Deck 7: Valuing Stocks

Question 1

If the stock prices follow a random walk,successive stock prices are not related.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

If security prices follow a random walk,then on any particular day the odds are that an increase or decrease in price is about equally likely.

Question 5

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

Question 6

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

Question 7

A negative free cash flow for a business is always sign that it is not performing well.

Question 8

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

Question 9

The dividend discount model states 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 10

Market value,unlike book value and liquidation value,treats the firm as a going concern.

Question 11

The dividend yield of a stock is much like the current yield of a bond.Both ignore prospective capital gains or losses.

Question 12

The growth of mature companies is primarily funded by:

A) issuing new shares of stock.
B) issuing new debt securities.
C) reinvesting company earnings.
D) increasing accounts payable.

Question 13

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

Question 14

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

Question 15

Market efficiency implies that one could earn above-average returns by examining the history of a firm's stock price.

Question 16

If stock prices follow a random walk,their prices bear no relation to the company's real activities.

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

Many professional investors attempt to beat the market by buying index funds.

Question 20

Evidence that stock prices follow a random walk does not imply that there aren't predictable cycles in prices.

Question 21

The semi-strong form of the efficient market hypothesis states that:

A) the efficient market hypothesis is only half true.
B) professional investors make superior profits but amateurs can't.
C) stock prices do not follow a random walk.
D) prices reflect all publicly available information.

Question 22

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%
B) 4.0%
C) 10.0%
D) 5.0%

Question 23

Wilt's has earnings per share of $2.98 and dividends per share of $0.35.What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%?

A) 2.14%
B) 1.71%
C) 12.89%
D) 16.06%

Question 24

The sustainable growth rate represents the ____ rate at which a firm can grow:

A) maximum; while maintaining a constant debt-equity ratio.
B) maximum; based solely on internal financing.
C) minimum; while maintaining a constant debt-equity ratio.
D) minimum; based solely on internal financing.

Question 25

Which one of the following is least likely to account for an excess of market value over book value of equity?

A) Inaccurate depreciation methods
B) High rate of return on assets
C) The presence of growth opportunities
D) Valuable off-balance sheet assets

Question 26

A firm's liquidation value is the amount:

A) necessary to repurchase all outstanding shares of common stock.
B) realized from selling all assets and paying off all creditors.
C) a purchaser would pay to acquire all of the firm's assets.
D) shown on the balance sheet as total owners' equity.

Question 27

Which of the following values treats the firm as a going concern?

A) Market value
B) Book value
C) Liquidation value
D) Both market and book values

Question 28

A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%.What might investors expect to pay for the stock one year from now after the next dividend has been paid?

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

Question 29

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?

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

Question 30

If the general sentiment of investors is pessimistic,stock prices are more apt to:

A) increase significantly.
B) increase slightly.
C) remain constant.
D) decline.

Question 31

A firm has 120,000 shares of stock outstanding,a sustainable rate of growth of 3.8%,and $648,200 in next year's free cash flow.What value would you place on a share of this firm's stock if you require a 14% rate of return?

A) $48.09
B) $52.96
C) $54.02
D) $61.58

Question 32

Which of these statements is correct? Free cash flow

A) is available to be paid out to investors as interest or dividends, or to repay debt or buy back stock.
B) is positive if the company is issuing debt or stock.
C) is equal to net income.
D) is another term for retained earnings.

Question 33

Which statement is correct?

A) Stock repurchases invalidate the dividend discount model
B) Stock repurchases do not add value to a business and can be ignored.
C) When there are repurchases, it is simpler to value a business by discounting the free cash flow.
D) Stock repurchases increase the number of shares and make it difficult to forecast dividends per share

Question 34

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%,what is the stock's current price?

A) $24.30
B) $18.00
C) $22.22
D) $40.50

Question 35

If markets are efficient,when new information about a stock becomes available,the price will:

A) remain unchanged because it already reflects this information.
B) accurately and rapidly adjust to include this new information.
C) adjust to accurately reflect this new information over the course of the next few days.
D) most likely increase because all new information has a positive effect on stock prices.

Question 36

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

A) Low current earnings
B) Few, if any, intangible assets
C) High future earning power
D) Low, unstable dividend payment

Question 37

With respect to the notion that stock prices follow a random walk,many researchers have concluded that:

A) stock prices reflect a majority of available information about the firm.
B) successive price changes are predictable.
C) past stock price changes provide little useful information about future stock price changes.
D) stock prices always rise excessively in January.

