Deck 8: Valuing Stocks

Question 1

Many companies grow very fast at first, but slower future growth can be expected. Such companies are called

A) Fortune 500 companies
B) Blue Chip companies
C) Variable Growth Rate firms
D) Constant Growth Rate firms

Answer 1

Variable Growth Rate firms

Question 2

Stock valuation model dynamics make clear that higher growth rates lead to

A) lower valuations.
B) higher valuations.
C) lower growth rates continuing.
D) higher growth rates continuing.

Answer 2

higher valuations.

Question 3

Stock Index Performance On November 26, 2007, The Dow Jones Industrial Average closed at 12,743.40, which was down 237.44 that day. What was the return (in percent) of the stock market that day?

A) -.02%
B) +.02%
C) -1.83
D) +1.83%

Answer 3

-1.83

Question 4

As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims.

A) creditors
B) bondholders
C) preferred stockholders
D) common stockholders

Question 5

Trading at physical exchanges like the New York Stock Exchange and the American Stock Exchange takes place

A) at dealers' trading posts.
B) at brokers' trading posts.
C) at dealers' computers.
D) at market markers.

Question 6

Dividend yield is defined as

A) the last four quarters of dividend income expressed as a percentage of the par value of the stock.
B) the last four quarters of dividend income expressed as a percentage of the current stock price.
C) the last dividend paid expressed as a percentage of the current stock price.
D) the next dividend to be paid expressed as a percentage of the current stock price.

Question 7

Investors sell stock at the

A) dealer price.
B) bid price.
C) quoted ask price.
D) broker price.

Question 8

Investors buy stock at the

A) dealer price.
B) bid price.
C) quoted ask price.
D) broker price.

Question 9

These are valued as a special zero-growth case of the constant growth rate model.

A) common stock
B) preferred stock
C) future dividends
D) future stock prices

Question 10

This will only be executed if the order's price conditions are met.

A) a trade
B) a limit order
C) an unlimited order
D) a spread

Question 11

These investors earn returns from receiving dividends and from stock price appreciation.

A) bondholders
B) stockholders
C) investment bankers
D) managers

Question 12

Value stocks usually have

A) low P/E ratios and high growth rates.
B) high P/E ratios and low growth rates.
C) low P/E ratios and low growth rates.
D) high P/E ratios and high growth rates.

Question 13

The Standard & Poor's 500 Index includes

A) all of the stock listed on the New York Stock Exchange.
B) 30 of the largest (market capitalization) and most active companies in the U.S. economy.
C) 500 firms that are the largest in their respective economic sectors.
D) 500 firms that are the largest as ranked by Fortune Magazine.

Question 14

The NASDAQ Composite includes

A) all of the stocks listed on the NASDAQ Stock Exchange.
B) 30 of the largest (market capitalization) and most active companies in the U.S. economy.
C) 500 firms that are the largest in their respective economic sectors.
D) 500 firms that are the largest as ranked by Fortune Magazine.

Question 15

We often use the P/E ratio model with the firm's growth rate to estimate

A) required rates of return.
B) inflation.
C) a stock's current price.
D) a stock's future price.

Question 16

The Dow Jones Industrial Average (DJIA) includes

A) all of the stock listed on the New York Stock Exchange.
B) 30 of the largest (market capitalization) and most active companies in the U.S. economy.
C) 500 firms that are the largest in their respective economic sectors.
D) 500 firms that are the largest as ranked by Fortune Magazine.

Question 17

Stock valuation model dynamics make clear that lower discount rates lead to

A) lower valuations.
B) higher valuations.
C) lower growth rates.
D) higher growth rates.

Question 18

The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm's

A) market capitalization.
B) book value.
C) market makers.
D) constant growth model.

Question 19

When residual cash flows are high, stock values will be

A) unchanged.
B) low.
C) high.
D) unpredictable.

Question 20

We can estimate a stock's value by

A) using the book value of the total stockholder equity section.
B) discounting the future dividends and future stock price appreciation.
C) compounding the past dividends and past stock price appreciation.
D) using the book value of the total assets divided by the number of shares outstanding.

