Deck 8: Valuation Tools

Question 1

Which of the following words is best associated with the concepts of PEG, Greenspan Model, PVGO, and dividend discount model?

A) book value
B) market value
C) income measurement
D) cash flow

Answer 1

market value

Question 2

Fundamental analysis seeks to determine a _____ independent of the current market value of a stock based on _____ information.

A) future stock value; currently available
B) current stock value; expected
C) book value; past
D) current stock value; currently available

Answer 2

current stock value; currently available

Question 3

If the fair value of a popular stock market index, determined by using the dividend discount model and data from the market index, were priced above the current level of the index, an analyst may conclude that:

A) the market is overvalued.
B) the fair value determined has no relevance to the current index.
C) the market is undervalued.
D) the dividend discount model cannot be used to estimate a fair value level of the market.

Answer 3

the market is undervalued.

Question 4

Estimating a fair value of a market index with the dividend discount model usually involves substituting _____ for _____ in the model?

A) required rate of return; growth rate
B) expected earnings; expected dividends
C) expected dividends; expected earnings
D) historical dividends; expected dividends

Question 5

Estimating a fair value of a market index with the dividend discount model would entail estimating the capitalization rate, which is:

A) the required rate of return
B) the estimated earnings.
C) the difference between the required rate of return and the growth rate.
D) a proxy for the growth rate in the model.

Question 6

The sustainable growth rate is the rate of growth assets can grow from earnings retained and

A) sufficient added debt to maintain the current debt ratio.
B) is calculated as the product of the ROE and retention ratio.
C) is estimated as the "cap" rate in the dividend discount model.
D) all of the above are correct.

Question 7

The earnings yield is the:

A) reciprocal of the P/E ratio.
B) expected return on the present assets of the company.
C) assumes no earnings growth and a 100% payout ratio.
D) all of the above are correct.

Question 8

If the PE of a broad market index is below the historical average PE, an investor might expect:

A) the earnings yield ratio to increase in the future.
B) the value of stocks in the index to decrease in the future.
C) the PE's of the index to fall in the future.
D) the earnings/price ratio to decrease in the future as stock values increase.

Question 9

The Greenspan Model attempts to estimate the relative valuation of the stock market by:

A) subtracting the 10-year Treasury bond yield from the S&P 500 earnings yield.
B) comparing the U.S. T-Bill rate with the E/P ratio of the broad market.
C) subtracting the S&P earnings yield from the yield on a long-term U.S. Treasury bond.
D) subtracting the S&P dividend yield from the 10-year Treasury yield.

Question 10

A negative value on the Greenspan model tends to indicate that the general market is:

A) performing as well as can be expected.
B) is undervalued.
C) is overvalued.
D) an indicator that the Federal Reserve System will tighten or slow the growth of the money supply.

Question 11

There is growing evidence that the equity risk premium, demanded by investors in recent years, is really _____ its historical average.

A) below
B) above
C) similar to
D) none of the above

Question 12

If inflation averages three per cent over the next twenty years, and investors continue to be taxed on their investment returns, which of the following investments may be a hedge against inflation?

A) T-Bills
B) Long-term U.S. Treasuries
C) a diversified portfolio of stocks
D) none of the above.

Question 13

If expected equity risk premiums are overestimated, then most U.S. private pensions are likely to be:

A) under funded
B) over funded
C) using estimated rates of return that will underestimate future equity returns.
D) generate excess cash for corporations in the years to come.

Question 14

A $40 stock with a 4% dividend yield and an anticipated growth rate of 6%, what is the estimated shareholder expected rate of return if the U.S. T-bill rate is 2%?

A) 12%
B) 10%
C) 8%
D) 4%

Question 15

A decline in investors' equity risk premium should, everything else the same, _____ future stock prices.

A) decrease
B) increase
C) have no impact on
D) create more volatility in

Question 16

If applying the Greenspan Model to individual stock value analysis, if the present yield on long-term, safe bonds are greater than the expected earnings/price yield of the stock,

A) sell the stock.
B) buy the stock.
C) wait six months and reevaluate.
D) you should have bought the stock a year ago.

Question 17

The Greenspan Model equivalent value for an individual stock is found by:

A) estimating the 10-year Treasury bond rate for the next 10 years and adding this value to the current earnings yield.
B) multiplying the difference between the 10-year Treasury yield and the estimated earnings yield by a factor of two.
C) dividing the estimated earnings/share by the current 10-year Treasury yield.
D) multiplying the estimated earnings/share by the current 10-year Treasury yield.

Question 18

The GARP method for determining the intrinsic value of a stock seeks stocks

A) with high rates of earnings growth.
B) with low values relative to growth prospects.
C) with high payout ratios.
D) with significantly high P/E ratios.