Question 38

For a firm that repurchases its stock,firm value is most easily estimated by discounting _______________

A) dividends plus repurchases per share.
B) repurchases rather than dividends.
C) free cash flows.
D) pre-repurchase earnings per share.

Question 39

Firms with valuable intangible assets are more likely to show a(n):

A) excess of book value over market value of equity.
B) high going-concern value.
C) low liquidation value.
D) low P/E ratio.

Question 40

The sustainable rate of growth:

A) increases as the dividend payout ratio increases.
B) must be moderate over the long-term even if it is high in the short-term.
C) assumes the debt-equity ratio will increase at the same rate as the growth rate.
D) must exceed the required rate of return to be used in the dividend discount model.

Question 41

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 42

What should you pay for a stock if next year's annual dividend is forecast to be $5.25,the constant-growth rate is 2.85%,and you require a 15.5% rate of return?

A) $31.25
B) $38.87
C) $41.50
D) $42.68

Question 43

It is possible to ignore cash dividends that occur very far into the future when using a dividend discount model because those dividends:

A) will most likely be paid to a different investor.
B) will most likely not be paid.
C) have an insignificant present value.
D) have a minimal, if any, potential rate of growth.

Question 44

ABC common stock is expected to have extraordinary growth in earnings and dividends of 20% per year for 2 years,after which the growth rate will settle into a constant 6%.If the discount rate is 15% and the most recent dividend was $2.50,what should be the approximate current share price?

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

Question 45

If the dividend yield for year 1 is expected to be 5% based on a stock price of $25,what will the year 4 dividend be if dividends grow annually at a constant rate of 6%?

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

Question 46

Dani's just paid an annual dividend of $6 per share.What is the dividend expected to be in five years if the growth rate is 4.2%?

A) $7.07
B) $7.37
C) $7.14
D) $7.44

Question 47

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 48

What rate of return is expected from a stock that sells for $30 per share,pays $1.54 annually in dividends,and is expected to sell for $32.80 per share in one year?

A) 15.03%
B) 14.28%
C) 14.09%
D) 14.47%

Question 49

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%?

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

Question 50

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

A) 4%.
B) 9%.
C) 21%.
D) 25%.

Question 51

The expected return on a common stock is equal to:

A) [(1 + dividend yield) × (1 + capital appreciation rate)] − 1.
B) the capital appreciation rate + dividend yield.
C) (1 + capital appreciation rate)/(1 + dividend yield).
D) the capital appreciation rate − dividend yield.

Question 52

What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate in each of years 2 and 3,and then grow at a constant rate of 5% if the stock's required return is 13% and next year's dividend will be $4.00?

A) $67.60
B) $62.08
C) $68.64
D) $73.44

Question 53

The value of common stock will likely decrease if:

A) the investment horizon decreases.
B) the growth rate of dividends increases.
C) the discount rate increases.
D) dividends are discounted back to the present.

Question 54

What is the plowback ratio for a firm that has earnings per share of $2.68 and pays out $1.75 per share in dividends?

A) 28.20%
B) 34.70%
C) 66.67%
D) 71.80%

Question 55

When valuing stock with the dividend discount model,the present value of future dividends will:

A) change depending on the time horizon selected.
B) remain constant regardless of the time horizon selected.
C) remain constant regardless of the rate of growth.
D) always equal the present value of the terminal price.

Question 56

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

A) A firm with PVGO = $0.
B) A firm with investment opportunities yielding 10%.
C) A firm with investment opportunities yielding 15%.
D) A firm with PVGO < $0.

Question 57

A stock currently sells for $50 per share,has an expected return of 15%,and an expected capital appreciation rate of 10%.What is the amount of the expected dividend?

A) $2.50
B) $2.75
C) $3.00
D) $3.50

Question 58

What price would you pay today for a stock if you require a rate of return of 13%,the dividend growth rate is 3.6%,and the firm recently paid an annual dividend of $2.50?

A) $27.55
B) $30.28
C) $26.60
D) $31.37

Question 59

Under which of the following forms of market efficiency would stock prices always reflect fair value?

A) Weak-form efficiency
B) Semi-strong-form efficiency
C) Strong-form efficiency
D) Semi-weak-form efficiency

Question 60

What constant-growth rate in dividends is expected for a stock valued at $32.40 if next year's dividend is forecast at $2.20 and the appropriate discount rate is 13.6%?

A) 7.02%
B) 6.59%
C) 6.81%
D) 7.38%

Question 61

If The Wall Street Journal lists a stock's dividend as $1,then it is most likely the case that the stock:

A) pays $1 per share per quarter.
B) paid $.25 per share per quarter for the past year.
C) paid $1 during the past quarter, with no future dividends forecast.
D) is expected to pay a dividend of $1 per share at the end of next year.

Question 62

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 63

A stock is expected to pay dividends of $1.20 per share in Year 1 and $1.35 per share in Year 2.After that,the dividend is expected to increase by 2.5% annually.What is the current value of the stock at a discount rate of 14.5%?

A) $11.29
B) $10.87
C) $12.07
D) $13.39

Question 64

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

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

Question 65

Suzi owns 100 shares of AB stock.She expects to receive a $238 in dividends next year.Investors expect the stock to sell for $46 a share one year from now.What is the intrinsic value of this stock if the dividend payout ratio is 40% and the discount rate is 13.5%?

A) $38.19
B) $42.63
C) $40.53
D) $45.77

Question 66

Which one of the following is more likely to be responsible for a firm having a low PVGO?

A) ROE exceeds required return.
B) Plowback is very high.
C) Market value of equity is close to book value.
D) Book value of equity is low.

Question 67

What is the required return for a stock that has a constant-growth rate of 3.3%,a price of $25,an expected dividend of $2.10,and a P/E ratio of 14.4?

A) 12.40%
B) 10.92%
C) 11.70%
D) 11.26%

Question 68

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

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

Question 69

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

A) At least one of the stocks becomes temporarily mispriced.
B) This is a common occurrence indicating that one stock has more PVGO.
C) This cannot happen if the shares are traded in an auction market.
D) The expected risk levels will change until the expected returns are equal.

Question 70

What is the expected constant-growth rate of dividends for a stock with a current price of $87,an expected dividend payment of $5.40 per share,and a required return of 16%?

A) 8.48%
B) 6.25%
C) 9.79%
D) 5.23%

Question 71

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

A) Its stock price will remain constant.
B) Its stock price will increase by the sustainable growth rate.
C) Its stock price will decline unless the dividend payout ratio is zero.
D) Its stock price will decline unless the plowback rate exceeds the required return.

Question 72

What is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation?

A) Market value of equity
B) Book value of equity
C) Zero
D) Shareholders may be required to pay to be liquidated.

Question 73

Investors are willing to purchase stocks having high P/E ratios because:

A) they expect these shares to sell for a lower price.
B) they expect these shares to offer higher dividend payments.
C) these shares are accompanied by guaranteed earnings.
D) they expect these shares to have greater growth opportunities.

Question 74

Psychologists have observed that:

A) once investors have made a loss, they become much more willing to take risks.
B) investors tend to place too much faith in their ability to spot mispriced stocks.
C) when forecasting the future, people tend to place too little weight on recent events.
D) investors like stocks of companies whose names begin with letters that occur early in the alphabet.

Question 75

Which of the following is true for a firm having a stock price of $42,an expected dividend of $3,and a sustainable growth rate of 8%?

A) It has a required return of 15.14%.
B) It has a dividend yield of 7.35%.
C) The stock price is expected to be $45 next year.
D) It has a capital appreciation rate of 7.14%.

Question 76

If the price of a stock falls on 4 consecutive days of trading,then stock prices:

A) cannot be following a random walk.
B) can still be following a random walk.
C) are almost certain to increase the following day.
D) are almost certain to decrease the following day.

Question 77

The terminal value of a share of stock:

A) is similar to the maturity value of a bond.
B) refers to the share value at the end of an investor's holding period.
C) is the value received by investors upon liquidation of the firm.
D) is the price for shares traded through a dealers' market.

Question 78

Jefferson's recently paid an annual dividend of $1.31 per share.The dividend is expected to decrease by 4% each year.How much should you pay for this stock today if your required return is 16%?

A) $6.29
B) $5.74
C) $10.48
D) $11.57

Question 79

What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth,and has a required return of 12.5%?

A) $0
B) $4.86
C) $34.56
D) $30.24

Question 80

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

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