Question 21

P/E Ratio and Stock Price International Business Machines (IBM) has earnings per share of $6.85 and a P/E ratio of 15.19. What is the stock price?

A) $0.45
B) $2.22
C) $45.09
D) $104.05

Question 22

Buying Stock with a Market Order You would like to buy shares of Nokia (NOK). The current bid and ask quotes are $20.13 and $20.15, respectively. You place a market buy-order for 300 shares that executes at these quoted prices. How much money did it cost to buy these shares?

A) $6.00
B) $6,039.00
C) $6,045.00
D) $12,084.00

Question 23

Buying Stock with Commission At your discount brokerage firm, it costs $9.95 per stock trade. How much money do you need to buy 100 shares of Ralph Lauren (RL), which trades at $85.13?

A) $8,503.05
B) $8,503.00
C) $8,522.95
D) $9,508.00

Question 24

Buying Stock with a Market Order You would like to buy shares of International Business Machines (IBM). The current bid and ask quotes are $96.17 and $96.24, respectively. You place a market buy-order for 100 shares that executes at these quoted prices. How much money did it cost to buy these shares?

A) $7.00
B) $9,617.00
C) $9,624.00
D) $19,241.00

Question 25

Buying Stock with Commission At your discount brokerage firm, it costs $8.50 per stock trade. How much money do you need to buy 200 shares of Apple (AAPL), which trades at $171.54?

A) $32,608.00
B) $34,299.50
C) $34,316.50
D) $36,008.00

Question 26

P/E Ratio and Stock Price Ralph Lauren (RL) has earnings per share of $3.85 and a P/E ratio of 17.37. What is the stock price?

A) $0.22
B) $4.51
C) $22.16
D) $66.87

Question 27

Dividend Growth Annual dividends of Wal-Mart Stores (WMT) grew from $0.23 in 2000 to $0.83 in 2007. What was the annual growth rate?

A) 2.61%
B) 20.12%
C) 37.29%
D) 260.87%

Question 28

Dividend Growth Annual dividends of Pfizer, Inc. (PFE) grew from $0.38 in 2000 to $1.15 in 2007. What was the annual growth rate?

A) 2.02%
B) 17.14%
C) 28.95%
D) 202.63%

Question 29

P/E Ratio and Stock Price Pfizer, Inc. (PFE) has earnings per share of $2.09 and a P/E ratio of 11.02. What is the stock price?

A) $0.19
B) $5.27
C) $18.97
D) $23.03

Question 30

Selling Stock with Commissions At your full-service brokerage firm, it costs $120 per stock trade. How much money do you receive after selling 200 shares of Ralph Lauren (RL), which trades at $85.13?

A) $16,546.00
B) $16,906.00
C) $17,026.00
D) $17,146.00

Question 31

Value of Dividends and Future Price A firm is expected to pay a dividend of $3.00 next year and $3.21 the following year. Financial analysts believe the stock will be at their target price of $80.00 in two years. Compute the value of this stock with a required return of 13 percent.

A) $50.00
B) $67.52
C) $67.82
D) $86.21

Question 32

Selling Stock with a Limit Order You would like to sell 400 shares of International Business Machines (IBM). The current bid and ask quotes are $96.24 and $96.17, respectively. You place a limit sell-order at $96.20. If the trade executes, how much money do you receive from the buyer?

A) $38,464.00
B) $38,468.00
C) $38,480.00
D) $38,496.00

Question 33

Value a Constant Growth Stock Financial analysts forecast Target Corp (TGT) growth for the future to be 11 percent. Their recent dividend was $0.52. What is the value of their stock when the required rate of return is 11.89 percent?

A) $5.25
B) $6.48
C) $58.43
D) $64.85

Question 34

Value of Dividends and Future Price A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with a required return of 10 percent.

A) $65.40
B) $66.67
C) $65.57
D) $79.14

Question 35

Selling Stock with a Limit Order You would like to sell 100 shares of Pfizer, Inc. (PFE). The current bid and ask quotes are $27.22 and $27.25, respectively. You place a limit sell-order at $27.24. If the trade executes, how much money do you receive from the buyer?

A) $2,722.00
B) $2,724.00
C) $2,725.00
D) $5,446.00

Question 36

Value of a Preferred Stock If a preferred stock from Ecology and Environment, Inc. (EEI) pays $2.50 in annual dividends, and the required return on the preferred stock is 5.8 percent, what's the value of the stock?

A) $0.15
B) $0.43
C) $14.50
D) $43.10

Question 37

Selling Stock with Commissions At your full-service brokerage firm, it costs $110 per stock trade. How much money do you receive after selling 100 shares of Time Warner, Inc. (TMX), which trades at $22.62?

A) $2,152.00
B) $2,262.00
C) $2,372.00
D) $2,388.20

Question 38

Stock Index Performance On November 27, 2007, The Dow Jones Industrial Average closed at 12,958.44, which was up 215.04 that day. What was the return (in percent) of the stock market that day?

A) -.017%
B) +.017%
C) -1.69%
D) +1.69

Question 39

Value of a Preferred Stock If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 7 percent, what's the value of the stock?

A) $0.21
B) $0.43
C) $21.00
D) $42.86

Question 40

Value a Constant Growth Stock Financial analysts forecast Best Buy Company (BBY) growth for the future to be 13 percent. Their recent dividend was $0.49. What is the value of their stock when the required rate of return is 14.13 percent?

A) $3.92
B) $4.90
C) $43.36
D) $49.00

Question 41

P/E Ratio Model and Future Price Walmart (WMT) recently earned a profit of $3.13 per share and has a P/E ratio of 14.22. The dividend has been growing at a 12.5 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio declined to 10 in five years.

A) $6.08, $5.04 respectively
B) $72.22, $50.40 respectively
C) $80.20, $56.40 respectively
D) $86.46, $60.80 respectively

Question 42

P/E Model and Cash Flow Valuation Suppose that a firm's recent earnings per share and dividends per share are $3.00 and $1.50, respectively. Both are expected to grow at 10 percent. However, the firm's current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 within five years. Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years. Then discount these cash flows using a 14 percent required rate.

A) $31.68
B) $40.15
C) $46.89
D) $60.00

Question 43

Constant Growth Stock Valuation Best Buy Co (BBY) paid a $0.27 dividend per share in 2003, which grew to $0.49 in 2007. This growth is expected to continue. What is the value of this stock at the beginning of 2007 when the required rate of return is 17.23 percent?

A) $2.84
B) $42.24
C) $49.03
D) $50.78

Question 44

Variable Growth A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a 25 percent rate for the next 3 years. Afterwards, a more stable 8 percent growth rate can be assumed. If a 10 percent discount rate is appropriate for this stock, what is its value?

A) $12.50
B) $75.93
C) $83.13
D) $120.24

Question 45

P/E Model and Cash Flow Valuation Suppose that a firm's recent earnings per share and dividends per share are $2.50 and $1.00, respectively. Both are expected to grow at 10 percent. However, the firm's current P/E ratio of 22 seems high for this growth rate. The P/E ratio is expected to fall to 18 within five years. Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years. Then discount these cash flows using a 14 percent required rate.

A) $37.51
B) $37.64
C) $42.14
D) $72.47

Question 46

Value of Future Cash Flows A firm recently paid a $1.00 annual dividend. The dividend is expected to increase by 10 percent in each of the next four years. In the fourth year, the stock price is expected to be $100. If the required rate for this stock is 14 percent, what is its current value?

A) $25.00
B) $36.60
C) $62.87
D) $72.30

Question 47

Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.15 per share in 3 years. This dividend will grow at 9 percent indefinitely. Using a 10 percent discount rate, compute the value of this stock.

A) $12.28
B) $12.40
C) $16.35
D) $16.50

Question 48

A preferred stock from DLC pays $3.00 in annual dividends. If the required return on the preferred stock is 9.3%, what is the value of the stock?

A) $34.89
B) $32.26
C) $38.49
D) $31.13

Question 49

At your discount brokerage firm, it costs $7.95 per stock trade. How much money do you receive after selling 250 shares of General Electric (GE), which trades at $55.19?

