Question 1

Which of the following statements regarding P/E ratios is true?

Accepted Answer

A)  Generally, the riskier the stock, the higher the P/E ratio. 
B)  In recent years, the small capitalization stocks had the highest P/E ratios. 
C)  As interest rates increase, P/E ratios are expected to decline. 
D)  Higher growth prospects often lead to lower P/E ratios. 
A)  Generally, the riskier the stock, the higher the P/E ratio. 
B)  In recent years, the small capitalization stocks had the highest P/E ratios. 
C)  As interest rates increase, P/E ratios are expected to decline. 
D)  Higher growth prospects often lead to lower P/E ratios.

Question 2

Bronco Inc.'s common stock is currently selling for $42 and paying a dividend of $3. If the investors expect dividends to double in 8 years, what is the required rate of return for Western Inc?

Accepted Answer

In order for dividends to double in 9 ye

Question 3

Generally speaking, if interest rates fall and other factors remain constant, the P/E ratio of most companies company will:

Accepted Answer

A)  become negative. 
B)  increase. 
C)  decrease. 
D)  become more volatile. 
A)  become negative. 
B)  increase. 
C)  decrease. 
D)  become more volatile.

Question 4

Under the multiple growth model, at least ------ different growth rates are used.

Accepted Answer

A)  two 
B)  three 
C)  four 
D)  five 
A)  two 
B)  three 
C)  four 
D)  five

Question 5

All of the following are interchangeable terms except for:

Accepted Answer

A)  discount rate 
B)  coupon rate 
C)  required rate of return 
D)  capitalization rate 
A)  discount rate 
B)  coupon rate 
C)  required rate of return 
D)  capitalization rate

Question 6

Economic value added is the difference between:

Accepted Answer

A)  operating profits and cost of capital. 
B)  operating profits and cost of equity. 
C)  net profits and cost of capital. 
D)  net profits and cost of equity. 
A)  operating profits and cost of capital. 
B)  operating profits and cost of equity. 
C)  net profits and cost of capital. 
D)  net profits and cost of equity.

Question 7

Analysts often use a ________% rule in security valuation in recognition of the fact that estimating a security's value is an inexact process.

Accepted Answer

A)  5 
B)  10 
C)  15 
D)  20 
A)  5 
B)  10 
C)  15 
D)  20

Question 8

A major difference between the dividend discount model (DDM) and the free cash flow to equity model (FCFE) is that the FCFE:

Accepted Answer

A)  accounts for potential capital gains and the DDM does not. 
B)  measures what a firm could pay out in dividends and the DDM measures what is actually paid. 
C)  measures both dividend growth and stability and the DDM only measures the dividend growth. 
D)  bases its calculations on future value techniques while the DDM uses present value calculations. 
A)  accounts for potential capital gains and the DDM does not. 
B)  measures what a firm could pay out in dividends and the DDM measures what is actually paid. 
C)  measures both dividend growth and stability and the DDM only measures the dividend growth. 
D)  bases its calculations on future value techniques while the DDM uses present value calculations.

Question 9

What are the implications for the usefulness of the P/E ratio if a company's earnings are very low (like a few cents) or negative?

Accepted Answer

Either very low or negative earnings cau

Question 10

Declining interest rates in the market should send P/E ratios, on average, higher.

Accepted Answer

A) True 
 B)False

Question 11

The price/sales ratio indicates:

Accepted Answer

A)  the amount of risk in the firm's operations. 
B)  what the market is willing to pay for a firm's revenues. 
C)  the price advantage a company has for its brand names. 
D)  what the analysts see as the breakup value of the firm. 
A)  the amount of risk in the firm's operations. 
B)  what the market is willing to pay for a firm's revenues. 
C)  the price advantage a company has for its brand names. 
D)  what the analysts see as the breakup value of the firm.

Question 12

WWW Company currently (t = 0) earns $4.00 per share, and has a payout of 40 percent. Dividends are expected to grow at a constant rate of 4 percent per year. The required rate of return is 15 percent. The price of this stock would be estimated at

Accepted Answer

A)  $57.14. 
B)  $22.86. 
C)  $15.13. 
D)  $24.69. 
A)  $57.14. 
B)  $22.86. 
C)  $15.13. 
D)  $24.69.

