Deck 11: Stock Valuation

Question 1

If the valuation of a stock is $10 and its price is $13, the investor should establish a short position in the stock.​

Answer 1

True

Question 2

The value of a common stock depends in part on the expected growth in dividends.​

Answer 2

True

Question 3

An increase in the required return will tend to increase the value of a stock.​

Answer 3

False

Question 4

One index of systematic risk is a stock's beta coefficient.​

Question 5

The return on an investment in stock depends on both dividends and capital gains.​

Question 6

The risk‑adjusted model for the valuation of common stock excludes yields on competitive securities.​

Question 7

A P/E ratio may be used as a multiple to forecast a firm's future earnings.​

Question 8

If management increases a firm's dividends, its growth rate will also increase.​

Question 9

An increase in risk should cause the value of a common stock to fall.​

Question 10

Low P/E stocks indicate that the firm distributes a large proportion of its earnings as cash dividends.​

Question 11

Valuation of stock depends on past dividends.​

Question 12

The value of a stock should increase if investors' required rate of return declines.​

Question 13

The P/E ratio measures a stock's price relative to the firm's equity.​

Question 14

​The value of stock depends in part on future dividends and investors' required return.

Question 15

The dividend‑growth model assumes the firm will be liquidated at some specified time in the future.​

Question 16

The required return for an investment in a stock increases if the firm's beta declines.​

Question 17

The dividend‑growth model determines what an investor thinks a stock is worth but not necessarily its price.​

Question 18

The dividend‑growth model may be applied only if it is assumed that the growth in dividends will be constant.​

Question 19

​An increase in the required return on the market will tend to decrease stock valuations.

Question 20

The dividend‑growth model cannot be adjusted for changes in growth rates or changes in risk.​

Question 21

​An increase in investors' required return should cause the value of a common stock to

A) ​rise
B) ​fall
C) ​remain unchanged
D) ​remain stable or rise slightly

Question 22

If you purchase Large Oil, Inc. for $36 and the firm pays a $3.00 annual dividend which you expect to grow at 7.5 percent, what is the implied annual rate of return on your investment?​

Question 23

​According to the dividend‑growth model, the value of a common stock depends on ​
1) the price of the stock
2) investors' required rate of return
3) the future growth in dividends

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​all three

Question 24

​If the valuation of a stock is $20 and it currently sells for $25, then ​
1) the stock is undervalued
2) the stock is overvalued
3) the investor should establish a short position
4) the investor should establish a long position

A)1 and 3​
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 25

Two stocks each pay a $1 dividend that is growing annually at 4 percent. Stock A's beta = 1.3; stock B's beta = 0.8.
a. Which stock is more volatile?
b. If Treasury bills yield 2 percent and you expect
the market to rise by 8 percent, what is your
risk-adjusted required return for each stock?
c. Using the dividend-growth model, what is the
maximum price you would be willing to pay for each
stock?
d. Why are their valuations different?
​

Question 26

​Your broker recommends that you purchase Good Mills at $34. The stock pays a $2.20 annual dividend, which (like its per share earnings) is expected to grow annually at 3 percent. If you want to earn 9 percent on your funds, is this stock a good buy?

Question 27

When risk analysis is introduced into the dividend‑ growth model, the required rate of return considers

A) ​the firm's growth rate
B) ​the firm's dividend
C) ​the firm's beta coefficient
D) ​the firm's past dividends

Question 28

​The value of a stock may increase if
1) risk is increased
2) risk is decreased
3) investors' required rate of return increases
4) investors' required rate of return decreases

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 29

​The value of a stock should decline if

A) ​the risk‑free rate declines
B) ​the return on the market declines
C) ​the firm's beta rises
D) ​the earnings multiple rises

Question 30

According to the dividend‑growth model, the value of a stock does not depend on​

A) future dividends​
B) ​past dividends
C) ​future growth
D) ​investor's required rate of return

Question 31

What is the annual rate of return on an investment in a common stock that cost $40.50 if the current dividend is $1.50 and the growth in the value of the shares and the dividend is 8 percent?​

Question 32

A P/E ratio considers​

A) ​profits relative to earnings
B) ​price of the stock relative to earnings
C) ​price of a preferred stock relative to earnings
D) ​profits relative to equity

Question 33

​A price to book ratio considers

A) profits relative to earnings
B) ​price of the stock relative to equity
C) ​profits relative to equity
D) ​price of the stock relative to earnings