Deck 6: Stock Valuation

Question 1

Which one of these formulas is used to estimate a firm's growth rate?

A)Annual dividend/Current stock price
B)(1 - Dividend payout ratio)× g
C)Retention ratio × ROE
D)Retention ratio × ROA
E)1 - Dividend payout ratio

Answer 1

Retention ratio × ROE

Question 2

The market in which new securities are originally sold to investors is called the _____ market.

A)dealer
B)auction
C)over-the-counter
D)secondary
E)primary

Answer 2

primary

Question 3

Multiple classes of stock are primarily created to:

A)allow certain shareholders to retain control of a firm.
B)replace cash dividends with share repurchases.
C)allow common stock to have cumulative privileges.
D)eliminate preemptive rights.
E)ensure all shareholders have equal rights.

Answer 3

allow certain shareholders to retain control of a firm.

Question 4

The free cash flow model,as compared to other models,tends to be most helpful when valuing a share of stock in:

A)a firm that pays dividends that increase at a constant rate of growth.
B)various firms having similar growth opportunities.
C)a non-dividend paying firm that has external financing needs.
D)a firm that plans to lower its dividend growth rate in the future.
E)a firm that pays a fixed annual dividend.

Question 5

A dealer will buy at the ____ price and sell at the _____ price.

A)bid;bid
B)ask;ask
C)ask;bid
D)bid;ask
E)spread;spread

Question 6

A _____ is a form of equity security that has a stated liquidating value.

A)debenture
B)bond
C)common stock
D)preferred stock
E)proxy

Question 7

A market participant who buys and sells securities from inventory is called a:

A)broker.
B)trader.
C)principal.
D)capitalist.
E)dealer.

Question 8

According to finance professionals,which one of these factors has the biggest impact on a firm's PE ratio?

A)Accounting practices of the firm
B)Risk-level of the firm
C)Size of the firm
D)Growth opportunities
E)Age of the firm

Question 9

What is the primary business of the NYSE?

A)Set market prices
B)Provide a face-to-face trading floor
C)Attract and process order flow
D)Provide a primary market
E)Regulate securities trading

Question 10

An agent who arranges security transactions among investors without maintaining an inventory is called a:

A)broker.
B)trader.
C)capitalist.
D)principal.
E)dealer.

Question 11

The voting procedure where you must own 50 percent plus one of the outstanding shares of stock to guarantee that you will win a seat on the board of directors is called _____ voting.

A)proxy
B)cumulative
C)deferred
D)straight
E)democratic

Question 12

NASDAQ has which one of these features?

A)Broker system
B)Trading floor
C)Multiple market maker system
D)Designated market maker system
E)Trading stations called "posts"

Question 13

Lew,an individual investor,sold 100 shares of Global Tech stock on Monday.Janice,another individual investor,purchased those shares but never met Lew.You know for certain that this trade occurred in which market?

A)Primary market
B)Dealer market
C)NASDAQ
D)Secondary market
E)NYSE

Question 14

The EV/EBITDA ratio has an advantage over the PE ratio in situations where comparisons are being made of firms that vary based on their:

A)method of depreciation.
B)rate of growth.
C)degree of leverage.
D)level of cash.
E)sales level.

Question 15

The voting procedure where a shareholder grants authority to another individual to vote his/her shares is called _____ voting.

A)proxy
B)deferred
C)straight
D)cumulative
E)democratic

Question 16

What is the primary role of a designated market maker (DMM)?

A)Providing a two-sided market
B)Acting as a floor broker
C)Functioning as a supplementary liquidity provider
D)Acting as a one-sided trader
E)Handling only electronic trades

Question 17

The total return on a stock is equal to:

A)the annual dividend divided by the current stock price.
B)the difference between the capital gains yield and the dividend yield.
C)the capital gains yield plus the dividend yield.
D)(1 + Dividend yield )× (1 + Inflation rate).
E)(1 + Capital gains yield)× (1 + Dividend yield).

Question 18

Assume you are using the total payout method for determining the price of a share of stock.When computing the total present value,the total payout is divided by the:

A)required rate of return minus the dividend growth rate.
B)average investor's required rate of return.
C)dividend growth rate.
D)sum of the dividend growth rate and the net income growth rate.
E)required rate of return minus the net income rate of growth.

Question 19

The voting procedure whereby shareholders may cast all of their votes for one member of the board is called _____ voting.

A)democratic
B)deferred
C)straight
D)cumulative
E)proxy

Question 20

The rate at which a stock's price is expected to appreciate (or depreciate)is called the _____ yield.

A)current
B)capital gains
C)dividend
D)total
E)earnings

Question 21

In a liquidation,the owners of 6 percent preferred stock are generally entitled to a liquidation payment of _____ a share as long as there is sufficient funds available.

A)$1
B)$6
C)$60
D)$100
E)$1,000

Question 22

Corporate dividends:

A)are a source of tax-free income for individual investors.
B)reduce the taxable income of the payer.
C)are only 70 percent taxable to corporate shareholders.
D)are paid out of pre-tax income and thus are taxed at the personal level.
E)are taxed at the personal level even though they are paid from aftertax income.

Question 23

Which one of the following statements concerning dealers and brokers in the financial markets is correct?

A)A broker never assumes ownership of the securities being traded.
B)A dealer pays the ask price when purchasing securities.
C)A broker earns income in the form of a bid-ask spread.
D)A dealer in market securities arranges sales between buyers and sellers for a fee.
E)A broker deals solely in the primary market.

Question 24

In a stock market report,the open price represents the:

A)price a dealer is willing to pay.
B)price at which a designated market maker will sell.
C)first trade of the day.
D)closing price on the previous trading day.
E)current bid price.

Question 25

A stock that pays a constant annual dividend will have a market price that:

A)increases when the market rate of return increases.
B)decreases when the market rate of return increases.
C)decreases over time.
D)increases over time.
E)always remains constant.

Question 26

A securities market primarily comprised of dealers who buy and sell for their own inventories is generally referred to as a(n)______ market.

A)over-the-counter
B)auction
C)broker
D)regional
E)trading floor

Question 27

A stock quote shows a last price of 32.13,a P/E of 17,and a net change of -.23.Based on this information,which one of the following statements is correct?

A)The closing price on the previous trading day was $.23 lower than today's closing price.
B)A dealer can purchase the stock for $.23 less than an investor can.
C)The earnings per share decreased by $.23 a share this year.
D)The earnings per share have increased by 17 percent this year.
E)The earnings per share are equal to 1/17^th of $32.13.

Question 28

Which one of the following transactions occurs in the primary market?

A)Repurchase of GHI stock from Tim by GHI
B)Tax-free gift of DEF stock to Heather by Jennifer
C)Sale of ABC stock by Fred Jones to Mary Smith
D)Initial sale of JKL stock by JKL to Jamie
E)Transfer of MNO stock from Tom to his son,Jon

Question 29

Jack owns shares of stock in Boynton Foods and wants to be elected to the company's board of directors.There are 10,000 shares of stock outstanding and each share is granted one vote for each open position on the board.Presently,the company is voting to elect two new directors.Jack can be assured of his election:

A)if straight voting applies and he owns at least 25 percent of the shares,plus one additional share.
B)if straight voting applies and he owns at least one-third of the shares,plus one additional share.
C)if cumulative voting applies and he owns 25 percent of the shares,plus one additional share.
D)only if cumulative voting applies and he owns the majority of the shares.
E)if cumulative voting applies and he owns one-third of the shares,plus one additional share.

Question 30

Which one of these represents the portion of a stock's rate of return that is attributable to the growth rate of the dividends?

A)Capital gains yield
B)Real rate of return
C)Interest yield
D)Inflation rate
E)Dividend yield

Question 31

The owner of preferred stock:

A)owns shares that generally have a stated liquidating value of $1,000 per share.
B)has the right to veto the outcome of an election held by the common shareholders.
C)has the right to collect payment on any unpaid dividends as long as the stock is non-cumulative preferred.
D)is entitled to a distribution of income prior to the common shareholders.
E)is guaranteed voting rights similar to a common shareholder.