Question 19

The PEG ratio for a company with a stock price of $40, P/E ratio of 10 and an EPS annual earnings growth rate of 12% is _____ . Base on the PEG ratio, the firm is _____ ?

A) .833; overvalued
B) .833; undervalued
C) 1.2; overvalued
D) $4 EPS; overvalued.

Question 20

The concept of pro forma earnings attempts to measure:

A) the historical cash or core earnings of the company.
B) the expected cash or core earnings after considerations for one-time events.
C) the expected cash or core earnings from the business, independent of one-time, non-reoccurring adjustments.
D) what managers would like earnings to be in the future.

Question 21

EBITDA attempts to measure the _____ of a business and excludes _____ , compared to net income.

A) non-cash earnings; one-time, nonrecurring adjustments.
B) operating cash flow; non-cash expenses and financing costs
C) cash flow from operations: non-cash expenses and financing costs
D) none of the above.

Question 22

Free cash flow is an estimate of cash flow from operations less _____ , which provides an amount of cash flow available for _____ .

A) financing costs, including dividends; reinvestment
B) capital expenditures; financing, including dividends.
C) untaxed transactions; the bottom line.
D) taxes; shareholders.

Question 23

The result of the 2000 SEC Regulation Fair Disclosure has been what?

A) greater transparency in financial reporting
B) greater corporate profitability reporting
C) less information disclosure by corporations
D) more useful information disclosures

Question 24

A company earns 20% ROE on a margin of 8% and an asset efficiency of 1.25. What is the company's ratio of debt to assets?

A) 2
B) 1
C) .5
D) .33

Question 25

The PVGO concepts divides the current market price of a stock into which two components?

A) the past and current earnings.
B) the value associated with present fixed assets and the value associated with current assets
C) the value associated with present assets and the value associated with future earnings.
D) The amount of growth opportunities included in the market value less that associated with the book value/share.

Question 26

Value investors using GARP analysis generally prefer a

A) PEG ratio greater than 5
B) PEG ratio greater than 1
C) PEG ratio less than 1
D) PEG ratio less than zero

Question 27

Another name for EBITDA used by some valuation analysts is

A) net income
B) free cash flow
C) operating cash flow
D) earnings-based cash flow

Question 28

Fundamental analysis seeks to determine the correct book value relative to the current market value.

Question 29

The Greenspan Model (Treasury bond rate less E/P ratio of market index) increases as stock market value increase.

Question 30

If the earnings yield on a large number of stocks is less than the default risk free bond, investors are likely to buy stock.

Question 31

Estimating the relative value of stocks using a general market index requires the use of the expecteddividend yield.

Question 32

In the dividend discount model, the percentage rate difference between the equity required rate and expected growth rate is called the capitalization rate.

Question 33

The present value of growth opportunities is the difference between the current price and the perpetual present value stream of next years earnings.

Question 34

SEC Regulation FD is intended to increase stock market efficiency.

Question 35

Investing via the GARP methodology involves finding undervalued companies with good growth prospects.

Question 36

SEC Regulation FD seeks to eliminate the practice of selective disclosure to a narrow group of institutional investors at the expense of the general investor.

Question 37

The sustainable growth rate is the payout ratio times the ROE.

Question 38

There is growing evidence that the equity risk premium has decreased from its historical average.

Question 39

Everything else the same a narrowing of the equity risk premium should alert investors to a variety of undervalued stocks.

Question 40

Rising long-term Treasury bond yields should prompt investors, per the Greenspan Model, to aggressively buy stocks.

Question 41

Increasing ROE will likely always increase share price for a company.

Question 42

A PEG ratio of greater than one indicates an investment opportunity for investors.

Question 43

A slowing of a company's earnings growth rate will increase the PEG ratio.

Question 44

The concept of pro forma earnings, while acceptable, invite some companies to overstate future earnings.

Question 45

The concept of EBITDA attempts to measure GAAP net income more accurately.

Question 46

EBITDA adds back interest, taxes, and non-cash expenses to net income and serves as a proxy for operating cash flow.

Question 47

Free cash flow is a measure of operating profitability.

Question 48

Free cash flows measures the cash flow from operations after financing activities.

Question 49

The DuPont analysis ignores the impact of changes in risk assumed by a company.

Question 50

In the DuPont analysis, the ROE is the sum of the margin, asset efficiency, and leverage ratios.

Question 51

Increasing the leverage may increase the ROA of a company.

Question 52

The PVGO portion of a company's current stock price represents added net present value from future investments.

Question 53

Because firms cannot hide operating cash flows in the EBITDA measure, it will likely become more important in future financial analysis.