Question 1

_________ is equal to common shareholders' equity divided by common shares outstanding.

Accepted Answer

A)  Book value per share 
B)  Liquidation value per share 
C)  Market value per share 
D)  Tobin's Q 
A)  Book value per share 
B)  Liquidation value per share 
C)  Market value per share 
D)  Tobin's Q

Question 2

WACC is the most appropriate discount rate to use when applying a ______ valuation model.

Accepted Answer

A)  FCFF 
B)  FCFE 
C)  DDM 
D)  FCFF or DDM, depending on the debt level of the firm, 
E)  P/E 
A)  FCFF 
B)  FCFE 
C)  DDM 
D)  FCFF or DDM, depending on the debt level of the firm, 
E)  P/E

Question 3

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be

Accepted Answer

A)  $1,000,000. 
B)  $2,000,000. 
C)  $3,000,000. 
D)  $4,000,000. 
A)  $1,000,000. 
B)  $2,000,000. 
C)  $3,000,000. 
D)  $4,000,000.

Question 4

Zoom Corp has an expected ROE of 15%. The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

Accepted Answer

A)  3.0% 
B)  4.8% 
C)  7.5% 
D)  6.0% 
A)  3.0% 
B)  4.8% 
C)  7.5% 
D)  6.0%

Question 5

JCPenney Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.

Accepted Answer

A)  $33.00 
B)  $40.67 
C)  $71.80 
D)  $66.00 
E)  None of the options are correct. 
A)  $33.00 
B)  $40.67 
C)  $71.80 
D)  $66.00 
E)  None of the options are correct.

Question 6

When valuing a stock, an overestimated terminal growth rate can might not be noticed if the ____________ is also higher?

Accepted Answer

A)  terminal cash flow 
B)  plowback ratio 
C)  discount rate 
D)  earnings 
A)  terminal cash flow 
B)  plowback ratio 
C)  discount rate 
D)  earnings

Question 7

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

Accepted Answer

A)  Credit analysts 
B)  Fundamental analysts 
C)  Systems analysts 
D)  Technical analysts 
E)  Specialists 
A)  Credit analysts 
B)  Fundamental analysts 
C)  Systems analysts 
D)  Technical analysts 
E)  Specialists

Question 8

The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be

Accepted Answer

A)  7.69. 
B)  8.33. 
C)  9.09. 
D)  11.11. 
E)  None of the options are correct. 
A)  7.69. 
B)  8.33. 
C)  9.09. 
D)  11.11. 
E)  None of the options are correct.

Question 9

Red Stapler Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. Shares currently sell for $90. What is Red Stapler's market value per share?

Accepted Answer

A)  $1.68 
B)  $2.60 
C)  $32.14 
D)  $60.71 
E)  None of the options are correct. 
A)  $1.68 
B)  $2.60 
C)  $32.14 
D)  $60.71 
E)  None of the options are correct.

Question 10

You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A

Accepted Answer

A)  will be greater than the intrinsic value of stock B. 
B)  will be the same as the intrinsic value of stock B. 
C)  will be less than the intrinsic value of stock B. 
D)  will be the same or greater than the intrinsic value of stock B. 
E)  None of the options are correct. 
A)  will be greater than the intrinsic value of stock B. 
B)  will be the same as the intrinsic value of stock B. 
C)  will be less than the intrinsic value of stock B. 
D)  will be the same or greater than the intrinsic value of stock B. 
E)  None of the options are correct.

Question 11

The growth in per share FCFE of FOX, Inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. After this five-year period, the growth in per share FCFE is expected to be 3% per year, indefinitely. The required rate of return on FOX, Inc. is 13%. Last year's per share FCFE was $1.85. The first three dividends are worth _______ today.

Accepted Answer

A)  $12.14 
B)  $100 
C)  $3.81 
D)  $9.39 
E)  None of the above 
A)  $12.14 
B)  $100 
C)  $3.81 
D)  $9.39 
E)  None of the above

Question 12

Northern Train Corp is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Northern Train Corp has a beta of 3.00. The return you should require on the stock is

Accepted Answer

A)  10%. 
B)  18%. 
C)  30%. 
D)  42%. 
A)  10%. 
B)  18%. 
C)  30%. 
D)  42%.