Question 32

Greener Grass Co.pays a constant annual dividend of $1 a share and has 1,000 shares of common stock outstanding.The company:

A)must always show a current liability on its balance sheet of $1,000 for dividends payable.
B)must still declare each dividend before it becomes an actual company liability.
C)is obligated to continue paying $1 a share each year.
D)can deduct $1,000 a year as a business expense as a result of its dividend payment.
E)can be forced into bankruptcy by its shareholders if it fails to pay at least $1 a year in dividends.

Question 33

Differential growth refers to a firm that increases its dividend by:

A)three or more percent per year.
B)an amount that is determined on an annual basis.
C)a rate that is expected to be sustainable indefinitely.
D)an amount in excess of $.25 per year.
E)varying rates over a period of time.

Question 34

Denver Wool is owned by a group of shareholders who all vote independently and who all want personal control over the firm.There are three open seats and Don is one of six contenders.If straight voting is utilized and Don is a current shareholder,then he:

A)is only permitted to elect one director,regardless of the number of shares he owns.
B)will be assured of his election if he owns at least one-sixth,plus one,of the outstanding shares.
C)must own at least two-thirds of the shares,plus one,to exercise control over the elections.
D)can only be assured of his election if he owns sufficient shares to control the entire election.
E)can be assured of his election provided he owns more shares than any other single shareholder.

Question 35

Which one of the following statements concerning preferred stock is correct?

A)Unpaid preferred dividends are a liability of the firm whether or not they have been declared.
B)Preferred shareholders may be granted voting rights if preferred dividend payments remain unpaid.
C)Any unpaid preferred dividends will accrue interest at a rate equal to the dividend rate.
D)All unpaid dividends on both cumulative and non-cumulative preferred stock must be paid before any common stock dividends are declared.
E)Preferred dividends will be paid quarterly only when the firm has current net income that exceeds the amount of the quarterly dividend.

Question 36

Alto stock pays an annual dividend of $1.10 a share and has done so for the past six years.No changes in the dividend amount are expected.The relevant market rate of return is 7.8 percent.Given this,one share of this stock:

A)is basically worthless as it offers no growth potential.
B)is valued as a constant growth stock.
C)is valued as a perpetuity.
D)is valued as a differential growth stock.
E)has a current market value of $1.10.

Question 37

Electronic communications networks (ECNs):

A)have open access to the NYSE but no access to NASDAQ.
B)totally replaced face-to-face trading on the NYSE in 2013.
C)are available only to financial institutional traders.
D)act to increase liquidity in the financial markets.
E)are used solely by market makers to place bid and ask quotes.

Question 38

The underlying assumption of the dividend growth model is that a stock is worth:

A)the present value of the future income provided by that stock.
B)the same amount to every investor.
C)an amount computed as the next annual dividend divided by the market rate of return.
D)an amount computed as the last annual dividend divided by the required rate of return.
E)the same amount as any other stock that paid the same dividend this year.

Question 39

Based on the dividend growth model,an increase in investors' overall level of required returns will:

A)cause the market values of all stocks to decrease,all else held constant.
B)not affect overall stock market prices.
C)cause dividend growth rates to increase to offset this change.
D)cause non-dividend paying stocks to decrease in price while dividend-paying stock prices remain constant.
E)cause some stock prices to rise while others fall.

Question 40

A stock report contains the following information: P/E 21.4,closing price 28.16,dividend 1.10,net chg .06,and an ask of 28.22 × 300.Which one of the following statements is correct given this information?

A)The stock price has increased by 6 percent thus far this year.
B)The closing price on the previous trading day was $28.10.
C)The earnings per share are approximately $2.
D)The dividend yield is 21.4 percent.
E)The bid-ask spread is $.300.

Question 41

Blasco just paid an annual dividend of $1.24 a share.What is one share of this stock worth to you if the dividends increase by 2 percent annually and you require a rate of return of 12 percent?

A)$12.40
B)$10.33
C)$10.54
D)$12.65
E)$11.07

Question 42

Shares of ABBO stock are currently selling for $29.06 a share.The last annual dividend paid was $1.50 a share and dividends increase at a constant rate.If the market rate of return is 10 percent,what is the dividend growth rate?