Question 13

S&P's Outlook reports intrinsic value for stocks based on a combination of relative valuation and discounted cash flow analysis.

Accepted Answer

A) True 
 B)False

Question 14

The constant growth dividend model uses the:

Accepted Answer

A)  historical growth rate in dividends. 
B)  historical growth rate in earnings. 
C)  estimated growth rate in dividends. 
D)  estimated growth rate in earnings. 
A)  historical growth rate in dividends. 
B)  historical growth rate in earnings. 
C)  estimated growth rate in dividends. 
D)  estimated growth rate in earnings.

Question 15

The financial newscaster comments that the Stock X is overvalued at an earnings multiple of 60. What could cause a P/E this high?

Accepted Answer

Either the price could be high

Question 16

A. T. Edwards paid an annual dividend of $1.25 last year. Investors expect the dividends to grow at a rate of 6 percent per year over the foreseeable future. If the required rate of return for this stock is 12 percent, what is its intrinsic value today?

Accepted Answer

P₀ = [D₀ (1+g)]/ (k-g)

Question 17

If the intrinsic value of stock is greater than the current stock price, the stock is overvalued and should be sold short.

Accepted Answer

A) True 
 B)False

Question 18

The dividend model that is most appropriate for a young company that pays small dividends now but is expected to increase dividends in a few years is the:

Accepted Answer

A)  zero-growth model. 
B)  constant growth model. 
C)  expansion growth model. 
D)  multiple growth model. 
A)  zero-growth model. 
B)  constant growth model. 
C)  expansion growth model. 
D)  multiple growth model.

Question 19

If all investors use the constant growth dividend model to value the same stock, they will all arrive at the same estimate of value.

Accepted Answer

A) True 
 B)False

Question 20

Relative valuation measures commonly used by market participants today include:

Accepted Answer

A)  P/E ratio, Price/Book Value, and Sales/Price ratios 
B)  Earnings per Share ratio 
C)  Discounted Cash Flow 
D)  Residual Income Valuation 
A)  P/E ratio, Price/Book Value, and Sales/Price ratios 
B)  Earnings per Share ratio 
C)  Discounted Cash Flow 
D)  Residual Income Valuation

Exam 10: Common Stock Valuation Lessons for All Investors

Which of the following statements regarding P/E ratios is true?

Bronco Inc.'s common stock is currently selling for $42 and paying a dividend of $3. If the investors expect dividends to double in 8 years, what is the required rate of return for Western Inc?

Generally speaking, if interest rates fall and other factors remain constant, the P/E ratio of most companies company will:

Under the multiple growth model, at least ------ different growth rates are used.

All of the following are interchangeable terms except for:

Economic value added is the difference between:

Analysts often use a ________% rule in security valuation in recognition of the fact that estimating a security's value is an inexact process.

A major difference between the dividend discount model (DDM) and the free cash flow to equity model (FCFE) is that the FCFE:

What are the implications for the usefulness of the P/E ratio if a company's earnings are very low (like a few cents) or negative?

Declining interest rates in the market should send P/E ratios, on average, higher.

The price/sales ratio indicates:

WWW Company currently (t = 0) earns $4.00 per share, and has a payout of 40 percent. Dividends are expected to grow at a constant rate of 4 percent per year. The required rate of return is 15 percent. The price of this stock would be estimated at

S&P's Outlook reports intrinsic value for stocks based on a combination of relative valuation and discounted cash flow analysis.

The constant growth dividend model uses the:

The financial newscaster comments that the Stock X is overvalued at an earnings multiple of 60. What could cause a P/E this high?

A. T. Edwards paid an annual dividend of $1.25 last year. Investors expect the dividends to grow at a rate of 6 percent per year over the foreseeable future. If the required rate of return for this stock is 12 percent, what is its intrinsic value today?

If the intrinsic value of stock is greater than the current stock price, the stock is overvalued and should be sold short.

The dividend model that is most appropriate for a young company that pays small dividends now but is expected to increase dividends in a few years is the:

If all investors use the constant growth dividend model to value the same stock, they will all arrive at the same estimate of value.

Relative valuation measures commonly used by market participants today include:

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