Question 1

Economic value added (EVA)indicates the amount by which a company's operating profit exceeds its cost of capital.

Accepted Answer

A) True 
 B)False  True

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

Sam is evaluating a stock that is expected to pay a $1.25 per share dividend at the beginning of next year.He expects the dividend to grow by 10% per year and has determined that 12% is an appropriate required return for the stock.What is the highest amount he should pay for the stock?

Accepted Answer

A) $1.25 
B) $12.50 
C) $15.00 
D) $62.50 
A) $1.25 
B) $12.50 
C) $15.00 
D) $62.50 D

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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 6

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

Accepted Answer

A) The net income shown in the company's most recent annual report 
B) Earnings from the firm's last four published quarterly income statements 
C) The firm's estimated earnings for the next 12 months 
D) All of these definitions of earnings are used by analysts 
A) The net income shown in the company's most recent annual report 
B) Earnings from the firm's last four published quarterly income statements 
C) The firm's estimated earnings for the next 12 months 
D) All of these definitions of earnings are used by analysts

Question 7

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 rate of 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 8

Stan expects Terta Corp.to pay its first dividend of $3 in five years.He expects the dividend to grow at 6% thereafter,and his required return on the stock is 9.5%.The largest amount that Stan should pay for the stock is closest to:

Accepted Answer

A) $54. 
B) $60. 
C) $68. 
D) $86. 
A) $54. 
B) $60. 
C) $68. 
D) $86.

Question 9

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

Accepted Answer

A) Investors are generally more pessimistic about the prospects for high P/E stocks. 
B) Historically,the average P/E for the market as a whole has been approximately 10. 
C) Companies with high growth rates generally have higher P/E ratios. 
D) All else the same,investors prefer to purchase stocks with relatively high P/E ratios. 
A) Investors are generally more pessimistic about the prospects for high P/E stocks. 
B) Historically,the average P/E for the market as a whole has been approximately 10. 
C) Companies with high growth rates generally have higher P/E ratios. 
D) All else the same,investors prefer to purchase stocks with relatively high P/E ratios.

Question 10

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

Accepted Answer

A) Prices in the stock market move from moment to moment. 
B) Small changes to the assumptions of k or g result in major changes in the estimated value. 
C) It is extremely unlikely that a stream of cash flows will continue to grow at the same rate. 
D) The relative valuation techniques are more accurate approaches. 
A) Prices in the stock market move from moment to moment. 
B) Small changes to the assumptions of k or g result in major changes in the estimated value. 
C) It is extremely unlikely that a stream of cash flows will continue to grow at the same rate. 
D) The relative valuation techniques are more accurate approaches.

Question 11

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 rate of return is closest to:

Accepted Answer

A) 10.50%. 
B) 10.75%. 
C) 13.10%. 
D) 13.50%. 
A) 10.50%. 
B) 10.75%. 
C) 13.10%. 
D) 13.50%.

Question 12

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?

Accepted Answer

A) Subtract the value of debt and divide by shares outstanding 
B) Add the value of debt and divide by shares outstanding 
C) Subtract the value of capital expenditures and divide by shares outstanding 
D) Divide by shares outstanding 
A) Subtract the value of debt and divide by shares outstanding 
B) Add the value of debt and divide by shares outstanding 
C) Subtract the value of capital expenditures and divide by shares outstanding 
D) Divide by shares outstanding

Question 13

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?
$\begin{array}{|r|r|c|c|c|}
\hline \mathrm{D}_{1} & \mathrm{D}_{2} & \mathrm{D}_{3} & \mathrm{D}_{4} & \text { Later } \
\hline \$ 2.00 & \$ 2.40 & \$ 2.76 & \$ 3.17 & 6 \% \text { growth } \
\hline
\end{array}$

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

Question 14

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 15

Which factor is least likely to explain why one company has a higher P/E ratio than another?

Accepted Answer

A) The company has a higher growth rate of earnings. 
B) The company has a higher required rate of return. 
C) The company has a higher current ratio. 
D) The company has a higher return on equity. 
A) The company has a higher growth rate of earnings. 
B) The company has a higher required rate of return. 
C) The company has a higher current ratio. 
D) The company has a higher return on equity.

Question 16

Which of the following is a component of the formula used to derive 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 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

Riza Corporation's preferred stock has a par value of $100 and a dividend rate of 6%.If the required return on the stock is 8%,its intrinsic value is closest to:

Accepted Answer

A) $75. 
B) $94. 
C) $133. 
D) $300. 
A) $75. 
B) $94. 
C) $133. 
D) $300.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 10: Common Stock Valuation

Economic value added (EVA)indicates the amount by which a company's operating profit exceeds its cost of capital.

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

Sam is evaluating a stock that is expected to pay a $1.25 per share dividend at the beginning of next year.He expects the dividend to grow by 10% per year and has determined that 12% is an appropriate required return for the stock.What is the highest amount he should pay for the stock?

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.

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.

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

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 rate of return is 15 percent.What is the intrinsic value of this stock?

Stan expects Terta Corp.to pay its first dividend of $3 in five years.He expects the dividend to grow at 6% thereafter,and his required return on the stock is 9.5%.The largest amount that Stan should pay for the stock is closest to:

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

What is the major difficulty with using discounted cash flow approaches to estimate a stock'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 rate of return is closest to:

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?

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 6\% growth

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

Which factor is least likely to explain why one company has a higher P/E ratio than another?

Which of the following is a component of the formula used to derive a firm's enterprise value?

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?

Riza Corporation's preferred stock has a par value of $100 and a dividend rate of 6%.If the required return on the stock is 8%,its intrinsic value is closest to:

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

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

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