A) $14,037.95
B) $11,958.55
C) $12,174.95
D) $13,789.55

Question 50

P/E Ratio Model and Future Price Target Corp (TGT) recently earned a profit of $3.57 earnings per share and has a P/E ratio of 17.3. The dividend has been growing at a 14 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 23 in five years.

A) $118.85, $158.01 respectively
B) $137.19, $182.39 respectively
C) $173.87, $231.15 respectively
D) $308.81, $410.55 respectively

Question 51

Changes in Growth and Stock Valuation Consider a firm that had been priced using a 10 percent growth rate and a 14 percent required rate. The firm recently paid a $1.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12 percent rate. How much should the stock price change (in dollars and percentage)?

A) $25, 1%
B) $25, 100%
C) $28.50, 1.04%
D) $28.50, 104%

Question 52

Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in 2 years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.

A) $4.42
B) $4.59
C) $5.43
D) $7.21

Question 53

Constant Growth Stock Valuation Target Corp (TGT) paid a $0.21 dividend per share in 2000, which grew to $0.52 in 2007. This growth is expected to continue. What is the value of this stock at the beginning of 2007 when the required rate of return is 14.77 percent?

A) $3.52
B) $55.32
C) $62.97
D) $63.49

Question 54

Expected Return American Eagle Outfitters (AEO) recently paid a $0.38 dividend. The dividend is expected to grow at a 15.5 percent rate. At the current stock price of $24.07, what is the return shareholders are expecting?

A) 15.50%
B) 15.52%
C) 17.08%
D) 17.32%

Question 55

Value of Future Cash Flows A firm recently paid a $0.30 annual dividend. The dividend is expected to increase by 8 percent in each of the next four years. In the fourth year, the stock price is expected to be $60. If the required rate for this stock is 10 percent, what is its current value?

A) $15.00
B) $20.41
C) $42.13
D) $45.30

Question 56

Changes in Growth and Stock Valuation Consider a firm that had been priced using a 6 percent growth rate and a 9 percent required rate. The firm recently paid a $0.50 dividend. The firm has just announced that because of a new joint venture, it will likely grow at an 8 percent rate. How much should the stock price change (in dollars and percentage)?

A) $33.33, 67%
B) $33.33, 198%
C) $36.33, 67%
D) $36.33, 206%

Question 57

Variable Growth A fast growing firm recently paid a dividend of $0.50 per share. The dividend is expected to increase at a 25 percent rate for the next 3 years. Afterwards, a more stable 12 percent growth rate can be assumed. If a 15 percent discount rate is appropriate for this stock, what is its value?

A) $5.00
B) $22.62
C) $25.75
D) $36.46

Question 58

Expected Return The Buckle (BKE) recently paid a $0.90 dividend. The dividend is expected to grow at a 19 percent rate. At the current stock price of $43.17, what is the return shareholders are expecting?

A) 19.00%
B) 19.02%
C) 21.48%
D) 22.74%

Question 59

Expected Return Home Depot (HD) recently paid a $0.90 dividend. The dividend is expected to grow at a 17 percent rate. At the current stock price of $33.08, what is the return shareholders are expecting?

A) 2.70%
B) 17.03%
C) 17.18%
D) 20.18%

Question 60

At your discount brokerage firm, it costs $9.95 per stock trade. How much money do you need to buy 200 shares of General Electric (GE), which trades at $45.19?

A) $9,038.00
B) $4528.95
C) $9,047.95
D) $4,595.95

Question 61

A firm recently paid a $0.50 annual dividend. The dividend is expected to increase by 10% in each of the next three years. In the third year, the stock price is expected to be $110. If the required return is 15%, what is its value?

A) $62.53
B) $68.95
C) $73.71
D) $78.67

Question 62

GEN has 1 million shares outstanding and a P/E ratio of 12. Its earnings per share is $2.00 What is GEN's market capitalization?

A) $24,000,000
B) $12,000,000
C) $2,000,000
D) $96,000,000

Question 63

Ultra Petroleum (UPL) has earnings per share of $1.75 and P/E of 42.56. What is the stock price?

