Question 1

The zero-growth dividend model:

Accepted Answer

A)  gives the highest value for a common stock. 
B)  is the most accurate model to use. 
C)  is equivalent to the valuation model for preferred stock. 
D)  assumes the highest required return possible. 
A)  gives the highest value for a common stock. 
B)  is the most accurate model to use. 
C)  is equivalent to the valuation model for preferred stock. 
D)  assumes the highest required return possible. C

Question 2

Relatively small changes in inputs used in DDM can change the estimated value by large percentage amounts.

Accepted Answer

A) True 
 B)False  True

Question 3

Value stocks, such as those considered the Dogs of the Dow, will generally have:

Accepted Answer

A)  no dividend payments 
B)  a low P/E ratio 
C)  a low payout ratio 
D)  a high required return 
A)  no dividend payments 
B)  a low P/E ratio 
C)  a low payout ratio 
D)  a high required return B

Question 4

The estimated value of common stock is the:

Accepted Answer

A)  present value of all expected cash flows. 
B)  present value of all capital gains. 
C)  future value of all dividend payments. 
D)  present value of all dividend payments. 
A)  present value of all expected cash flows. 
B)  present value of all capital gains. 
C)  future value of all dividend payments. 
D)  present value of all dividend payments.

Question 5

Which of the following statements regarding intrinsic value and market price is true?

Accepted Answer

A)  If intrinsic value is greater than the current market price, the stock should be avoided or, if already held, sold. 
B)  If intrinsic value is less than the current market price, the stock is undervalued. 
C)  If intrinsic value is equal to the current market price, the stock is correctly valued. 
D)  If the intrinsic value is greater than the current market price, the stock is considered speculative. 
A)  If intrinsic value is greater than the current market price, the stock should be avoided or, if already held, sold. 
B)  If intrinsic value is less than the current market price, the stock is undervalued. 
C)  If intrinsic value is equal to the current market price, the stock is correctly valued. 
D)  If the intrinsic value is greater than the current market price, the stock is considered speculative.

Question 6

What is the estimated value of a stock with a required rate of return of 12 percent, a projected constant growth rate of dividends of 7 percent and expected dividend of $2.50?

Accepted Answer

A)  $60 
B)  $15 
C)  $150 
D)  $5 
A)  $60 
B)  $15 
C)  $150 
D)  $5

Question 7

Which of the following situations indicates a signal to buy a stock?

Accepted Answer

A) IV > CMP B) IV < CMP C) IV = CMP D) Impossible to determine. A) IV > CMP B) IV < CMP C) IV = CMP D) Impossible to determine.

Question 8

The current market price of the stock of a company, Stryker Ltd. is $30 per share. The dividends for the next year are expected to be $4.00 per share and the investor is confident that the selling price of the stock will be $35 at the end of one year. What is the implied rate of return assuming dividends are growing at a constant rate?

Accepted Answer

P₀ = $30; D₁ = $4; P₁ = $35 P₀ = D₁ / (k-g) T

Question 9

Why did investors favor large cap stocks in the mid to late 1990s?

Accepted Answer

They were perceived as less ri

Question 10

Which of the following is not one of the reasons two investors both using the constant growth version of the DDM on the same stock might arrive at different estimates of the stock's value?

Accepted Answer

A)  They used different expected returns. 
B)  They used different growth rates of dividends. 
C)  They used different required returns. 
D)  They assume a different payout ratio. 
A)  They used different expected returns. 
B)  They used different growth rates of dividends. 
C)  They used different required returns. 
D)  They assume a different payout ratio.

Question 11

The Crazy Horse Corporation's stock is trading at $75. The firm paid out $2.20 in dividends during the last year. If the payout ratio of the firm is 45 percent, what is its price earnings ratio?

Accepted Answer

Payout ratio = DPS/E

Question 12

Which of the following models incorporates debt financing, including both the repayment and interest on existing debt as the sale of new debt, as well as preferred stock financing?

