; not guaranteed 
B)  guaranteed; guaranteed 
C)  not guaranteed; not guaranteed 
D)  not guaranteed; guaranteed 
A)  guaranteed; not guaranteed 
B)  guaranteed; guaranteed 
C)  not guaranteed; not guaranteed 
D)  not guaranteed; guaranteed

Question 17

What is the maximum gain after two coin tosses for a person who starts with $1 if the occurrence of a head produces a 50% gain while the occurrence of a tail produces a 50% loss?

Accepted Answer

A)  $1.00 
B)  $1.25 
C)  $1.75 
D)  $2.25 
A)  $1.00 
B)  $1.25 
C)  $1.75 
D)  $2.25

Question 18

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

Accepted Answer

A)  Its stock price will remain constant. 
B)  Its stock price will increase by the sustainable growth rate. 
C)  Its stock price will decline unless dividend payout ratio is zero. 
D)  Its stock price will decline unless plowback rate exceeds required return. 
A)  Its stock price will remain constant. 
B)  Its stock price will increase by the sustainable growth rate. 
C)  Its stock price will decline unless dividend payout ratio is zero. 
D)  Its stock price will decline unless plowback rate exceeds required return.

Question 19

If investors believe a company will have the opportunity to make very profitable investments in the future,they will pay more for the company's stock today.

Accepted Answer

A) True 
 B)False

Question 20

What price would you expect to pay for a stock with 13% required rate of return,4% rate of dividend growth,and an annual dividend of $2.50 which will be paid tomorrow?

Accepted Answer

A)  $27.78 
B)  $30.28 
C)  $31.10 
D)  $31.39 
A)  $27.78 
B)  $30.28 
C)  $31.10 
D)  $31.39

Exam 7: Valuing Stocks

Explain the relationships among the earnings-price (E/P)ratio,required rate of return,and present value of growth opportunities.

Which of the following is true for a firm having a stock price of $42,an expected dividend of $3,and a sustainable growth rate of 8%?

How does competition among investors lead to efficient markets?

Which of the following is least likely to account for an excess of market value over book value of equity?

The rise of the dot-coms in the late 1990s is probably due to:

If security prices follow a random walk,then on any particular day the odds are that an increase or decrease in price is equally likely.

According to random-walk theory,what are the odds that a stock will increase in price after having increased on 2 consecutive days of trading?

The intent of technical analysis is to discover patterns in past stock prices.

The expected return on a common stock is composed of:

Google's stock price tripling after the IPO suggests that valuing growth stocks is an exact science.

The terminal value of a share of stock:

Which of the following situations accurately describes a growth stock,assuming that each firm has a required return of 12%?

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share,has an expected dividend of $2.50,and a required return of 20%?

What is the most likely value of the PVGO for a stock with current price of $50,expected earnings of $6 per share,and a required return of 20%?

An excess of market value over the book value of equity can be attributed to going concern value.

In the calculation of rates of return on common stock,dividends are _______ and capital gains are _____.

What is the maximum gain after two coin tosses for a person who starts with $1 if the occurrence of a head produces a 50% gain while the occurrence of a tail produces a 50% loss?

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

If investors believe a company will have the opportunity to make very profitable investments in the future,they will pay more for the company's stock today.

What price would you expect to pay for a stock with 13% required rate of return,4% rate of dividend growth,and an annual dividend of $2.50 which will be paid tomorrow?

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk,Return,and the Opportunity Cost of Capital

Risk,Return,and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

In the calculation of rates of return on common stock,dividends are ___ and capital gains are _.