A)5.32%
B)4.60%
C)4.81%
D)5.05%
E)4.45%

Question 43

XanEx is a new firm that just paid an annual dividend of $1 a share.The firm plans to increase its dividend by 20 percent a year for the next four years and then decrease the growth rate to 5 percent annually.If the required rate of return is 10.25 percent,what is one share of this stock worth today?

A)$33.04
B)$38.19
C)$41.05
D)$31.19
E)$34.81

Question 44

Sharpe General Stores is declining so it has announced that it will pay annual dividends of $.80,$.50,and $.50 over the next three years,respectively.The following year,the firm will close and pay a final dividend of $13.80 a share.If you have a required return of 14.5 percent,what is one share of this stock worth to you today?

A)$8.24
B)$9.21
C)$9.44
D)$9.72
E)$10.81

Question 45

Grenville common stock had a 12.25 percent rate of return last year.The fixed annual dividend is $.65 a share,which equates to a dividend yield of 1.6 percent.What was the rate of price appreciation on the stock?

A)11.50%
B)10.48%
C)9.75%
D)10.65%
E)13.85%

Question 46

Dirt Bikes just announced that its next annual dividend will be $1.42 a share and that all future dividends are expected to increase by 2.5 percent annually.What is the market rate of return if this stock is currently selling for $14.11 a share?

A)9.76%
B)10.00%
C)12.56%
D)13.67%
E)12.87%

Question 47

Tyler Industries stock traditionally provides a rate of return of 14.2 percent.The company just paid an annual dividend of $1.65 a share and recently announced it will commence increasing its dividends by 3.5 percent each year.For this stock to return its traditional rate,what should the market price of this stock be?

A)$12.03
B)$11.62
C)$15.96
D)$13.98
E)$15.42

Question 48

Shares of a common stock offer an expected total return of 12 percent.What is the dividend yield if the dividend increases by 3 percent annually?

A)15.00%
B)3.00%
C)9.00%
D)8.74%
E)15.36%

Question 49

Mario's is going to pay $1,$2.50,and $5 a share over the next three years,respectively.After that,the company plans to pay annual dividends of $1.25 per share indefinitely.If your required return is 13 percent,how much are you willing to pay for one share today?

A)$13.87
B)$10.87
C)$11.67
D)$12.97
E)$13.67

Question 50

Wilton's Market just announced its next annual dividend will be $1.50 a share with future dividends increasing by 1.8 percent annually.How much will one share of this stock be worth five years from now if the required return is 15.5 percent?

A)$11.76
B)$11.97
C)$14.14
D)$12.19
E)$13.79

Question 51

Lester's Diner just paid an annual dividend of $.24 a share and plans on increasing this amount by 2 percent annually.What is the expected dividend for Year 6?

A)$.30
B)$.33
C)$.24
D)$.27
E)$.35

Question 52

The Vinyard recently paid a $2.38 annual dividend on its common stock.This dividend increases at 1.75 percent per year and currently sells for $40.15 a share.What is the rate of return?

A)9.62%
B)9.53%
C)8.50%
D)7.78%
E)11.28%

Question 53

JJ Companies will pay an annual dividend of $2.10 a share on its common stock next year.Last week,the company paid a dividend of $2 a share.The company adheres to a constant rate of growth dividend policy.What will one share of this stock be worth ten years from now if the applicable discount rate is 9 percent?

A)$85.52
B)$81.44
C)$34.21
D)$41.16
E)$52.50

Question 54

Ernst Electrical increases its annual dividend by 2.2 percent annually.The stock commands a market rate of return of 15 percent and sells for $26.60 a share.What is the expected amount of the next dividend?

A)$3.33
B)$3.47
C)$3.18
D)$3.21
E)$3.40

Question 55

Wislow Brothers common stock sells for $28.20 a share and pays an annual dividend that increases by 1.5 percent annually.The market rate of return on this stock is 11.3 percent.What is the amount of the last dividend paid?

A)$2.68
B)$2.72
C)$2.84
D)$2.78
E)$2.87

Question 56

Dille Inc.pays no dividend at the present time.In Years 2 and 3,the firm will pay annual dividends of $3 a share.After that,it will pay a constant $1 a share dividend indefinitely.What is this stock worth at a required return of 15 percent?