Question 13

Confusion Corp is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Confusion Corp shares to be $22 a year from now. The beta of Confusion Corp's stock is 1.25. The market's required rate of return on Confusion's stock is

Accepted Answer

A)  14.0%. 
B)  17.5%. 
C)  16.5%. 
D)  15.25%. 
E)  None of the options are correct. 
A)  14.0%. 
B)  17.5%. 
C)  16.5%. 
D)  15.25%. 
E)  None of the options are correct.

Question 14

Suppose that the average P/E multiple in the gas industry is 17. KMP is expected to have an EPS of $5.50 in the coming year. The intrinsic value of KMP stock should be

Accepted Answer

A)  $28.12. 
B)  $93.50. 
C)  $63.00. 
D)  $72.00. 
E)  None of the options are correct. 
A)  $28.12. 
B)  $93.50. 
C)  $63.00. 
D)  $72.00. 
E)  None of the options are correct.

Question 15

Mednas Corp has an expected ROE of 11%. The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

Accepted Answer

A)  3.0% 
B)  4.8% 
C)  8.25% 
D)  9.0% 
A)  3.0% 
B)  4.8% 
C)  8.25% 
D)  9.0%

Question 16

Suppose that the average P/E multiple in the oil industry is 16. Graphite Corp is expected to have an EPS of $4.50 in the coming year. The intrinsic value of Graphite Corp stock should be

Accepted Answer

A)  $28.12. 
B)  $35.55. 
C)  $63.00. 
D)  $72.00. 
E)  None of the options are correct. 
A)  $28.12. 
B)  $35.55. 
C)  $63.00. 
D)  $72.00. 
E)  None of the options are correct.

Question 17

Old Style Corporation produces goods that are very mature in their product life cycles. Old Style Corporation is expected to have per share FCFE in year 1 of $1.00, per share FCFE of $0.90 in year 2, and per share FCFE of $0.85 in year 3. After year 3, per share FCFE is expected to decline at a rate of 2% per year. An appropriate required rate of return for the stock is 8%. The first three dividends are worth _______ today.

Accepted Answer

A)  $2.54 
B)  $3.56 
C)  $3.81 
D)  $2.37 
E)  None of the above 
A)  $2.54 
B)  $3.56 
C)  $3.81 
D)  $2.37 
E)  None of the above

Question 18

You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X

Accepted Answer

A)  will be greater than the intrinsic value of stock Y. 
B)  will be the same as the intrinsic value of stock Y. 
C)  will be less than the intrinsic value of stock Y. 
D)  will be the same or greater than the intrinsic value of stock Y. 
E)  None of the options are correct. 
A)  will be greater than the intrinsic value of stock Y. 
B)  will be the same as the intrinsic value of stock Y. 
C)  will be less than the intrinsic value of stock Y. 
D)  will be the same or greater than the intrinsic value of stock Y. 
E)  None of the options are correct.

Question 19

Which of the following is the best measure of the floor for a stock price?

Accepted Answer

A)  Book value 
B)  Liquidation value 
C)  Replacement cost 
D)  Market value 
E)  Tobin's Q 
A)  Book value 
B)  Liquidation value 
C)  Replacement cost 
D)  Market value 
E)  Tobin's Q

Question 20

Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends are expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today.

Accepted Answer

A)  $33.00 
B)  $39.86 
C)  $55.00 
D)  $66.00 
E)  $40.68 
A)  $33.00 
B)  $39.86 
C)  $55.00 
D)  $66.00 
E)  $40.68

Exam 18: Equity Valuation Models

_________ is equal to common shareholders' equity divided by common shares outstanding.

WACC is the most appropriate discount rate to use when applying a ______ valuation model.

Zoom Corp has an expected ROE of 15%. The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

JCPenney Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.

When valuing a stock, an overestimated terminal growth rate can might not be noticed if the ____________ is also higher?

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be

You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A

Suppose that the average P/E multiple in the gas industry is 17. KMP is expected to have an EPS of $5.50 in the coming year. The intrinsic value of KMP stock should be

Mednas Corp has an expected ROE of 11%. The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

Suppose that the average P/E multiple in the oil industry is 16. Graphite Corp is expected to have an EPS of $4.50 in the coming year. The intrinsic value of Graphite Corp stock should be

You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X

Which of the following is the best measure of the floor for a stock price?

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters