Question 1

The process of fundamental valuation requires estimates of all the following factors, except

Accepted Answer

A)  The time pattern of returns. 
B)  The economy's real risk-free rate. 
C)  The risk premium for the asset. 
D)  The times series of stock prices. 
E)  The expected rate of inflation. 
A)  The time pattern of returns. 
B)  The economy's real risk-free rate. 
C)  The risk premium for the asset. 
D)  The times series of stock prices. 
E)  The expected rate of inflation. D

Question 2

What is the P/E ratio is determined by?

Accepted Answer

A)  The required rate of return. 
B)  The expected dividend payout ratio. 
C)  The expected growth rate of dividends. 
D)  Choices a and b 
E)  All of the above. 
A)  The required rate of return. 
B)  The expected dividend payout ratio. 
C)  The expected growth rate of dividends. 
D)  Choices a and b 
E)  All of the above. E

Question 3

The price of a bond can be calculated by discounting future coupons over the bonds life by the yield to maturity.

Accepted Answer

A) True 
 B)False  False

Question 4

An example of a relative valuation technique is the Price/Cash Flow ratio.

Accepted Answer

A) True 
 B)False

Question 5

The two components that are required in order to carry out asset valuation are 1) the stream of expected cash flows and 2) the required rate of return.

Accepted Answer

A) True 
 B)False

Question 6

The growth rate of equity earnings without external financing is equal to which of the following?

Accepted Answer

A)  Retention rate plus return on equity. 
B)  Retention rate minus return on equity. 
C)  Retention rate divided by return on equity. 
D)  Retention rate times return on equity. 
E)  Return on equity divided by retention rate. 
A)  Retention rate plus return on equity. 
B)  Retention rate minus return on equity. 
C)  Retention rate divided by return on equity. 
D)  Retention rate times return on equity. 
E)  Return on equity divided by retention rate.

Question 7

Exhibit 20-3
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A large grocery chain is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 6 years remaining until maturity. The bonds were issued with a 6% coupon rate (paid semiannually) and a par value of $1,000. Because of increased risk the required rate has risen to 10%.
-Refer to Exhibit 20-3. What is the current value of these securities?

Accepted Answer

A)  $656.40 
B)  $899.00 
C)  $822.70 
D)  $569.50 
E)  $962.00 
A)  $656.40 
B)  $899.00 
C)  $822.70 
D)  $569.50 
E)  $962.00

Question 8

In 2009, Swisten Inc. issued a $150 par value preferred stock that pays an 8% annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring an 15% return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Accepted Answer

A)  $80 
B)  $75 
C)  $59 
D)  $95 
E)  $110 
A)  $80 
B)  $75 
C)  $59 
D)  $95 
E)  $110

Question 9

What is the value of a preferred stock that has a par value of $100, a required rate of return of 11%, and pays a 7% annual dividend?

Accepted Answer

A)  $63.64 
B)  $157.14 
C)  $909.09 
D)  $1,428.57 
E)  $2,500.00 
A)  $63.64 
B)  $157.14 
C)  $909.09 
D)  $1,428.57 
E)  $2,500.00

Question 10

Ross Corporation paid dividends per share of $1.20 at the end of 1999. At the end of 2009 it paid dividends per share of $3.50. Calculate the compound annual growth rate in dividends.

Accepted Answer

A)  52.17% 
B)  34.28% 
C)  23% 
D)  19.17% 
E)  11.29% 
A)  52.17% 
B)  34.28% 
C)  23% 
D)  19.17% 
E)  11.29%

Question 11

In 2009, Venus Fly Co. issued a $75 par value preferred stock which pays a 7% annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring a 5% return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Accepted Answer

A)  $125 
B)  $84 
C)  $91 
D)  $145 
E)  $105 
A)  $125 
B)  $84 
C)  $91 
D)  $145 
E)  $105

Question 12

Hunter Corporation had a dividend payout ratio of 63% in 2009. The retention rate in 2009 was

Accepted Answer

A)  37% 
B)  63% 
C)  50% 
D)  0% 
E)  100% 
A)  37% 
B)  63% 
C)  50% 
D)  0% 
E)  100%

Question 13

In 2009, Smiths Corp. issued a $50 par value preferred stock that pays a 6% annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring a 7% return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Accepted Answer

A)  $42.86 
B)  $30.00 
C)  $31.54 
D)  $33.38 
E)  $38.37 
A)  $42.86 
B)  $30.00 
C)  $31.54 
D)  $33.38 
E)  $38.37

Question 14

Using the constant growth model, an increase in the required rate of return from 17 to 20% combined with an increase in the growth rate from 8 to 11% would cause the price to

Accepted Answer

A)  Rise more than 3% 
B)  Rise less than 3%. 
C)  Remain constant. 
D)  Fall more than 3%. 
E)  Fall less than 3%. 
A)  Rise more than 3% 
B)  Rise less than 3%. 
C)  Remain constant. 
D)  Fall more than 3%. 
E)  Fall less than 3%.

Question 15

A bond typically pays interest payments every six months equal to the coupon rate times the face value of the bond.

Accepted Answer

A) True 
 B)False

Question 16

Fundamentalists typically use the "Bottom-Up Approach" whereas technicians use the "Top-Down Approach" to the valuation process.

Accepted Answer

A) True 
 B)False

Question 17

Which securities can be valued by dividing the annual dividend by the required rate of return?

Accepted Answer

A)  Low coupon bonds 
B)  Junk bonds 
C)  Common stocks 
D)  Preferred stocks 
E)  Constant growth common stocks 
A)  Low coupon bonds 
B)  Junk bonds 
C)  Common stocks 
D)  Preferred stocks 
E)  Constant growth common stocks

Question 18

Growth companies are those firms that consistently earn higher rates of return by assuming greater amounts of risk.

Accepted Answer

A) True 
 B)False

Question 19

Exhibit 20-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A major manufacturer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 7 years remaining till maturity. The bonds were issued with an 8% coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 10%.
-Refer to Exhibit 20-2. What is the current value of these securities?

Accepted Answer

A)  $900.18 
B)  $1151.92 
C)  $972.52 
D)  $1113.63 
E)  $904.00 
A)  $900.18 
B)  $1151.92 
C)  $972.52 
D)  $1113.63 
E)  $904.00

Question 20

If the estimated value of an asset is greater than the market price, you would want to buy the investment.

Accepted Answer

A) True 
 B)False

The process of fundamental valuation requires estimates of all the following factors, except

What is the P/E ratio is determined by?

The price of a bond can be calculated by discounting future coupons over the bonds life by the yield to maturity.

An example of a relative valuation technique is the Price/Cash Flow ratio.

The two components that are required in order to carry out asset valuation are 1) the stream of expected cash flows and 2) the required rate of return.

The growth rate of equity earnings without external financing is equal to which of the following?

What is the value of a preferred stock that has a par value of $100, a required rate of return of 11%, and pays a 7% annual dividend?

Ross Corporation paid dividends per share of $1.20 at the end of 1999. At the end of 2009 it paid dividends per share of $3.50. Calculate the compound annual growth rate in dividends.

Hunter Corporation had a dividend payout ratio of 63% in 2009. The retention rate in 2009 was

Using the constant growth model, an increase in the required rate of return from 17 to 20% combined with an increase in the growth rate from 8 to 11% would cause the price to

A bond typically pays interest payments every six months equal to the coupon rate times the face value of the bond.

Fundamentalists typically use the "Bottom-Up Approach" whereas technicians use the "Top-Down Approach" to the valuation process.

Which securities can be valued by dividing the annual dividend by the required rate of return?

Growth companies are those firms that consistently earn higher rates of return by assuming greater amounts of risk.

If the estimated value of an asset is greater than the market price, you would want to buy the investment.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

Exam 20: An Introduction to Security Valuation

The process of fundamental valuation requires estimates of all the following factors, except

What is the P/E ratio is determined by?

The price of a bond can be calculated by discounting future coupons over the bonds life by the yield to maturity.

An example of a relative valuation technique is the Price/Cash Flow ratio.

The two components that are required in order to carry out asset valuation are 1) the stream of expected cash flows and 2) the required rate of return.

The growth rate of equity earnings without external financing is equal to which of the following?

What is the value of a preferred stock that has a par value of $100, a required rate of return of 11%, and pays a 7% annual dividend?

Ross Corporation paid dividends per share of $1.20 at the end of 1999. At the end of 2009 it paid dividends per share of $3.50. Calculate the compound annual growth rate in dividends.

Hunter Corporation had a dividend payout ratio of 63% in 2009. The retention rate in 2009 was

Using the constant growth model, an increase in the required rate of return from 17 to 20% combined with an increase in the growth rate from 8 to 11% would cause the price to

A bond typically pays interest payments every six months equal to the coupon rate times the face value of the bond.

Fundamentalists typically use the "Bottom-Up Approach" whereas technicians use the "Top-Down Approach" to the valuation process.

Which securities can be valued by dividing the annual dividend by the required rate of return?

Growth companies are those firms that consistently earn higher rates of return by assuming greater amounts of risk.

If the estimated value of an asset is greater than the market price, you would want to buy the investment.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters