Deck 8: Valuing Stocks

Question 1

Which of these investors earn returns from receiving dividends and from stock price appreciation?

A) bondholders
B) stockholders
C) investment bankers
D) managers

Answer 1

stockholders

Question 2

When residual cash flows are high, stock values will be

A) unchanged.
B) low.
C) high.
D) unpredictable.

Answer 2

high.

Question 3

Many companies grow very fast at first, but slower future growth can be expected. Such companies are called

A) Fortune 500 companies.
B) blue chip companies.
C) variable growth rate firms.
D) constant growth rate firms.

Answer 3

variable growth rate firms.

Question 4

As residual claimants, which of these investors claim any cash flows to the firm that remain after the firm pays all other claims?

A) creditors
B) bondholders
C) preferred stockholders
D) common stockholders

Question 5

Stock valuation model dynamics make clear that lower discount rates lead to

A) lower valuations.
B) higher valuations.
C) lower growth rates.
D) higher growth rates.

Question 6

The dividend discount model:

A) is a valuation approach based on future dividend income.
B) is a hybrid security that has characteristics of both long-term debt and common stock.
C) expects to have above average rates of growth in revenue, earnings, and/or dividends.
D) none of the above.

Question 7

Stock valuation model dynamics make clear that higher growth rates lead to

A) lower valuations.
B) higher valuations.
C) lower growth rates continuing.
D) higher growth rates continuing.

Question 8

Investors buy stock at the

A) dealer price.
B) bid price.
C) quoted ask price.
D) broker price.

Question 9

The Standard & Poor's 500 Index includes

A) all of the stock listed on the New York Stock Exchange.
B) 30 of the largest (market capitalization) and most active companies in the U.S. economy.
C) 500 firms that are the largest in their respective economic sectors.
D) 500 firms that are the largest as ranked by Fortune Magazine.

Question 10

Which of the following will only be executed if the order's price conditions are met?

A) a trade
B) a limit order
C) an unlimited order
D) a spread

Question 11

Investors sell stock at the

A) dealer price.
B) bid price.
C) quoted ask price.
D) broker price.

Question 12

We can estimate a stock's value by

A) using the book value of the total stockholder equity section.
B) discounting the future dividends and future stock price appreciation.
C) compounding the past dividends and past stock price appreciation.
D) using the book value of the total assets divided by the number of shares outstanding.

Question 13

Trading at physical exchanges like the New York Stock Exchange and the American Stock Exchange takes place

A) at dealers' trading posts.
B) at brokers' trading posts.
C) at dealers' computers.
D) at market markers.

Question 14

Which of the following characteristics describe the NASDAQ stock market?

A) is an electronic stock market without a physical trading floor.
B) ranks second behind the NYSE in terms of total dollar value.
C) lists approximately 3,900 domestic and foreign companies.
D) All of the above.

Question 15

A variable growth rate:

A) is a valuation technique used when a firm's current growth rate is expected to change sometime in the future.
B) combines the present-value cash flow equation and the constant-growth-rate model equation.
C) both a and b
D) neither a or b

Question 16

At any given time, the market value of a firm's common stock depends upon:

A) The company's profitability and the growth prospects for the future.
B) The current market interest rates and the conditions in the overall stock market.
C) Both a and b
D) Neither a or b

Question 17

Which of these are valued as a special zero-growth case of the constant growth rate model?

A) common stock
B) preferred stock
C) future dividends
D) future stock prices

Question 18

The NASDAQ Composite includes

A) all of the stocks listed on the NASDAQ Stock Exchange.
B) 30 of the largest (market capitalization) and most active companies in the U.S. economy.
C) 500 firms that are the largest in their respective economic sectors.
D) 500 firms that are the largest as ranked by Fortune Magazine.

Question 19

The Dow Jones Industrial Average (DJIA) includes

A) all of the stock listed on the New York Stock Exchange.
B) 30 of the largest (market capitalization) and most active companies in the U.S. economy.
C) 500 firms that are the largest in their respective economic sectors.
D) 500 firms that are the largest as ranked by Fortune Magazine.

Question 20

Why is the ask price higher than the bid price?

A) It represents the gain a market maker achieves.
B) It represents the gain the stock seller achieves.
C) It represents the gain the stock buyer achieves.
D) It represents the gain all participants will achieve.

Question 21

When reviewing a stock's price measured to other stocks, you are assessing a stock's:

A) price/earnings (P/E) ratio
B) relative value
C) value stocks
D) none of the above.

Question 22

The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm's

A) market capitalization.
B) book value.
C) market makers.
D) constant growth model.

Question 23

If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 7 percent, what's the value of the stock?

A) $0.21
B) $0.43
C) $21.00
D) $42.86

Question 24

At your full-service brokerage firm, it costs $120 per stock trade. How much money do you receive after selling 200 shares of Ralph Lauren (RL), which trades at $85.13?

A) $16,546.00
B) $16,906.00
C) $17,026.00
D) $17,146.00

Question 25

If on November 26, 2017, The Dow Jones Industrial Average closed at 12,743.40, which was down 237.44 that day. What was the return (in percent) of the stock market that day?

A) −0.02 percent
B) +0.02 percent
C) −1.83 percent
D) +1.83 percent

Question 26

International Business Machines (IBM) has earnings per share of $6.85 and a P/E ratio of 15.19. What is the stock price?

A) $0.45
B) $2.22
C) $45.09
D) $104.05

Question 27

We often use the P/E ratio model with the firm's growth rate to estimate

A) required rates of return.
B) inflation.
C) a stock's current price.
D) a stock's future price.

Question 28

At your discount brokerage firm, it costs $8.50 per stock trade. How much money do you need to buy 200 shares of Apple (AAPL), which trades at $171.54?

A) $32,608.00
B) $34,299.50
C) $34,316.50
D) $36,008.00

Question 29

At your full-service brokerage firm, it costs $110 per stock trade. How much money do you receive after selling 100 shares of Time Warner, Inc. (TMX), which trades at $22.62?

A) $2,152.00
B) $2,262.00
C) $2,372.00
D) $2,388.20

Question 30

You would like to sell 100 shares of Pfizer, Inc. (PFE). The current bid and ask quotes are $27.22 and $27.25, respectively. You place a limit sell-order at $27.24. If the trade executes, how much money do you receive from the buyer?

A) $2,722.00
B) $2,724.00
C) $2,725.00
D) $5,446.00

Question 31

If a preferred stock from Ecology and Environment, Inc. (EEI) pays $2.50 in annual dividends, and the required return on the preferred stock is 5.8 percent, what's the value of the stock?

A) $0.15
B) $0.43
C) $14.50
D) $43.10

Question 32

You would like to buy shares of International Business Machines (IBM). The current bid and ask quotes are $96.17 and $96.24, respectively. You place a market buy-order for 100 shares that executes at these quoted prices. How much money did it cost to buy these shares?

A) $7.00
B) $9,617.00
C) $9,624.00
D) $19,241.00

Question 33

You would like to buy shares of Nokia (NOK). The current bid and ask quotes are $20.13 and $20.15, respectively. You place a market buy-order for 300 shares that executes at these quoted prices. How much money did it cost to buy these shares?

A) $6.00
B) $6,039.00
C) $6,045.00
D) $12,084.00

Question 34

Pfizer, Inc. (PFE) has earnings per share of $2.09 and a P/E ratio of 11.02. What is the stock price?

A) $0.19
B) $5.27
C) $18.97
D) $23.03

Question 35

Dividend yield is defined as

A) the last four quarters of dividend income expressed as a percentage of the par value of the stock.
B) the last four quarters of dividend income expressed as a percentage of the current stock price.
C) the last dividend paid expressed as a percentage of the current stock price.
D) the next dividend to be paid expressed as a percentage of the current stock price.

Question 36

Ralph Lauren (RL) has earnings per share of $3.85 and a P/E ratio of 17.37. What is the stock price?

A) $0.22
B) $4.51
C) $22.16
D) $66.87

Question 37

At your discount brokerage firm, it costs $9.95 per stock trade. How much money do you need to buy 100 shares of Ralph Lauren (RL), which trades at $85.13?

A) $8,503.05
B) $8,503.00
C) $8,522.95
D) $9,508.00

Question 38

If on November 27, 2017, The Dow Jones Industrial Average closed at 12,958.44, which was up 215.04 that day. What was the return (in percent) of the stock market that day?

A) −0.017 percent
B) +0.017 percent
C) −1.69 percent
D) +1.69 percent

Question 39

Value stocks usually have

A) low P/E ratios and high growth rates.
B) high P/E ratios and low growth rates.
C) low P/E ratios and low growth rates.
D) high P/E ratios and high growth rates.

Question 40

You would like to sell 400 shares of International Business Machines (IBM). The current bid and ask quotes are $96.24 and $96.17, respectively. You place a limit sell-order at $96.20. If the trade executes, how much money do you receive from the buyer?

A) $38,464.00
B) $38,468.00
C) $38,480.00
D) $38,496.00

Question 41

A firm is expected to pay a dividend of $3.00 next year and $3.21 the following year. Financial analysts believe the stock will be at their target price of $80.00 in two years. Compute the value of this stock with a required return of 13 percent.

A) $50.00
B) $67.52
C) $67.82
D) $86.21

Question 42

Financial analysts forecast Target Corp. (TGT) growth for the future to be 11 percent. Their recent dividend was $0.52. What is the value of their stock when the required rate of return is 11.89 percent?

A) $5.25
B) $6.48
C) $58.43
D) $64.85

Question 43

A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with a required return of 10 percent.

A) $65.40
B) $66.67
C) $65.57
D) $79.14

Question 44

Home Depot (HD) recently paid a $0.90 dividend. The dividend is expected to grow at a 17 percent rate. At the current stock price of $33.08, what is the return shareholders are expecting?

A) 2.70 percent
B) 17.03 percent
C) 17.18 percent
D) 20.18 percent

Question 45

Consider a firm that had been priced using a 10 percent growth rate and a 14 percent required rate. The firm recently paid a $1.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12 percent rate. How much should the stock price change (in dollars and percentage)?

A) $25, 1 percent
B) $25, 100 percent
C) $28.50, 1.04 percent
D) $28.50, 104 percent

Question 46

Consider a firm that had been priced using a 6 percent growth rate and a 9 percent required rate. The firm recently paid a $0.50 dividend. The firm has just announced that because of a new joint venture, it will likely grow at an 8 percent rate. How much should the stock price change (in dollars and percentage)?

A) $33.33, 67 percent
B) $33.33, 198 percent
C) $36.33, 67 percent
D) $36.33, 206 percent

Question 47

A fast growing firm recently paid a dividend of $0.50 per share. The dividend is expected to increase at a 25 percent rate for the next 3 years. Afterwards, a more stable 12 percent growth rate can be assumed. If a 15 percent discount rate is appropriate for this stock, what is its value?

A) $5.00
B) $22.62
C) $25.75
D) $36.46

Question 48

American Eagle Outfitters (AEO) recently paid a $0.38 dividend. The dividend is expected to grow at a 15.5 percent rate. At the current stock price of $24.07, what is the return shareholders are expecting?

A) 15.50 percent
B) 15.52 percent
C) 17.08 percent
D) 17.32 percent

Question 49

Financial analysts forecast Best Buy Company (BBY) growth for the future to be 13 percent. Their recent dividend was $0.49. What is the value of their stock when the required rate of return is 14.13 percent?

A) $3.92
B) $4.90
C) $43.36
D) $49.00

Question 50

Best Buy Co. (BBY) paid a $0.27 dividend per share in 2013, which grew to $0.49 in 2017. This growth is expected to continue. What is the value of this stock at the beginning of 2017 when the required rate of return is 17.23 percent?

A) $2.84
B) $42.24
C) $49.03
D) $50.78

Question 51

A firm recently paid a $1.00 annual dividend. The dividend is expected to increase by 10 percent in each of the next four years. In the fourth year, the stock price is expected to be $100. If the required rate for this stock is 14 percent, what is its value?

A) $25.00
B) $36.60
C) $62.87
D) $72.30

Question 52

Target Corp. (TGT) paid a $0.21 dividend per share in 2010, which grew to $0.52 in 2017. This growth is expected to continue. What is the value of this stock at the beginning of 2017 when the required rate of return is 14.77 percent?

A) $3.52
B) $55.32
C) $62.97
D) $63.49

Question 53

A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in two years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.

A) $4.42
B) $4.59
C) $5.43
D) $7.21

Question 54

Target Corp. (TGT) recently earned a profit of $3.57 earnings per share and has a P/E ratio of 17.3. The dividend has been growing at a 14 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 23 in five years?

A) $118.85, $158.01 respectively
B) $137.19, $182.39 respectively
C) $173.87, $231.15 respectively
D) $308.81, $410.55 respectively

Question 55

Annual dividends of Pfizer, Inc. (PFE) grew from $0.38 in 2000 to $1.15 in 2007. What was the annual growth rate?

A) 2.02 percent
B) 17.14 percent
C) 28.95 percent
D) 202.63 percent

Question 56

The Buckle (BKE) recently paid a $0.90 dividend. The dividend is expected to grow at a 19 percent rate. At the current stock price of $43.17, what is the return shareholders are expecting?

A) 19.00 percent
B) 19.02 percent
C) 21.48 percent
D) 22.74 percent

Question 57

Annual dividends of Walmart Stores (WMT) grew from $0.23 in 2000 to $0.83 in 2007. What was the annual growth rate?

A) 2.61 percent
B) 20.12 percent
C) 37.29 percent
D) 260.87 percent

Question 58

A firm recently paid a $0.30 annual dividend. The dividend is expected to increase by 8 percent in each of the next four years. In the fourth year, the stock price is expected to be $60. If the required rate for this stock is 10 percent, what is its value?

A) $15.00
B) $20.41
C) $42.13
D) $45.30

Question 59

A firm does not pay a dividend. It is expected to pay its first dividend of $0.15 per share in three years. This dividend will grow at 9 percent indefinitely. Using a 10 percent discount rate, compute the value of this stock.

A) $12.28
B) $12.40
C) $16.35
D) $16.50

Question 60

Walmart (WMT) recently earned a profit of $3.13 per share and has a P/E ratio of 14.22. The dividend has been growing at a 12.5 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio declined to 10 in five years?

A) $6.08, $5.04 respectively
B) $72.22, $50.40 respectively
C) $80.20, $56.40 respectively
D) $86.46, $60.80 respectively

Question 61

Consider a firm that had been priced using a 12 percent growth rate and a 16 percent required return. The firm recently paid a $5.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12.5 percent rate. How much should the stock price change (in dollars and percentage)?

A) $21.50; 13.72 percent
B) $21.50; 16.14 percent
C) $20.71; 14.79 percent
D) $20.71; 19.93 percent

Question 62

A firm is expected to pay a dividend of $2.00 next year and $3.75 the following year. Financial analysts believe the stock will be at their price target of $125.00 in two years. Compute the value of this stock with a required rate of return of 15 percent.

A) $78.34
B) $81.05
C) $87.13
D) $99.09

Question 63

Financial analysts forecast ABC Inc. growth for the future to be 12 percent. ABC's recent dividend was $1.60. What is the value of ABC stock when the required return is 15 percent?

A) $59.73
B) $63.72
C) $79.81
D) $91.02

Question 64

A firm recently paid a $0.50 annual dividend. The dividend is expected to increase by 10 percent in each of the next three years. In the third year, the stock price is expected to be $110. If the required return is 15 percent, what is its value?

A) $62.53
B) $68.95
C) $73.71
D) $78.67

Question 65

At your discount brokerage firm, it costs $7.95 per stock trade. How much money do you receive after selling 250 shares of General Electric (GE), which trades at $55.19?