Accepted Answer

A)  FCFE model 
B)  FCFF model 
C)  constant growth rate model 
D)  multiple growth rate model 
A)  FCFE model 
B)  FCFF model 
C)  constant growth rate model 
D)  multiple growth rate model

Question 13

Brotech Unlimited sells at $40 per share, and its latest 12 month earnings were $8 per share, of which $3.20 per share were paid as dividends.
(a) What is Brotech's current P/E ratio?
(b) If Brotech's earnings are expected to grow by 9 percent per year, what is the projected price for next year assuming that the P/E ratio remains constant?
(c) If you had a required rate of return of 15 percent, expected the dividend payout ratio to remain constant, and dividends to grow at a rate of 9 percent, would you buy this stock? Explain your answer.

Accepted Answer

(a) Current P/E = Current Price/Current

Question 14

Other things equal, the higher the required return, the lower the P/E.

Accepted Answer

A) True 
 B)False

Question 15

Several analysts and empiricists recommend investing in stocks with what kind of price to book value ratios?

Accepted Answer

A)  low. 
B)  equal to one. 
C)  high. 
D)  equal to zero. 
A)  low. 
B)  equal to one. 
C)  high. 
D)  equal to zero.

Question 16

Which of the following variables has an inverse relationship with the P/E ratio?

Accepted Answer

A)  payout ratio 
B)  expected growth rate of dividends 
C)  expected growth rate of earnings 
D)  required rate of return 
A)  payout ratio 
B)  expected growth rate of dividends 
C)  expected growth rate of earnings 
D)  required rate of return

Question 17

Unlike discounted cash flow techniques, relative valuation does not require comparatively strong assumptions about the inputs that lead to an estimate of stock value.

Accepted Answer

A) True 
 B)False

Question 18

A relatively new valuation technique that emphasizes the difference between a firm's operating profits and its cost of capital is called:

Accepted Answer

A)  the discounted dividend model. 
B)  the capital asset pricing model. 
C)  economic value added model. 
D)  the market capitalization model. 
A)  the discounted dividend model. 
B)  the capital asset pricing model. 
C)  economic value added model. 
D)  the market capitalization model.

Question 19

Under the zero-growth dividend model, expected dividends are the same as current dividends.

Accepted Answer

A) True 
 B)False

Question 20

The constant growth rate model of the DDM implies that:

Accepted Answer

A)  earnings are not relevant to stock prices. 
B)  the payout ratio remains fixed. 
C)  the stock price grows at the same rate as dividends. 
D)  the growth rate in dividends equates to zero (i.e., dividends remain a "constant" dollar amount over time). 
A)  earnings are not relevant to stock prices. 
B)  the payout ratio remains fixed. 
C)  the stock price grows at the same rate as dividends. 
D)  the growth rate in dividends equates to zero (i.e., dividends remain a "constant" dollar amount over time).

The zero-growth dividend model:

Relatively small changes in inputs used in DDM can change the estimated value by large percentage amounts.

Value stocks, such as those considered the Dogs of the Dow, will generally have:

The estimated value of common stock is the:

Which of the following statements regarding intrinsic value and market price is true?

What is the estimated value of a stock with a required rate of return of 12 percent, a projected constant growth rate of dividends of 7 percent and expected dividend of $2.50?

Which of the following situations indicates a signal to buy a stock?

Why did investors favor large cap stocks in the mid to late 1990s?

Which of the following is not one of the reasons two investors both using the constant growth version of the DDM on the same stock might arrive at different estimates of the stock's value?

The Crazy Horse Corporation's stock is trading at $75. The firm paid out $2.20 in dividends during the last year. If the payout ratio of the firm is 45 percent, what is its price earnings ratio?

Which of the following models incorporates debt financing, including both the repayment and interest on existing debt as the sale of new debt, as well as preferred stock financing?

Other things equal, the higher the required return, the lower the P/E.

