Question 1

To estimate the intrinsic value of a security, investors should rely on:

Accepted Answer

A)  the approach that they are most comfortable using. 
B)  the approach that is easiest to apply and interpret. 
C)  the approach that generally gives the most conservative value. 
D)  more than one approach. 
A)  the approach that they are most comfortable using. 
B)  the approach that is easiest to apply and interpret. 
C)  the approach that generally gives the most conservative value. 
D)  more than one approach. D

Question 2

The P/E ratio is one of the most widely used measures to assess the financial attractiveness of potential stock investments.

Accepted Answer

A) True 
 B)False  True

Question 3

Charlie is valuing a common stock with forecast dividends as shown below. He thinks that 10% is an appropriate discount rate. What is the most he should pay for the stock? $$\begin{array} { | c | c | c | c | c | } 
\hline \mathbf { D } _ { \mathbf { 1 } } & \mathbf { D } _ { \mathbf { 2 } } & \mathbf { D } _ { \mathbf { 1 } } & \mathbf { D } _ { \mathbf { 4 } } & \text { Later } \
\hline \$ 2.00 & \$ 2.40 & \$ 2.76 & \$ 3.17 & \mathbf { 6 \% } \text { prowth } \
\hline
\end{array}$$

Accepted Answer

A)  $60.20 
B)  $63.25 
C)  $65.42 
D)  $84.01 
A)  $60.20 
B)  $63.25 
C)  $65.42 
D)  $84.01 C

Question 4

Investors will arrive at the same intrinsic valuation for common stocks because valuation is based on an objective approach.

Accepted Answer

A) True 
 B)False

Question 5

An increase in interest rates generally reduces P/E ratios and stock prices.

Accepted Answer

A) True 
 B)False

Question 6

Carl is evaluating a stock that just paid a dividend of $2.00 per share. He expects this dividend to grow by 4% per year, and he has determined that 11% is the appropriate required return. What is the most he should pay for the stock?

Accepted Answer

A)  $18.18 
B)  $18.91 
C)  $28.57 
D)  $29.71 
A)  $18.18 
B)  $18.91 
C)  $28.57 
D)  $29.71

Question 7

Technology stocks generally have P/E ratios that are higher than the market average.

Accepted Answer

A) True 
 B)False

Question 8

The free cash flow to the firm model uses which of the following as the discount rate?

Accepted Answer

A)  The required return on equity 
B)  The before-tax cost of debt 
C)  The after-tax cost of equity 
D)  The weighted average cost of capital 
A)  The required return on equity 
B)  The before-tax cost of debt 
C)  The after-tax cost of equity 
D)  The weighted average cost of capital

Question 9

Which of the following is a component of a firm's enterprise value?

Accepted Answer

A)  EBITDA 
B)  Accounts receivable 
C)  Bonds 
D)  Fixed assets 
A)  EBITDA 
B)  Accounts receivable 
C)  Bonds 
D)  Fixed assets

Question 10

Which of the following represent two major approaches used to value stocks?

Accepted Answer

A)  Discounted cash flow techniques and absolute valuation techniques 
B)  Discounted cash flow techniques and relative valuation techniques 
C)  Compound free cash flow techniques and relative valuation techniques 
D)  Markowitz diversification techniques and relative valuation techniques 
A)  Discounted cash flow techniques and absolute valuation techniques 
B)  Discounted cash flow techniques and relative valuation techniques 
C)  Compound free cash flow techniques and relative valuation techniques 
D)  Markowitz diversification techniques and relative valuation techniques

Question 11

The only reliable way to value a common stock is to discount the future flow of dividends at a discount rate appropriate to the riskiness of the company.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is not used in relative valuation comparisons?

Accepted Answer

A)  The relative value measure from past periods. 
B)  The relative value measure for the industry under consideration. 
C)  The relative value measure for a comparable firm. 
D)  The relative value measure derived from the DCF model. 
A)  The relative value measure from past periods. 
B)  The relative value measure for the industry under consideration. 
C)  The relative value measure for a comparable firm. 
D)  The relative value measure derived from the DCF model.

Question 13

Helen plans to purchase a stock that is currently paying no dividend. Helen expects the stock to pay its first dividend of $5.00 per share in eight years. Furthermore, she expects the firm to have an ROE of 16% and a dividend payout ratio of 60% thereafter. What value should Helen place on the stock now if her required return on the stock is 8.75%?

Accepted Answer

g = 0.16 x (1 - 0.60) = 0.064

Question 14

The YTC Corporation just paid an annual dividend of $1.50. Harry expects the dividends of the YTC Corporation to grow at 12% for the next four years and at 7% thereafter. The beta of YTC is 1.25 and Harry considers the market risk premium to be 4.2%. A five-year, zero-coupon Treasury bond is yielding 4.01%. What value should Harry place on the stock?

Accepted Answer

k = 4.01 + 1.25 x 4.2 = 9.26% D₁ = 1.5 x

Question 15

Tanex Inc. has a return on assets (ROA) of 12%, a return on equity (ROE) of 15%, and a dividend payout ratio of 60%. Based on the sustainable growth formula, Tanex's estimated growth is:

Accepted Answer

A)  4.8%. 
B)  6.0%. 
C)  7.2%. 
D)  9.0%. 
A)  4.8%. 
B)  6.0%. 
C)  7.2%. 
D)  9.0%.

Question 16

Seaside Boats currently earns $4.00 per share and has a retention ratio of 75%. It is expected to have a constant growth rate of 5 percent per year. The required return is 15 percent. What is the intrinsic value of this stock?

Accepted Answer

A)  $10 
B)  $10.50 
C)  $40 
D)  $42 
A)  $10 
B)  $10.50 
C)  $40 
D)  $42

Question 17

Mr. & Mrs. Jones plan to buy stock to earn the funds needed for their son's college education. They will sell the stock in 7 years to pay tuition. What amount should they use as an estimate for the stock price when they sell in year 7?

Accepted Answer

A)  The discounted value of the dividends for years 1 through 6. 
B)  The discounted value of all the dividends from year 7 on. 
C)  The discounted value of all dividends from year 1 on. 
D)  The price that is currently quoted in the stock market. 
A)  The discounted value of the dividends for years 1 through 6. 
B)  The discounted value of all the dividends from year 7 on. 
C)  The discounted value of all dividends from year 1 on. 
D)  The price that is currently quoted in the stock market.

Question 18

Which of the following is frequently used as a measure of cash flow in the P/CF ratio?

Accepted Answer

A)  Revenue 
B)  Gross Profit 
C)  EBITDA 
D)  Income from continuing operations 
A)  Revenue 
B)  Gross Profit 
C)  EBITDA 
D)  Income from continuing operations

Question 19

Historically, the average P/E for the S&P 500 is approximately 16.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is most likely to increase a company's P/E ratio?

Accepted Answer

A)  The company announces a new product, which will increase sales and profits. 
B)  The company's beta increases. 
C)  The expected inflation rate increases. 
D)  Interest rates increase for all borrowers. 
A)  The company announces a new product, which will increase sales and profits. 
B)  The company's beta increases. 
C)  The expected inflation rate increases. 
D)  Interest rates increase for all borrowers.

To estimate the intrinsic value of a security, investors should rely on:

The P/E ratio is one of the most widely used measures to assess the financial attractiveness of potential stock investments.

Charlie is valuing a common stock with forecast dividends as shown below. He thinks that 10% is an appropriate discount rate. What is the most he should pay for the stock? Later \ 2.00 \ 2.40 \ 2.76 \ 3.17 prowth

Investors will arrive at the same intrinsic valuation for common stocks because valuation is based on an objective approach.

An increase in interest rates generally reduces P/E ratios and stock prices.

Carl is evaluating a stock that just paid a dividend of $2.00 per share. He expects this dividend to grow by 4% per year, and he has determined that 11% is the appropriate required return. What is the most he should pay for the stock?

Technology stocks generally have P/E ratios that are higher than the market average.

The free cash flow to the firm model uses which of the following as the discount rate?

Which of the following is a component of a firm's enterprise value?

Which of the following represent two major approaches used to value stocks?

The only reliable way to value a common stock is to discount the future flow of dividends at a discount rate appropriate to the riskiness of the company.

Which of the following is not used in relative valuation comparisons?

Tanex Inc. has a return on assets (ROA) of 12%, a return on equity (ROE) of 15%, and a dividend payout ratio of 60%. Based on the sustainable growth formula, Tanex's estimated growth is:

Seaside Boats currently earns $4.00 per share and has a retention ratio of 75%. It is expected to have a constant growth rate of 5 percent per year. The required return is 15 percent. What is the intrinsic value of this stock?

Mr. & Mrs. Jones plan to buy stock to earn the funds needed for their son's college education. They will sell the stock in 7 years to pay tuition. What amount should they use as an estimate for the stock price when they sell in year 7?

Which of the following is frequently used as a measure of cash flow in the P/CF ratio?

Historically, the average P/E for the S&P 500 is approximately 16.

Which of the following is most likely to increase a company's P/E ratio?

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Theory

Portfolio Selection and Asset Allocation

Capital Market Theory and Asset Pricing Models

Common Stocks: Analysis and Strategy

Market Efficiency

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Options

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

Filters

Exam 10: Common Stock Valuation

To estimate the intrinsic value of a security, investors should rely on:

The P/E ratio is one of the most widely used measures to assess the financial attractiveness of potential stock investments.

Charlie is valuing a common stock with forecast dividends as shown below. He thinks that 10% is an appropriate discount rate. What is the most he should pay for the stock? Later \ 2.00 \ 2.40 \ 2.76 \ 3.17 prowth

Investors will arrive at the same intrinsic valuation for common stocks because valuation is based on an objective approach.

An increase in interest rates generally reduces P/E ratios and stock prices.

Carl is evaluating a stock that just paid a dividend of $2.00 per share. He expects this dividend to grow by 4% per year, and he has determined that 11% is the appropriate required return. What is the most he should pay for the stock?

Technology stocks generally have P/E ratios that are higher than the market average.

The free cash flow to the firm model uses which of the following as the discount rate?

Which of the following is a component of a firm's enterprise value?

Which of the following represent two major approaches used to value stocks?

The only reliable way to value a common stock is to discount the future flow of dividends at a discount rate appropriate to the riskiness of the company.

Which of the following is not used in relative valuation comparisons?

Tanex Inc. has a return on assets (ROA) of 12%, a return on equity (ROE) of 15%, and a dividend payout ratio of 60%. Based on the sustainable growth formula, Tanex's estimated growth is:

Seaside Boats currently earns $4.00 per share and has a retention ratio of 75%. It is expected to have a constant growth rate of 5 percent per year. The required return is 15 percent. What is the intrinsic value of this stock?

Mr. & Mrs. Jones plan to buy stock to earn the funds needed for their son's college education. They will sell the stock in 7 years to pay tuition. What amount should they use as an estimate for the stock price when they sell in year 7?

Which of the following is frequently used as a measure of cash flow in the P/CF ratio?

Historically, the average P/E for the S&P 500 is approximately 16.

Which of the following is most likely to increase a company's P/E ratio?

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Theory

Portfolio Selection and Asset Allocation

Capital Market Theory and Asset Pricing Models

Common Stocks: Analysis and Strategy

Market Efficiency

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Options

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

Filters