Exam 10: Common Stock Valuation Lessons for All Investors

Which of the following changes will likely lead to a higher P/E, assuming other factors are equal?

It is recommended that investors interested in the EVA approach should seek companies that have a return of capital in excess of ------- because this will likely exceed the cost of capital and the company is, therefore, adding value.

Under the P/E model, stock price is a product of:

Discounted cash flow techniques used in valuing common stock are based on:

Which of the following is a problem using the dividend discount model to value common stock?

A company has a price to sales ratio of 1.0, annual sales of $1 billion and 100 million shares of common stock outstanding. Its stock price is:

If the growth rate in dividends is greater than the required rate of return, the price found under the constant growth model will be negative.

Morningstar reports a "fair value" for stocks based on a relative valuation analysis.

You would expect a lower PSR for a retail company than for a biotechnology company.

Infinite growth is a problem with the dividend discount model because:

Book value is:

Contemporary Casuals, Inc., (CCI) has a beta of 1.15, an expected dividend of $2.30, and an expected dividend growth rate of 5 percent for the foreseeable future. The S&P500 expected return is 18 percent, and the Treasury bill rate is 6 percent. (a) Calculate the required return on Contemporary stock. (b) Calculate the price of Contemporary stock.

XYZ Company has expected earnings of $3.00 for next year and usually retains 40 percent for future growth. Its dividends are expected to grow at a rate of 10 percent indefinitely. If an investor has a required rate of return of 15 percent, what price would he be willing to pay for XYZ stock?

Based on PSR rule of thumb, if PSR is less than 1, the stock is:

Relative valuation methods tend to be more sophisticated, more formal and less intuitive than discounted cash flow techniques.

Seaside Toys currently earns $2.00 per share and currently pays $1.00 per share in dividends. It is expected to have a constant growth rate of 5 percent per year. The required rate of return is 15 percent. What is the intrinsic value of this stock?

The "New Economy" stocks of the 1990s, such as the experience of eToys, proved conclusively that old valuation principles do not apply today.

What variables must be estimated to use the dividend discount model? The P/E model?

There are many ways to measure Earnings Per Share.

Often "high-flyer" stocks have high P/E ratios, yet some analysts seek low P/E stocks. Are high or low P/E ratios more reliable as tools for valuation of stocks?