Exam 9: The Valuation of Common Stock

If you purchase TrisCorp stock at $71 a share and the firm pays a $5.20 dividend which is expected to grow at 7.5 percent, what is the implied annual rate of return on the investment?

A P/E ratio depends on 1. the firm's dividends 2. the price of the stock 3. the firm's per-share earnings

High P/E stocks should be preferred because they pay larger dividends.

If the financial markets were not efficient,

According to the dividend-growth model, the valuation of common stock depends on 1. the firm's dividends 2. investors' required rate of return 3. the prior year's dividends

A higher beta decreases the required rate of return.

According to the efficient market hypothesis, purchasing low P/S stocks should produce superior investment results.

The use of P/E ratios to select stocks suggests that

Value investors tend to prefer stocks with low price to sales and price to book ratios.

The risk-adjusted required rate of return includes 1. the firm's earnings 2. the firm's beta coefficient 3. the treasury bill rate (i.e., the risk-free rate)

The expected return depends on future dividends and future price appreciation.

A stock's price will tend to fall if 1. the firm's beta declines 2. the firm's beta increases 3. the risk-free rate declines 4. the risk-free rate increases

Investors may use P/E and price/sales ratios to value stocks. If this analysis is used, which of the following is desirable?

Your broker recommends that you purchase XYZ Inc. at $60. The stock pays a $2.40 dividend which (like its per-share earnings)is expected to grow annually at 8 percent. If you want to earn 12 percent on your funds, is this a good buy?

Two stocks each pay a $1 dividend that is growing annually at 8 percent. Stock A has a beta of 1.3; stock B's beta is 0.8. a. Which stock is more volatile? b. If treasury bills yield 6 percent and you expect the market to rise by 12 percent, what is your risk-adjusted required rate of return? c. Using the dividend-growth model, what is the maximum amount you would be willing to pay for each stock? d. Why are your valuations different?