Several analysts and empiricists recommend investing in stocks with what kind of price to book value ratios?

Which of the following variables has an inverse relationship with the P/E ratio?

Unlike discounted cash flow techniques, relative valuation does not require comparatively strong assumptions about the inputs that lead to an estimate of stock value.

A relatively new valuation technique that emphasizes the difference between a firm's operating profits and its cost of capital is called:

Under the zero-growth dividend model, expected dividends are the same as current dividends.

The constant growth rate model of the DDM implies that:

Investing Is an Important Activity Worldwide

Investment Alternatives: Generic Principles All Investors Must Know

Indirect Investing: a Global Activity

Securities Markets Matter to All Investors

All Financial Markets Have Regulations and Trading Practices

Return and Risk: the Foundation of Investing Worldwide

Portfolio Theory Is Universal

Portfolio Selection for All Investors

Asset Pricing Principles

Managing a Stock Portfolio: a Worldwide Issue

What Happens If Markets Are Efficient or Not?

Economy/ market Analysis Must Be Considered by All Investor

Sector/ industry Analysis

Company Analysis

Technical Analysis

Fixed Income Securities Are Available Worldwide

Managing Bond Portfolios: Some Issues Affect All Investors

Understanding Derivative Securities: Options

Understanding Derivative Securities: Futures

All Investors Must Consider Portfolio Management

Evaluation of Investment Performance: a Global Concept

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Exam 10: Common Stock Valuation Lessons for All Investors

The zero-growth dividend model:

Relatively small changes in inputs used in DDM can change the estimated value by large percentage amounts.

Value stocks, such as those considered the Dogs of the Dow, will generally have:

The estimated value of common stock is the:

Which of the following statements regarding intrinsic value and market price is true?

What is the estimated value of a stock with a required rate of return of 12 percent, a projected constant growth rate of dividends of 7 percent and expected dividend of $2.50?

Which of the following situations indicates a signal to buy a stock?

Why did investors favor large cap stocks in the mid to late 1990s?

Which of the following is not one of the reasons two investors both using the constant growth version of the DDM on the same stock might arrive at different estimates of the stock's value?

The Crazy Horse Corporation's stock is trading at $75. The firm paid out $2.20 in dividends during the last year. If the payout ratio of the firm is 45 percent, what is its price earnings ratio?

Which of the following models incorporates debt financing, including both the repayment and interest on existing debt as the sale of new debt, as well as preferred stock financing?

Other things equal, the higher the required return, the lower the P/E.

Several analysts and empiricists recommend investing in stocks with what kind of price to book value ratios?

Which of the following variables has an inverse relationship with the P/E ratio?

Unlike discounted cash flow techniques, relative valuation does not require comparatively strong assumptions about the inputs that lead to an estimate of stock value.

A relatively new valuation technique that emphasizes the difference between a firm's operating profits and its cost of capital is called:

Under the zero-growth dividend model, expected dividends are the same as current dividends.

The constant growth rate model of the DDM implies that:

Investing Is an Important Activity Worldwide

Investment Alternatives: Generic Principles All Investors Must Know

Indirect Investing: a Global Activity

Securities Markets Matter to All Investors

All Financial Markets Have Regulations and Trading Practices

Return and Risk: the Foundation of Investing Worldwide

Portfolio Theory Is Universal

Portfolio Selection for All Investors

Asset Pricing Principles

Managing a Stock Portfolio: a Worldwide Issue

What Happens If Markets Are Efficient or Not?

Economy/ market Analysis Must Be Considered by All Investor

Sector/ industry Analysis

Company Analysis

Technical Analysis

Fixed Income Securities Are Available Worldwide

Managing Bond Portfolios: Some Issues Affect All Investors

Understanding Derivative Securities: Options

Understanding Derivative Securities: Futures

All Investors Must Consider Portfolio Management

Evaluation of Investment Performance: a Global Concept

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