Deck 6: Common Stock Valuation

Question 1

The portion of net income that is held by a firm,for future growth,comprises which one of the following balance sheet accounts?

A) capital surplus
B) common stock
C) internal earnings
D) retained earnings
E) net earnings

Answer 1

D

Question 2

What is the percentage of a firm's net income which is reinvested in the firm to support future growth called?

A) payout ratio
B) distribution percentage
C) retention ratio
D) equity ratio
E) equity reinvestment

Answer 2

C

Question 3

What is beta?

A) a rate of return measure
B) the return on a stock relative to the overall market
C) the rate of dividend growth
D) the percentage of net income paid out as a dividend
E) measure of a stock's risk relative to the stock market average

Answer 3

E

Question 4

An analysis of which of the following are commonly included as part of fundamental analysis?
I)sales
II)book value
III)earnings per share
IV)cash flow

A) I and II only
B) I and IV only
C) II, III, and IV only
D) I, II, and IV only
E) I, II, III, and IV

Question 5

The dividend discount model assumes that:

A) the dividend payout ratio will remain constant.
B) the dividend growth rate is equal to the discount rate.
C) discount rate increases at a constant rate.
D) at least one dividend will be paid in the future.
E) the dividend payout ratio increases at a constant rate.

Question 6

Growth stocks are frequently described as having which one of the following characteristics?

A) high dividends
B) a value orientation
C) high P/E ratios
D) low cash flows per share
E) low retention ratios

Question 7

The net income per share divided by the market price per share is called the:

A) profit margin.
B) profit yield.
C) market yield.
D) earnings yield.
E) income ratio.

Question 8

What is the market value of a share of stock divided by the net income per share called?

A) earnings per share
B) price-earnings ratio
C) value-earnings ratio
D) earnings yield
E) market multiple

Question 9

The method of valuing a stock based on the present value of the future income derived from that stock is called:

A) technical analysis.
B) constant valuation.
C) the basic stock valuation method.
D) compound dividend analysis.
E) the dividend discount model.

Question 10

How is a sustainable dividend growth rate defined?

A) a constant rate at which dividends increase
B) a rate of growth that does not exceed two percent of the annual increase in revenue
C) a rate of growth that is set equal to one-half of the average growth rate of a firm's earnings
D) a rate that can be supported over time by a company's earnings
E) a rate of dividend growth that is equal to the discount rate used to value the firm's stock

Question 11

The price-book ratio is computed as the market value per share divided by the per share book value of:

A) total assets.
B) long-term debt.
C) equity.
D) long-term debt plus equity.
E) net working capital.

Question 12

A firm's current stock price divided by the firm's revenue per share is referred to as which one of the following ratios?

A) price-earnings
B) price-book
C) price-income
D) price-sales
E) price-cash flow

Question 13

What is the accounting relationship in which earnings per share minus dividends equal the change in book value per share called?

A) clean surplus relationship
B) economic value added relationship
C) accounting earnings identity
D) payout-retention identity
E) dividend valuation equation

Question 14

The Free Cash Flow Model: I.can be used to value a company with negative earnings.
II)is based on a firm having positive cash flows.
III)requires that a firm pay a dividend.
IV)directly estimates a value for a firm's equity

A) I only
B) I and II only
C) I and III only
D) I, II, and III only
E) I, II, III, and IV

Question 15

The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate.

A) diminishing valuation growth model
B) increasing valuation growth model
C) constant perpetual growth model
D) irregular growth perpetual model
E) two-stage growth model

Question 16

Based on the dividend discount model,an increase in which of the following will lower the current value of a stock?
I)amount of the next dividend
II)dividend growth rate
III)discount rate

A) I only
B) III only
C) I and II only
D) II and III only
E) I, II, and III

Question 17

The constant perpetual growth model assumes the:

A) dividends are paid for a stated number of years only.
B) net income is all paid out in dividends.
C) growth rate is less than the discount rate.
D) dividends are constant in amount.
E) discount rate increases at a constant rate.

Question 18

What is the percentage of a firm's earnings that is distributed to shareholders called?

A) payout ratio
B) distribution percentage
C) retention ratio
D) dividend portion
E) outflow ratio

Question 19

Which one of the following terms is used to identify the evaluation method that determines the value of a stock by reviewing a firm's financial statement in conjunction with other financial and economic information?

A) technical analysis
B) conceptual analysis
C) prediction valuation
D) fundamental analysis
E) discounted valuation

Question 20

The model used to value the stock of a firm which has a short-term growth rate that varies from its long-term growth rate is called the ________ dividend growth model.

A) flexible
B) increasing
C) two-stage
D) stepped up
E) geometric

Question 21

An increase in the retention ratio will:

A) increase the dividends per share.
B) decrease a firm's sustainable rate of growth.
C) decrease the equity of a firm.
D) increase the dividend growth rate.
E) increase the value of a firm's stock.

Question 22

The sustainable growth rate is equal to:

A) ROE × (1 - Payout ratio).
B) ROA × (1 - Payout ratio).
C) ROE × (1 - Retention ratio).
D) ROA × (1 - Retention ratio).
E) ROE × ROA.

Question 23

Which one of the following will increase the current residual income of a firm?

A) an increase in required earnings
B) a decrease in the current earnings per share
C) a decrease in future earnings per share
D) a decrease in the required return on the firm's equity
E) an increase in the firm's beginning book equity per share

Question 24

The retention ratio is the:

A) net income divided by total equity.
B) percentage of net income paid out to shareholders.
C) net income divided by the number of shares outstanding.
D) percentage of net income held by a firm for future growth.
E) inverse of the dividend payout ratio.

Question 25

Which one of the following is a requirement of the two-stage dividend growth model?

A) both growth rates must be less than the discount rate
B) one of the two growth rates must exceed the discount rate
C) the first growth rate must exceed the second growth rate
D) the first growth rate must equal the discount rate
E) the second growth rate must be less than the discount rate

Question 26

The constant perpetual growth model is applicable primarily to those firms which:

A) adhere to a residual dividend policy.
B) pay dividends that increase at a steady rate.
C) have irregular dividend growth rates.
D) maintain a constant dividend payout ratio.
E) have multiple rates of dividend growth.

Question 27

Which one of the following is a correct formula for computing a geometric average dividend growth rate?

A) [(1 + D₀) + (1 + D₁) × (1 + D_N)]^{N + 1} - 1
B) [(1 + D₀) × (1 + D₁) × (1 + D_N)]^{N - 1} - 1
C) [D_N/D₀]^1/N - 1
D) [D₀/D_N]^N - 1
E) [D_N/D₀]^N/1 - 1

Question 28

How will the price of a stock be affected if the dividend growth rate is decreased?

A) increase
B) either increase or no change
C) no change
D) either decrease or no change
E) decrease

Question 29

The price-sales ratio helps measure the ability of a firm to generate:

A) net profits.
B) quality cash flows.
C) higher earnings per share.
D) higher cash flow per share.
E) revenue growth.

Question 30

Which one of the following is used as an indicator that a firm has good-quality earnings?

A) declining price-earnings ratios
B) constant price-earnings ratios
C) cash flow per share that exceeds earnings per share
D) earnings per share that exceed cash flow per share
E) positive earnings per share

Question 31

Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio?

A) two-stage growth
B) residual income
C) perpetual dividend growth
D) supernormal growth
E) perpetual cash flow

Question 32

Hypo Tech expects its net income to grow at 20 percent a year for the next two years and then taper off to a constant 5 percent annual rate of growth.The firm maintains a constant dividend payout ratio.Which one of the following models is best suited for computing the current value of this firm's stock?

A) irregular dividend
B) constant perpetual growth
C) constant dividend
D) two-stage dividend growth
E) perpetuity formula

Question 33

A decrease in which one of the following will increase a firm's sustainable rate of growth?

A) net income
B) dividend payout ratio
C) total assets
D) retention ratio
E) earnings per share

Question 34

Which of the following have the same meaning as the term "economic value added"?
I)abnormal earnings
II)residual income
III)value created by a firm in period t
IV)EPSt - Bt-1× k

A) I and II only
B) III and IV only
C) I, II, and III only
D) II, III, and IV only
E) I, II, III, and IV

Question 35

Which one of the following statements related to the price-earnings (P/E)ratio is correct?

A) The earnings yield is the inverse of the P/E ratio.
B) The P/E ratio is equal to the market price per share divided by total net income.
C) The P/E ratio shown in The Wall Street Journal is based on next year's estimated earnings per share.
D) The P/E ratio varies directly with earnings per share.
E) The earnings for the past twelve months is the method analysts prefer for computing earnings for the P/E ratio.

Question 36

Which one of the following is the most common definition of cash flow as used in the price-cash flow ratio?

A) net income minus dividends
B) net income plus depreciation
C) net income minus depreciation plus taxes
D) earnings before interest and taxes plus depreciation
E) earnings before interest and taxes

Question 37

Which one of the following statements concerning beta is correct?

A) The beta assigned to the overall market is zero.
B) A stock with a beta of 1.2 earns a higher risk premium than a stock with a beta of 1.3.
C) A stock with a beta of 0.5 has 50 percent more risk than the overall market.
D) Beta is applied to the T-bill rate when computing the discount rate used for the dividend discount models.
E) The higher the beta, the higher the discount rate used for the dividend discount models.

Question 38

Which one of the following is correct concerning the two-stage dividend growth model?

A) The discount rate is based on the coupon rate a firm pays on its outstanding bonds.
B) The first growth rate must be higher than the second growth rate.
C) The time value of money is ignored.
D) The discount rate ignores the risks associated with an individual firm.
E) The discount rate considers the risk-free rate of return.

Question 39

Which one of the following correctly expresses the clean surplus relationship?

A) The change in book value per share is equal to earnings per share minus dividends.
B) The change in retained earnings is equal to net income.
C) The change in market value per share is equal to the change in book value per share.
D) The change in market value per share is equal to earnings per share minus dividends.
E) The rate of change in book value per share is equal to the firm's discount rate.

Question 40

The arithmetic average dividend growth rate is:

A) the compounded rate of growth over a specified time period.
B) easier to compute than the geometric average dividend growth rate.
C) the summation of the annual dividend growth rates.
D) generally preferred over the geometric average growth rate by most financial analysts.
E) generally larger than the geometric average growth rate when the annual growth rates are positive.

Question 41

The common stock of JL Recyclers has a required return of 12 percent and a current value of $18.72.The company pays its dividend annually and increases the amount by 4 percent each year.You own 300 shares of this stock.What was the total amount of the last dividend you received?

A) $319
B) $360
C) $432
D) $480
E) $513

Question 42

The Rug Barn has paid annual dividends of $1.30,$1.36,$1.40,$1.42,and $1.45 over the last 5 years,respectively.What is the geometric average dividend growth rate?

A) 1.98 percent
B) 2.11 percent
C) 2.39 percent
D) 2.55 percent
E) 2.77 percent

Question 43

Blue Water Tours just paid an annual dividend of $0.80 a share.The firm has a policy of increasing the dividend by 3.5 percent annually.What is the current value of this stock at a discount rate of 11.5 percent?

A) $9.52
B) $9.78
C) $9.91
D) $10.02
E) $10.35

Question 44

Main Street Antiques is planning on paying an annual dividend of $2.20 per share next year.The company is slowly downsizing and is decreasing its dividend by 3 percent annually.What is the current value of this stock at a discount rate of 8 percent?

A) $18.86
B) $19.12
C) $19.78
D) $20.00
E) $20.57

Question 45

Wilson's Furniture is experiencing good growth so has decided to commence paying dividends starting next year.The first dividend will be $0.50 a share with annual increases of 4 percent in the dividend amount.The discount rate is 10 percent.What will the value of this stock be four years from now?

A) $8.50
B) $8.72
C) $9.03
D) $9.23
E) $9.75

Question 46

Lakeside Sheet Metal is downsizing and plans on completely closing 3 years from now.The firm's liquidation plan calls for annual dividends of $3,$6,and $36 over the next 3 years,respectively.What is the current value of this stock given a discount rate of 14 percent?

A) $26.94
B) $27.16
C) $28.46
D) $31.50
E) $36.29

Question 47

The Back Room just paid an annual dividend of $1.50 a share.The firm expects to pay dividends forever and to increase the dividend by 4.5 percent annually.What is the expected value of this stock six years from now if the discount rate is 12 percent?

A) $27.22
B) $27.91
C) $28.06
D) $28.52
E) $29.08

Question 48

You would like to know the value of a firm's equity today in relation to the cost of that equity.Which one of the following ratios will provide you with this information?

A) price-earnings
B) price-book
C) price-sales
D) price-cash flow
E) price-assets

Question 49

Alpha Wood Interiors announced today that it is going out of business.As of today,no more regular dividends will be paid.The firm will,however,pay two liquidating dividends.The first will be paid one year from now in the amount of $15 a share.The second and final payment will be paid two years from now at an estimated $40 a share.What is the value of this stock today at a discount rate of 16 percent?

A) $38.76
B) $39.03
C) $41.41
D) $42.66
E) $44.01

Question 50

A firm has paid annual dividends of $1.34,$1.43,$1.55,$1.62,$1.64,and $1.75 per share over the past 6 years,respectively.What is the geometric average growth rate for these dividends?

A) 5.19 percent
B) 5.28 percent
C) 5.48 percent
D) 5.57 percent
E) 5.74 percent

Question 51

A stock sells for $12.36 a share and has a required return of 9 percent.Dividends are paid annually and increase at a constant 3 percent per year.What is the amount of the last dividend paid?

A) $0.46
B) $0.50
C) $0.59
D) $0.63
E) $0.72

Question 52

Precision Engineering recently announced that its next annual dividend will be $1.20 per share with later dividends increasing by 2.5 percent annually.What is the current value of this stock to you if you require a 12 percent rate of return?

A) $12.63
B) $12.95
C) $13.05
D) $13.37
E) $13.72

Question 53

You are considering buying shares of stock in the Steel Mill.The forecast for the firm is steady growth over the next decade.The firm just paid its annual dividend of $1.42 per share and has plans to increase that amount by 4 percent annually indefinitely.You require a 12.5 percent return on this type of security.What is your estimate of the value of this stock ten years from now?

A) $24.13
B) $24.38
C) $24.73
D) $25.06
E) $25.72

Question 54

Wholesale Foods common stock is valued at $11.05 per share.The firm pays annual dividends which increase at a constant rate.The last dividend paid was $1.20.The required return is 12 percent.What is the dividend growth rate?

A) 1.03 percent
B) 1.67 percent
C) 3.47 percent
D) 3.59 percent
E) 4.00 percent

Question 55

BP Industries stock is valued at $11.50 a share.The firm pays annual dividends at an increasing rate of 3.0 percent annually.Next year's dividend will be $1.15 per share.What is the required return on this stock?

A) 10.00 percent
B) 11.50 percent
C) 12.60 percent
D) 13.00 percent
E) 14.80 percent

Question 56

Factory Stores pays annual dividends and increases those dividends by 3 percent each year.The stock is currently valued at $11.80 a share and has a required return of 14 percent.You own 500 shares of this stock.What is the total amount of dividend income you should expect to receive next year?

A) $649
B) $659
C) $672
D) $685
E) $699

Question 57

Long Life Floors just paid an annual dividend of $0.82 a share and plans on increasing future dividends by 2 percent annually.The discount rate is 15 percent.What will the value of this stock be 5 years from today?

A) $6.96
B) $7.04
C) $7.10
D) $7.18
E) $7.25

Question 58

The Barclay House increases its dividend each year.The next annual dividend is expected to be $1.75 a share.Future dividends will increase by 4 percent annually.What is the current value of this stock if the discount rate is 10 percent?

A) $28.91
B) $28.05
C) $28.78
D) $29.00
E) $29.17

Question 59

America Boats plans to pay a $2.10 a share dividend at the end of each of the next 2 years.At the end of year 3,it will pay a final liquidating dividend of $13 a share.After that,the company plans to close its doors permanently.What is the current value of this stock at a discount rate of 12 percent?

A) $9.89
B) $10.26
C) $11.54
D) $12.80
E) $13.50

Question 60

Upwind Tours just announced that it will pay an annual dividend of $3.60 a share one year from now.Two years from now,the company expects to pay a $28 a share liquidating dividend.After that,the company will cease operations.What is the current value per share at a discount rate of 12.5 percent?

A) $23.88
B) $24.97
C) $25.32
D) $28.09
E) $29.16

Question 61

Art Supplies has a net income of $138,600.The firm has $1.25 million in assets and $500,000 in liabilities.What is the return on equity?

A) 13.87 percent
B) 15.09 percent
C) 16.44 percent
D) 18.48 percent
E) 21.21 percent

Question 62

Blue Water Tours has paid annual dividends of $2.10,$2.12,$2.15,$2.15,and $2.22 over the past 5 years,respectively.What is the arithmetic average growth rate for these dividends?

A) 1.08 percent
B) 1.41 percent
C) 1.57 percent
D) 1.70 percent
E) 1.73 percent

Question 63

Over the past 5 years,DL Insulation has paid annual dividends of $1.40,$1.55,$1.70,$1.73,and $1.77 per share.What is the geometric average dividend growth rate for this period?

A) 4.80 percent
B) 5.79 percent
C) 5.88 percent
D) 6.04 percent
E) 6.33 percent

Question 64

Mountain View Nursery is a relatively young firm which just paid its first annual dividend of $0.35 a share.Management projects dividend increases of 12 percent per year for five years followed by a constant growth rate of 3 percent annually.What is this stock worth today if the applicable discount rate is 11 percent?

A) $3.59
B) $4.66
C) $5.23
D) $6.01
E) $6.51

Question 65

The Watermelon Patch has a retention ratio of 0.75,dividends of $50,000,and total equity of $3.5 million.What is the firm's sustainable rate of growth?

A) 1.58 percent
B) 4.29 percent
C) 6.30 percent
D) 7.38 percent
E) 8.54 percent

Question 66

The Brown Jug has paid annual dividends of $0.61,$0.64,$0.71,$0.82,and $0.88 per share over the past 5 years,respectively.What is the geometric average dividend growth rate for this period?

A) 8.51 percent
B) 8.97 percent
C) 9.10 percent
D) 9.59 percent
E) 10.21 percent

Question 67

Knit 'n Needle started paying dividends 4 years ago.The annual dividends thus far have been $0.35,$0.38,$0.42,and $0.48,respectively.What is the arithmetic average dividend growth rate?

A) 6.33 percent
B) 8.58 percent
C) 9.70 percent
D) 10.80 percent
E) 11.13 percent

Question 68

Wilkinson and Daughters has net income of $415,400,total assets of $2.2 million,and total liabilities of $1.08 million.The company paid $270,000 in dividends.What is the firm's sustainable rate of growth?

A) 9.69 percent
B) 11.06 percent
C) 12.98 percent
D) 13.93 percent
E) 14.15 percent

Question 69

Roy's Markets has net income of $164,000.The firm has 200,000 shares of common stock outstanding.The dividend for this year is $0.61 per share.What is the retention ratio?

A) 0.220
B) 0.256
C) 0.314
D) 0.774
E) 0.780

Question 70

Oak Supply has earnings per share of $1.22.The firm has $840,000 in equity and 60,000 shares of stock outstanding.What is the return on equity?

A) 7.92 percent
B) 8.71 percent
C) 9.09 percent
D) 9.47 percent
E) 10.36 percent

Question 71

The last dividend paid by New Technologies was an annual dividend of $1.40 a share.Dividends for the next 3 years will be increased at an annual rate of 8 percent.After that,dividends are expected to increase by 3 percent each year.The discount rate is 16 percent.What is the current value of this stock?

A) $10.40
B) $12.60
C) $13.33
D) $14.10
E) $15.55

Question 72

The common stock of A.G.Tailor has a required return of 16 percent.The latest press release stated that last year's dividend was $0.90 per share and that future dividends will increase by 15 percent for the following 3 years.After that,the dividend growth rate will be 3 percent indefinitely.What is one share of this stock worth to you today?

A) $8.42
B) $9.60
C) $10.26
D) $10.75
E) $12.03

Question 73

Over the past 4 years,a local firm has paid annual dividends of $1.52,$1.55,$1.60,and $1.68.What is the arithmetic average dividend growth rate?

A) 2.69 percent
B) 2.98 percent
C) 3.24 percent
D) 3.40 percent
E) 3.62 percent

Question 74

The Grand Isle has 12,000 shares of stock outstanding at a market price of $31.60 per share.The book value per share is $12.08.The firm has earnings per share of $1.86 and a dividend payout ratio of 0.40.What is the firm's sustainable rate of growth?

A) 8.88 percent
B) 9.24 percent
C) 9.71 percent
D) 10.57 percent
E) 10.86 percent

Question 75

Western Adventures has earnings per share of $2.30 and dividends per share of $1.25.The total equity of the firm is $850,000.There are 40,000 shares of stock outstanding.What is the sustainable rate of growth?

A) 2.14 percent
B) 3.31 percent
C) 4.94 percent
D) 5.32 percent
E) 6.59 percent

Question 76

Southern Foods just paid an annual dividend of $1.10 a share.Management estimates the dividend will increase by 10 percent a year for the next four years.After that,the annual dividend growth rate is estimated at 3.2 percent.The required rate of return is 12 percent.What is the value of this stock today?

A) $12.55
B) $13.00
C) $14.54
D) $15.81
E) $16.21

Question 77

Dennison Mfg.pays annual dividends.For the past six years,the firm has paid dividends of $1.10,$1.15 $1.20,$1.25,$1.30,and $1.35,respectively.What is the geometric average dividend growth rate for this time period?

A) 3.51 percent
B) 4.18 percent
C) 4.94 percent
D) 5.07 percent
E) 6.03 percent

Question 78

Home Interiors has net income of $258,000.The firm has decided to pay $140,000 of that income out to the shareholders.What is the firm's retention ratio?

A) 0.355
B) 0.412
C) 0.457
D) 0.588
E) 0.645

Question 79

Detroit Imports has a dividend payout ratio of 40 percent and annual dividends of $2.60 per share.What is the retention ratio?

A) 0.167
B) 0.208
C) 0.600
D) 0.735
E) 0.792

Question 80

Ultra Fine Furnishings is in the process of selling its peripheral businesses and focusing on its upscale clients.In conjunction with this reorganization,the dividend will be decreased by 10 percent for the next three years.After that,the dividend will resume increasing at an annual rate of 5 percent.The required return on this stock is 14 percent and the last dividend paid was $2.40 a share.What is one share of this stock worth today?

A) $17.34
B) $18.08
C) $18.35
D) $19.68
E) $20.72