A)$9.91
B)$7.81
C)$8.62
D)$7.50
E)$11.40

Question 57

New Tours last annual dividend was $2 a share.The company plans to lower the dividend by $.50 each year for the next three years.In Year 5,it will pay a final liquidating dividend of $22 a share.If the required return is 16 percent,what is the current per share value of this stock?

A)$12.83
B)$13.08
C)$9.80
D)$14.13
E)$15.86

Question 58

Midtown Enterprises paid its first annual dividend yesterday in the amount of $.28 a share.The company plans to double each annual dividend payment for the next three years.After that,it will pay a constant $1.50 per share dividend indefinitely.What is one share of this stock worth today if the market rate of return on similar securities is 11.5 percent?

A)$9.41
B)$11.40
C)$11.46
D)$11.93
E)$12.43

Question 59

The Extreme Reaches Corp.last paid a $1.50 per share annual dividend.The company is planning on paying $3,$5,$7.50,and $10 a share over the next four years,respectively.After that the dividend will be a constant $2.50 per share per year.What is the current price of this stock if the rate of return is 14 percent?

A)$24.59
B)$31.96
C)$26.57
D)$28.03
E)$33.71

Question 60

The ELL common stock pays an annual dividend of $1.90 a share and is committed to maintaining a constant dividend.How much are you willing to pay for one share of this stock if your required return is 11 percent?

A)$15.56
B)$16.67
C)$17.27
D)$18.88
E)$20.00

Question 61

The Yarn Outlet has net income of $42,000 for the year with 12,000 shares of stock outstanding.Big Knitter is a similar firm with similar growth opportunities and it has 7,000 shares of stock outstanding with a market price of $13.30 a share and earnings per share of $.95.What is the estimated value of the Yarn Outlet?

A)$399,000
B)$737,040
C)$442,105
D)$151,620
E)$588,000

Question 62

A stock you are interested in paid a dividend of $1 per share last year.The anticipated growth rate in dividends and earnings is 25 percent for the next two years before settling down to a constant 5 percent growth rate.The discount rate is 12 percent.What is the current value of the stock?

A)$15.38
B)$20.50
C)$21.05
D)$22.27
E)$26.14

Question 63

Snider's Hardwoods adheres to a 40 percent dividend payout policy and has a return on assets of 11.3 percent.The firm's debt-equity ratio is .45.What is the firm's rate of growth?

A)6.78%
B)7.39%
C)9.83%
D)6.55%
E)4.10%

Question 64

Doctors-On-Call,a newly formed medical group,just paid a dividend of $.50 a share.The dividends are expected to increase by 20 percent a year for the next two years and then increase by 3 percent annually thereafter.What is the current value of a share if the appropriate discount rate is 12 percent?

A)$7.68
B)$6.91
C)$7.38
D)$8.26
E)$8.42

Question 65

Felix Pet Foods plans to pay an annual dividend of $.75 next year,increase the dividend by 12 percent for the following three years,and then increase the dividend by 2 percent annually thereafter.The required rate of return is 12.5 percent.What is this stock worth per share today?

A)$12.95
B)$7.05
C)$9.04
D)$7.28
E)$8.03

Question 66

Feltwater Furniture has 120,000 shares of stock outstanding.The firm expects to earn net income of $325,000 next year with annual increases of 3 percent per year thereafter.The firm also expects to pay out 75 percent of its net income in dividends and share repurchases.The required return is 14 percent.What is its share price?

A)$6.16
B)$18.47
C)$11.08
D)$21.09
E)$24.63

Question 67

Last week,Railway Cabooses paid its annual dividend of $1.20 a share.The company has been reducing its dividends by 6 percent each year.What is one share of stock worth at a required return of 14 percent?

A)$8.06
B)$5.64
C)$10.80
D)$14.10
E)$15.90

Question 68

Primary Colors has a debt-equity ratio of .48,a return on assets of 13.6 percent,and a dividend payout ratio of 30 percent.What is the firm's rate of growth?

A)6.04%
B)9.52%
C)20.13%
D)14.09%
E)3.26%

Question 69

Nu-Tech stock's last annual dividend was $1.10 a share.Dividends are expected to increase by 25 percent for the next two years and then increase at a constant 4 percent annually.The required return on this high-risk stock is 18.5 percent.What is the current value of one share?