A) $14,037.95
B) $11,958.55
C) $12,174.95
D) $13,789.55

Question 66

To list a stock on the NYSE, a company must meet minimum requirements that include all of the following EXCEPT

A) firm size.
B) total number of stockholders.
C) level of trading volume.
D) P/E ratio.

Question 67

Suppose that a firm's recent earnings per share and dividends per share are $2.50 and $1.00, respectively. Both are expected to grow at 10 percent. However, the firm's current P/E ratio of 22 seems high for this growth rate. The P/E ratio is expected to fall to 18 within five years. Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years. Then discount these cash flows using a 14 percent required rate.

A) $37.51
B) $37.64
C) $42.14
D) $72.47

Question 68

A preferred stock from DLC pays $3.00 in annual dividends. If the required return on the preferred stock is 9.3 percent, what is the value of the stock?

A) $34.89
B) $32.26
C) $38.49
D) $31.13

Question 69

A firm has been losing sales due to technological obsolescence. It projects growth for the future to be −2 percent. Its recent dividend was $2.00. What is the value of this stock when the required return is 9 percent?

A) $28.00
B) $29.14
C) $17.82
D) $15.52

Question 70

JPM has earnings per share of $3.75 and P/E of 47. What is the stock price?

A) $174.08
B) $176.25
C) $185.95
D) $112.98

Question 71

Ultra Petroleum (UPL) has earnings per share of $1.75 and P/E of 42.56. What is the stock price?

A) $74.48
B) $76.68
C) $85.68
D) $112.98

Question 72

Suppose that a firm's recent earnings per share and dividend per share are $2.50 and $1.00, respectively. Both are expected to grow at 5 percent. However, the firm's current P/E ratio of 23 seems high for this growth rate. The P/E ratio is expected to fall to 19 within five years. Compute a value for this stock. Assume a 10 percent required rate.

A) $36.19
B) $38.86
C) $40.31
D) $42.00

Question 73

Campbell Soup Co. paid a $1.55 dividend per share in 2012, which grew to $1.95 in 2017. This growth is expected to continue. What is the value of this stock at the beginning of 2017 when the required return is 10.5 percent?

A) $35.20
B) $34.16
C) $33.48
D) $32.17

Question 74

Which of the following is an electronic stock market without a physical trading floor?

A) American Stock Exchange
B) Mercantile Exchange
C) New York Stock Exchange
D) Nasdaq Stock Market

Question 75

Suppose that a firm's recent earnings per share and dividends per share are $3.00 and $1.50, respectively. Both are expected to grow at 10 percent. However, the firm's current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 within five years. Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years. Then discount these cash flows using a 14 percent required rate.

A) $31.68
B) $40.15
C) $46.89
D) $60.00

Question 76

A fast growing firm recently paid a dividend of $0.80 per share. The dividend is expected to increase at a rate of 30 percent for the next four years. Afterwards, a more stable 7 percent growth rate can be assumed. If a 10 percent discount rate is appropriate for this stock, what is its value?

A) $60.48
B) $60.18
C) $61.34
D) $73.86

Question 77

At your discount brokerage firm, it costs $9.95 per stock trade. How much money do you need to buy 200 shares of General Electric (GE), which trades at $45.19?

A) $9,038.00
B) $4,528.95
C) $9,047.95
D) $4,595.95

Question 78

A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a 25 percent rate for the next three years. Afterwards, a more stable 8 percent growth rate can be assumed. If a 10 percent discount rate is appropriate for this stock, what is its value?

A) $12.50
B) $75.93
C) $83.13
D) $120.24

Question 79

A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a rate of 15 percent for the next 3 years. Afterwards, a more stable 6 percent growth rate can be assumed. If a 10 percent discount rate is appropriate for this stock, what is its value?

A) $33.54
B) $37.99
C) $39.37
D) $42.03

Question 80

A firm has been losing sales due to technological obsolescence. It projects growth for the future to be −3 percent. Its recent dividend was $2.50. What is the value of this stock when the required return is 7 percent?

A) $28.17
B) $24.25
C) $17.42
D) $15.53