A) $74.48
B) $76.68
C) $85.68
D) $112.98

Question 64

A fast growing firm recently paid a dividend of $0.80 per share. The dividend is expected to increase at a rate of 30% rate for the next 4 years. Afterwards, a more stable 7% growth rate can be assumed. If a 10% discount rate is appropriate for this stock, what is its value?

A) $60.48
B) $60.18
C) $61.34
D) $73.86

Question 65

JPM has earnings per share of $3.75 and P/E of 47. What is the stock price?

A) $174.08
B) $176.25
C) $185.95
D) $112.98

Question 66

All of the following are stock market indices except _________________.

A) Standard & Poor's 500 Index
B) Dow Jones Industrial Average
C) Nasdaq Composite Index
D) Mercantile 1000

Question 67

Financial analysts forecast ABC Inc. growth for the future to be 12%. ABC's recent dividend was $1.60. What is the value of ABC stock when the required return is 15%?

A) $59.73
B) $63.72
C) $79.81
D) $91.02

Question 68

A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a rate of 15% rate for the next 3 years. Afterwards, a more stable 6% growth rate can be assumed. If a 10% discount rate is appropriate for this stock, what is its value?

A) $33.54
B) $37.99
C) $39.37
D) $42.03

Question 69

ABC has a net profit margin of 3.3% on Sales of $10,000,000. The firm has 50,000 shares outstanding. If the firm's P/E is 19 times, how much is the stock selling for?

A) $41.72
B) $34.96
C) $125.40
D) $99.16

Question 70

Suppose that a firm's recent earnings per share and dividend per share are $2.50 and $1.00, respectively. Both are expected to grow at 5 percent. However, the firm's current P/E ratio of 23 seems high for this growth rate. The P/E ratio is expected to fall to 19 within five years. Compute a value for this stock. Assume a 10 percent required rate.

A) $36.19
B) $38.86
C) $40.31
D) $42.00

Question 71

GEN has 3 million shares outstanding and a P/E ratio of 15. Its earnings per share is $3.00 What is GEN's market capitalization?

A) $45,000,000
B) $135,000,000
C) $112,000,000
D) $9,000,000

Question 72

GEN has 10 million shares outstanding and a stock price of $89.25. What is GEN's market capitalization?

A) $89,250,000,000
B) $89,250,000
C) $892,500,000
D) $892,500

Question 73

Which of the following is an electronic stock market without a physical trading floor?

A) American Stock Exchange
B) Mercantile Exchange
C) New York Stock Exchange
D) Nasdaq Stock Market

Question 74

To list a stock on the NYSE, a company must meet minimum requirements that include all of the following except ____________________.

A) Firm size
B) Total number of stockholders
C) Level of trading volume
D) P/E Ratio

Question 75

Individuals who use their own stock inventory and capital to buy and sell the stocks they represent are called _________________.

A) Market makers
B) Brokers
C) Investors
D) None of these.

Question 76

A firm has been losing sales due to technological obsolescence. It projects growth for the future to be -3%. Its recent divided was $2.50. What is the value of this stock when the required return is 7%?

A) $28.17
B) $24.25
C) $17.42
D) $15.53

Question 77

A firm has been losing sales due to technological obsolescence. It projects growth for the future to be -2%. Its recent divided was $2.00. What is the value of this stock when the required return is 9%?

A) $28.00
B) $29.14
C) $17.82
D) $15.52

Question 78

Campbell Soup Co paid a $1.55 dividend per share in 2004, which grew to $1.95 in 2009. This growth is expected to continue. What is the value of this stock at the beginning of 2010 when the required return is 10.5 percent?

A) $35.20
B) $34.16
C) $33.48
D) $32.17

Question 79

Consider a firm that had been priced using a 12 percent growth rate and a 16 percent required return. The firm recently paid a $5.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12.5 percent rate. How much should the stock price change (in dollars and percentage)?

A) $21.50; 13.72%
B) $21.50; 16.14%
C) $20.71; 14.79%
D) $20.71; 19.93%

Question 80

A firm is expected to pay a dividend of $2.00 next year and $3.75 the following year. Financial analysts believe the stock will be at their price target of $125.00 in two years. Compute the value of this stock with a required rate of return of 15%.

A) $78.34
B) $81.05
C) $87.13
D) $99.09