Exam 10: Common Stock Valuation

Sara estimated the revenue per share for Firm A as $5.50 and estimated the appropriate P/B ratio, P/E ratio, and P/S ratio as 1.9, 14.5, and 2.6, respectively. What is the estimated intrinsic value for Firm A?

Which of the following increases the price an investor is willing to pay for a stock?

Rita has calculated the discounted value of the free cash flows to the firm (FCFFs) for a company that has no preferred stock. What additional adjustment(s) does she have to make to her calculated discounted value to derive an estimate of the firm's stock price?

Janice is evaluating a stock that currently pays a dividend of $0.25 per share. She expects this level of dividend to continue indefinitely, and she has determined that 5% is the appropriate required return for the stock. What is the most she should pay for the stock?

Many analysts prefer to use a relative valuation technique, such as comparing P/E ratios, because these techniques are more grounded in theory than the DCF approaches.

The Huskie Corporation's stock paid a $3.85 dividend ten years ago and just paid a $7.75 dividend this year. Assume you expect the dividend to grow at this same rate into the future and your required return on the stock is 12.5%. What value should you place on the stock?

What is used as "earnings" in the price/earnings ratio?

Next year's expected EPS for Swanti Industries is $5 and the firm has a 60% payout ratio. Swanti's stock has a beta of 1.1, a required return of 10% and is selling at $120. Find Swanti's present value of growth opportunities (PVGO) and the percent PVGO is of Swanti's current price.

Sometimes analysts use other ratios such as price-to-book or price-to-sales ratio. Which of the following is a weakness of the use of these ratios?

The required return needed to discount a stock's future cash flows can be determined using the CAPM.

The P/B ratio is considered relatively useful for firms with high levels of intangible assets.

Jed plans to purchase a deferred dividend preferred stock. The stock has a dividend rate of 5%, a $100 par value, and will pay its first annual dividend in six years. If Jed's required return on the stock is 6.75%, what price should he pay for the stock now?

Which of the following descriptions of the price/earnings ratio is the most accurate?

If a stock's dividend growth rate or discount rate changes even a small amount, the change in the price calculated by the constant growth model can be very large.

Which of the following is not one of the steps in using discounted cash flow to value a company?

What is the major difficulty with using discounted cash flow approaches to estimate a stock’s intrinsic value?

Weldon Corp. is in the expansion stage of its life cycle and just paid its first dividend of $2 per share. An analyst forecasts that the dividend will grow at 16% in the near term but will decline linearly to 6% long-term growth over the next 10 years. The analyst believes the required return on Weldon's stock is 9%. Based on the analysts estimates and using the H-model, determine Weldon's intrinsic value.

No one knows with precision which valuation model to apply for any particular stock.

As an electric utility, Arbot Industries is expected to maintain a constant dividend payout ratio and constant growth rate of earnings for the foreseeable future. Earnings were $4.50 per share in the recently completed fiscal year. In recent years, the dividend payout ratio has been a constant 65% and is expected to remain so. Arbot's return on equity (ROE) is expected to be 14% in future years. Assume your required return on the stock is 8.5%. Based on the constant growth model, what is Arbot's intrinsic value?

Hannett Inc. has a stock price of $40 and just reported earnings of $3 per share. The firm maintains a constant dividend payout of 65% and has an expected return on equity (ROE) of 16%. Based on the constant growth model, Hannett's expected return is closest to: