Deck 7: Valuing Stocks

Question 1

The liquidation value of a firm is equal to the book value of the firm.

Answer 1

False

Question 2

Technical analysts have no effect upon the efficiency of the stock market.

Answer 2

False

Question 3

Securities with the same expected risk should offer the same expected rate of return.

Answer 3

True

Question 4

Investors may obtain the same securities at the same time in either the primary or secondary markets.

Question 5

Holding risk constant,an increase in dividend yield will tend to decrease a firm's rate of growth.

Question 6

If investors believe a company will have the opportunity to make very profitable investments in the future,they will pay more for the company's stock today.

Question 7

The dividend discount model does not hold for investors who have a preference for capital gains.

Question 8

A high P/E ratio indicates high level of risk.

Question 9

Stock value is always increased whenever earnings are plowed back into the firm.

Question 10

An excess of market value over the book value of equity can be attributed to going concern value.

Question 11

The dividend discount model should not be used to value stocks in which the dividend does not grow.

Question 12

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

Question 13

If the market is efficient,stock prices should only be expected to react to new information that is released.

Question 14

According to the dividend discount model,a stock's price today depends on the investor's horizon for holding the stock.

Question 15

The intent of technical analysis is to discover patterns in past stock prices.

Question 16

Technical analysts would be more likely than other investors to index their portfolios.

Question 17

The dividend discount model states that today's stock price equals the present value of all expected future dividends.

Question 18

Market efficiency implies that security prices impound new information quickly.

Question 19

The dividend discount model indicate that the value of a stock is the present value of the dividends it will pay over the investor's horizon plus the present value of the expected stock price at the end of that horizon.

Question 20

Cash dividends are offered to shareholders in lieu of increasing the stock's price.

Question 21

If next year's dividend is forecast to be $5.00,the constant growth rate is 4 percent,and the discount rate is 16 percent,then the current stock price should be:

A) $31.25
B) $40.00
C) $41.67
D) $43.33

Question 22

How much should you pay for a share of stock that offers a constant growth rate of 10 percent,requires a 16 percent rate of return,and is expected to sell for $50 one year from now?

A) $42.00
B) $45.00
C) $45.45
D) $47.00

Question 23

What should be the current price of a stock if the expected dividend is $5,the stock has a required return of 20 percent,and a constant dividend growth rate of 6 percent?

A) $19.23
B) $25.00
C) $35.71
D) $37.86

Question 24

Fundamental analysts attempt to get rich by identifying patterns in stock prices.

Question 25

What should be the price of a stock that offers a $4 annual dividend with no prospects of growth,and has a required return of 12.5 percent?

A) $8.50
B) $25.00
C) $32.00
D) $50.00

Question 26

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8 percent?

A) $22.86
B) $28.00
C) $42.00
D) $43.75

Question 27

What is the value of the expected dividend per share for a stock that has a required return of 16 percent,a price of $45,and a constant growth rate of 12 percent?

A) $1.80
B) $3.60
C) $4.50
D) $7.20

Question 28

If the dividend yield for year one is expected to be 5 percent based on the current price of $25,what will the year four dividend be if dividends grow at a constant 6 percent?

A) $1.33
B) $1.49
C) $1.58
D) $1.67

Question 29

What should be the stock value one year from today for a stock that currently sells for $35,has a required return of 15 percent,an expected dividend of $2.80,and a constant dividend growth rate of 7 percent?

A) $37.45
B) $37.80
C) $40.25
D) $43.05

Question 30

What is the current price of a share of stock for a firm with $5 million in balance-sheet equity,500,000 shares of stock outstanding,and a price/book value ratio of 4? (Use values in dollars)

A) $2.50
B) $10.00
C) $20.00
D) $40.00

Question 31

What price would you expect to pay for a stock with 13 percent required rate of return,4 percent rate of dividend growth,and an annual dividend of $2.50 which will be paid tomorrow?

A) $27.78
B) $30.28
C) $31.10
D) $31.39

Question 32

What is the most likely value of the PVGO for a stock with current price of $50,expected earnings of $6 per share,and a required return of 20 percent?

A) $10
B) $20
C) $25
D) $30

Question 33

What is the value of the expected dividend per share for a stock that has a required return of 16 percent,a price of $45,and a constant growth rate of 10 percent?

A) $2.70
B) $3.60
C) $4.50
D) $7.20

Question 34

What would be the expected price of a stock when dividends are expected to grow at a 25 percent rate for three years,and then grow at a constant rate of 5 percent,if the stock's required return is 13 percent and next year's dividend will be $4.00?

A) $61.60
B) $62.08
C) $68.64
D) $79.44

Question 35

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share,has an expected dividend of $2.50,and a required return of 20 percent?

A) $0
B) $6.00
C) $8.00
D) $10.00

Question 36

A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14 percent.What might investors expect to pay for the stock one year from now?

A) $82.20
B) $86.20
C) $87.20
D) $91.20

Question 37

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year,what is the stock's current price?

A) $4.50
B) $18.00
C) $22.22
D) $40.50

Question 38

What should be the current price of a share of stock if a $5 dividend was just paid,the stock has a required return of 20 percent,and a constant dividend growth rate of 6 percent?

A) $19.23
B) $25.00
C) $35.71
D) $37.86

Question 39

ABC common stock is expected to have extraordinary growth of 20 percent per year for two years,at which time the growth rate will settle into a constant 6 percent.If the discount rate is 15 percent and the most recent dividend was $2.50,what should be the current share price?

A) $31.16
B) $33.23
C) $37.39
D) $47.77

Question 40

What is the expected dividend to Be paid in three years if yesterday's dividend was $6.00,dividends are expected to grow at a constant 6 percent annual rate,and the firm has a 10 percent expected return?

A) $6.75
B) $7.15
C) $7.80
D) $9.37

Question 41

What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40?

A) 2.5 percent
B) 4.0 percent
C) 10.0 percent
D) 15.0 percent

Question 42

What is the expected constant growth rate of dividends for a stock currently priced at $50,that just paid a dividend of $4,and has a required return of 18 percent?

A) 3.41 percent
B) 5.50 percent
C) 9.26 percent
D) 12.5 percent

Question 43

Which of the following situations accurately describes a growth stock,assuming that each firm has a required return of 12 percent?

A) a firm with PVGO = $0
B) a firm with investment opportunities yielding 10 percent
C) a firm with investment opportunities yielding 15 percent
D) All of the choices represent growth stocks

Question 44

A fundamental analyst:

A) relies upon the same information as the technical analyst, but believes in the random walk.
B) studies a firm's financial statements to determine pricing inefficiencies.
C) believes that the market is strong-form efficient.
D) performs an unnecessary function, since markets are efficient.

Question 45

What is the return on equity for a firm that has a constant dividend growth rate of 7 percent and a dividend payout ratio of 60 percent?

A) 2.80 percent
B) 4.20 percent
C) 11.67 percent
D) 17.50 percent

Question 46

The expected return on a common stock is composed of:

A) dividend yield.
B) capital appreciation.
C) both dividend yield and capital appreciation.
D) capital appreciation minus the dividend yield.

Question 47

A payout ratio of 35 percent for a company indicates that:

A) 35 percent of dividends are plowed back for growth.
B) 65 percent of dividends are plowed back for growth.
C) 65 percent of earnings are paid out as dividends.
D) 35 percent of earnings are paid out as dividends.

Question 48

A company with a return on equity of 15 percent and a plowback ratio of 60 percent would expect a constant growth rate of:

A) 4 percent
B) 9 percent
C) 21 percent
D) 25 percent

Question 49

What constant growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 13 percent?

A) 5.00 percent
B) 6.25 percent
C) 6.75 percent
D) 15.38 percent

Question 50

What rate of return is expected from a stock that sells for $30 per share,pays $1.50 annually in dividends,and is expected to sell for $33 per share in one year?

A) 5.00 percent
B) 10.00 percent
C) 14.09 percent
D) 15.00 percent

Question 51

If a stock currently sells for $40.00 and has annual earnings per share of $3.00,the P/E multiple is:

A) 0.075
B) 7.0
C) 13.33
D) None of the choices are correct. .

Question 52

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8 percent and the firm's ROE is 20 percent?

A) 8 percent
B) 12 percent
C) 20 percent
D) 40 percent

Question 53

Assuming all of the following firms have a required return of 14 percent,which would you expect to have a positive present value of growth opportunities?

A) a firm with a P/E ratio of 9.
B) a firm with a P/E ratio of 6.
C) a firm with an E/P ratio of 20 percent.
D) None of the choices are expected to have positive PVGO.

Question 54

Which of the following describes a seasoned offering?

A) an IPO of common stock for a well-known firm
B) an IPO that is offered during the best buying season
C) an additional equity issue from a publicly traded firm
D) any shares traded in the secondary market are seasoned offerings

Question 55

What is the expected,constant growth rate of dividends for a stock with a current price of $100,expected dividend payment of $10 per share,and a required return of 16 percent?

A) 6.00 percent
B) 6.25 percent
C) 8.00 percent
D) 10.00 percent

Question 56

An analyst who relies upon past cycles of stock pricing to make investment decisions is:

A) performing fundamental analysis.
B) relying upon the strong-form of market efficiency.
C) assuming that the market is not weak-form efficient.
D) relying upon the random walk of stock prices.

Question 57

What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

A) 25.00 percent
B) 33.33 percent
C) 66.67 percent
D) 75.00 percent

Question 58

What is the required return for a stock that has a 6% constant growth rate,a price of $25,an expected dividend of $2,and a P/E ratio of 10?

A) 5%
B) 10%
C) 14%
D) 22%

Question 59

Technical analysts can provide:

A) no role in stock market efficiency.
B) an important role in stock market efficiency.
C) a zero correlation between stock prices.
D) the data necessary for fundamental analysis.

Question 60

A firm's liquidation value is the amount:

A) necessary to repurchase all shares of common stock.
B) realized from selling all assets and repaying debts.
C) a purchaser would pay for the firm in bankruptcy.
D) equal to the book value of equity.

Question 61

In general,if a firm has positive present value of growth opportunities,then its price-earnings ratio:

A) is greater than its required rate of return.
B) is less than its required rate of return.
C) equals its required rate of return.
D) will be lower than the industry average.

Question 62

Which of the following is a characteristic of a dealer market,rather than auction market,for common stock?

A) dealer markets are more likely to be centralized
B) dealer markets operate as primary, not secondary, markets
C) dealers may not offer all the same price for the same security
D) dealer markets specialize in trading income stocks

Question 63

Which of the following is least likely to contribute to going concern value?

A) high liquidation value
B) extra earning power
C) future investment opportunities
D) intangible assets

Question 64

If stock prices follow a random walk,which of the following statement(s)is(are)correct?

A) successive stock price changes are not related
B) the history of stock prices cannot be used to predict future returns to investors
C) Both successive stock price changes are not related and the history of stock prices cannot be used to predict future returns to investors
D) None of the choices are correct.

Question 65

According to the constant dividend growth model,a stock price should equal the:

A) sum of all future dividends.
B) sum of dividends to be received within the investor's holding period.
C) dividend yield plus the constant growth rate.
D) sum of all discounted future dividends.

Question 66

Which of the following should increase the firm's sustainable growth rate?

A) increase the dividend payout ratio
B) decrease the required return
C) decrease the ROE
D) increase the plowback ratio

Question 67

The study of published financial information on a company in order to make investment decisions is known as:

A) technical analysis.
B) fundamental analysis.
C) efficiency analysis.
D) random pricing analysis.

Question 68

Common stock can be valued using the perpetuity valuation formula if the:

A) discount rate is expected to remain constant.
B) dividends are not expected to grow.
C) growth rate in dividends is not constant.
D) investor does not intend to sell the stock.

Question 69

Stocks that have the same expected risk should:

A) offer the same dividend payment.
B) have the same sustainable growth rate.
C) have the same price.
D) have the same expected rate of return.

Question 70

Given the efficiency of our financial markets,:

A) there is no justification for technical analysts.
B) there is no justification for fundamental analysts.
C) both technical and fundamental analysts serve a useful function.
D) all investors should index their portfolio.

Question 71

A positive value for PVGO suggests that the firm has:

A) a positive return on equity.
B) a positive plowback ratio.
C) investment opportunities with superior returns.
D) a high rate of constant growth.

Question 72

Other things equal,a firm's sustainable growth rate could increase as a result of:

A) increasing the plowback ratio.
B) increasing the payout ratio.
C) decreasing the return on equity.
D) increasing total assets.

Question 73

How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:

A) will be paid to a different investor.
B) will not be paid by the firm.
C) have an insignificant present value.
D) ignore the tax consequences of future dividends.

Question 74

An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return.Which of the following seems most likely?

A) the 20% stock is a better investment.
B) the 14% stock is overpriced.
C) Both stocks will have approximately the same return.
D) Both stocks are priced correctly given their perceived risk.

Question 75

If the liquidation value of a corporation exceeds the market value of the equity,then the:

A) firm has no value as a going concern.
B) firm's stock will sell for book value.
C) firm is not taking advantage of available growth opportunities.
D) dividend payout ratio has been too high.

Question 76

Which of the following is inconsistent with a firm that sells for very near book value?

A) low current earning power
B) no intangible assets
C) high future earning power
D) low, unstable dividend payment

Question 77

Which of the following is least assured for firms that plowback a portion of earnings into the firm?

A) growth in earnings per share.
B) growth in dividends per share.
C) growth in book value of equity.
D) growth in stock price.

Question 78

LookGood,Inc.has just announced the bad news that its earnings have dropped by 30 percent.In fact,its investors had anticipated even worse results (a decrease of 40 percent).As a result,LookGood's stock price:

A) Increases.
B) Remains the same.
C) Decreases.
D) Follows a random walk as usual.

Question 79

Which of the following best characterizes the difference between growth stocks and income stocks?

A) growth stocks do not pay dividends
B) income stocks offer higher rates of return
C) income stocks are seasoned issues
D) growth stocks have greater PVGO

Question 80

Security prices are said to follow a "random walk," which means that:

A) stock selection for portfolio composition is unimportant.
B) it is impossible to know whether stocks offer higher returns than bonds.
C) investment analysts are unnecessary.
D) successive price changes are unpredictable.