A)$11.09
B)$12.33
C)$12.28
D)$12.63
E)$11.16

Question 70

Webster preferred stock pays an annual dividend of $7.50 a share.What is the maximum price you should pay today to purchase this stock if you desire a rate of return of 12.25 percent?

A)$60.00
B)$61.22
C)$46.50
D)$91.88
E)$75.00

Question 71

Hanover Inc.is an all-equity firm with 35,000 shares of stock outstanding.The firm expects sales of $750,000 next year.Sales are expected to grow by 10 percent the following year and then level off to a constant 4 percent growth rate.Net cash flow varies in direct proportion to sales and is currently equal to 17 percent of sales.The required return for this firm is 14 percent.What is the estimated current value of one share of stock?

A)$38.35
B)$36.21
C)$34.71
D)$35.20
E)$36.71

Question 72

ALP Inc.has decided to issue preferred stock with an annual dividend of $4 a share.Similar stocks are currently yielding 11 percent.What price should the firm expect to receive for each new share issued?

A)$36.36
B)$40.00
C)$14.92
D)$44.65
E)$18.97

Question 73

What is the maximum price an investor should pay for the common stock of a firm that has no growth opportunities but pays an annual dividend of $1.85? The market rate of return on similar securities is 14.5 percent.

A)$9.52
B)$10.88
C)$12.76
D)$17.00
E)$21.18

Question 74

Nu-Tek,Inc.is expecting a period of intense growth,so it has decided to retain more of its earnings to help finance that growth.As a result,it is going to reduce its annual dividend by 20 percent a year for the next three years.After that it will maintain a constant dividend of $1.60 a share.Last year,the annual dividend was $2.60 a share.What is the market value of this stock if the required rate of return is 13 percent?

A)$9.86
B)$12.60
C)$16.08
D)$14.23
E)$11.15

Question 75

Westside Motors has expected earnings after taxes for Year 4 of $122,000 and has 25,000 outstanding shares.The current value of the firm's earnings for the next four years,Years 1 through 4,is $391,600.The comparable PE for the firm is 8.2.What is the estimated value of one share of this stock if the required rate of return is 15 percent?

A)$54.15
B)$52.09
C)$55.68
D)$61.60
E)$57.87

Question 76

Duncan Street Mills is an all-equity firm with 28,000 shares of stock outstanding.The firm expects sales of $400,000 next year.Sales are expected to grow by 5 percent for the following two years and then level off to a constant 3 percent growth rate.Net cash flow varies in direct proportion to sales and is currently equal to 15 percent of sales.The required return for this firm is 16 percent.What is the estimated current value of one share of stock?

A)$17.02
B)$16.21
C)$16.94
D)$18.76
E)$17.34

Question 77

Tall Tree Timber has net income of $167,000 for the year with 60,000 shares of stock outstanding.Big Trees is a similar firm with similar growth opportunities and it has 75,000 shares of stock outstanding with a market price of $32.20 a share and earnings per share of $1.60.What is the estimated value of Tall Tree Timber?

A)$1,603,210
B)$3,360,875
C)$6,440,000
D)$2,087,500
E)$4,008,325

Question 78

Janlea Co.had total net earnings of $127,000 this past year and paid out 30 percent of those earnings in dividends.There are 100,000 shares of stock outstanding at a current market price of $11.62 a share.If the dividend growth rate is 5.6 percent,what is the required rate of return?

A)14.27%
B)6.56%
C)8.88%
D)24.40%
E)15.60%

Question 79

Dixie Mart has 75,000 shares of stock outstanding.The firm expects to earn net income of $268,000 next year with annual increases of 4.5 percent per year thereafter.The firm also expects to pay out 40 percent of its net income in dividends and share repurchases.The required return is 12 percent.What is its share price?

A)$16.16
B)$19.06
C)$26.20
D)$47.64
E)$49.23

Question 80

The preferred stock of Eastern Shores pays an annual dividend of $6.50 and sells for $42.19 a share.What is the dividend yield?

A)2.74%
B)15.41%
C)6.50%
D)6.49%
E)14.17%