Question 1

Explain the relationship between earnings-price ratio, required rate of return, and present value of growth opportunities.

Accepted Answer

The inverse of the price-earnings ratio

Question 2

In general, if a firm has positive present value of growth opportunities, then its price-earnings ratio:

Accepted Answer

A) Is greater than its required rate of return 
B) Is less than its required rate of return 
C) Equals its required rate of return 
D) Will be lower than the industry average 
A) Is greater than its required rate of return 
B) Is less than its required rate of return 
C) Equals its required rate of return 
D) Will be lower than the industry average

Question 3

How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:

Accepted Answer

A) Will be paid to a different investor 
B) Will not be paid by the firm 
C) Have an insignificant present value 
D) Ignore the tax consequences of future dividends 
A) Will be paid to a different investor 
B) Will not be paid by the firm 
C) Have an insignificant present value 
D) Ignore the tax consequences of future dividends

Question 4

Dividends that are expected to be paid far into the future have:

Accepted Answer

A) Great impact on current stock price, due to their expected size 
B) Equal impact on current stock price as near-term dividends 
C) Lesser impact on current stock price due to discounting 
D) No impact on current stock price because they are uncertain 
A) Great impact on current stock price, due to their expected size 
B) Equal impact on current stock price as near-term dividends 
C) Lesser impact on current stock price due to discounting 
D) No impact on current stock price because they are uncertain

Question 5

For a firm that expects earnings next year of $10.00 per share, has a plowback ratio of 35 percent, a return on equity of 20 percent, and a required return of 15 percent, show the current stock value and next year's expected stock value, assuming that growth is to be constant.

Accepted Answer

g = return on equity x plowback ratio
=

Question 6

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's current price?

Accepted Answer

A) $4.50 
B) $18.00 
C) $22.22 
D) $40.50 P/E = 13.5X
Then P = 13.5 x $3 
A) $4.50 
B) $18.00 
C) $22.22 
D) $40.50 P/E = 13.5X
Then P = 13.5 x $3

Question 7

A positive value for PVGO suggests that the firm has:

Accepted Answer

A) A positive return on equity 
B) A positive plowback ratio 
C) Investment opportunities with superior returns 
D) A high rate of constant growth 
A) A positive return on equity 
B) A positive plowback ratio 
C) Investment opportunities with superior returns 
D) A high rate of constant growth

Question 8

The terminal value of a share of stock:

Accepted Answer

A) Is similar to the maturity value of a bond 
B) Refers to the share value at the end of the investor's holding period 
C) Is the value received by investors upon liquidation of the firm 
D) Is the price for shares traded through a dealers' market 
A) Is similar to the maturity value of a bond 
B) Refers to the share value at the end of the investor's holding period 
C) Is the value received by investors upon liquidation of the firm 
D) Is the price for shares traded through a dealers' market

Question 9

What rate of return is expected from a stock that sells for $30 per share, pays $1.50 annually in dividends, and is expected to sell for $33 per share in one year?

Accepted Answer

A) 5.00 percent 
B) 10.00 percent 
C) 14.09 percent 
D) 15.00 percent Expected Return = 
A) 5.00 percent 
B) 10.00 percent 
C) 14.09 percent 
D) 15.00 percent Expected Return =

Question 10

Which of the following is true for a firm having a stock price of $42, and expected dividend of $3, and a sustainable growth rate of 8 percent?

Accepted Answer

A) It has a required return of 22 percent 
B) It has a dividend payout ratio of 37.5 percent 
C) It has an ROE of 7.14 percent 
D) It has a plowback rate of 7.14 percent $42 = $3/(r - .08) 
A) It has a required return of 22 percent 
B) It has a dividend payout ratio of 37.5 percent 
C) It has an ROE of 7.14 percent 
D) It has a plowback rate of 7.14 percent $42 = $3/(r - .08)

Question 11

Which of the following statements is correct about a stock currently selling for $50 per share that has a 16 percent expected return and a 10 percent expected capital appreciation?

Accepted Answer

A) Its expected dividend exceeds the actual dividend 
B) Its expected return will exceed the actual return 
C) It is expected to pay $3 in annual dividends 
D) It is expected to pay $8 in annual dividends Expected return = expected dividend yield + expected capital appreciation
16% = expected dividend yield + 10%
6% = expected dividend yield 
A) Its expected dividend exceeds the actual dividend 
B) Its expected return will exceed the actual return 
C) It is expected to pay $3 in annual dividends 
D) It is expected to pay $8 in annual dividends Expected return = expected dividend yield + expected capital appreciation
16% = expected dividend yield + 10%
6% = expected dividend yield

Question 12

Given the efficiency of our financial markets,

Accepted Answer

A) There is no justification for technical analysts 
B) There is no justification for fundamental analysts 
C) Both technical and fundamental analysts serve a useful function 
D) All investors should index their portfolio 
A) There is no justification for technical analysts 
B) There is no justification for fundamental analysts 
C) Both technical and fundamental analysts serve a useful function 
D) All investors should index their portfolio

Question 13

For a firm that expects earnings next year of $10.00 per share, has a plowback ratio of 35%, a return on equity of 20%, and a required return of 15%, show the current stock value and next year's expected stock value, assuming that growth is to be constant.

Accepted Answer

g = return on equity x plowback ratio =

Question 14

Lincoln Thomas believes that the Harris Group will pay a dividend of $4 on its common stock in year 2.Thereafter, you expect dividends to grow at a rate of 12 percent a year in perpetuity.If Lincoln requires a return of 24 percent on his investment, how much should he be willing to pay for the stock?

Accepted Answer

P₀ = DIV₁/(r

Question 15

What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

Accepted Answer

A) 25.00 percent 
B) 33.33 percent 
C) 66.67 percent 
D) 75.00 percent plowback = 1 - payout ratio
= 1 - 
A) 25.00 percent 
B) 33.33 percent 
C) 66.67 percent 
D) 75.00 percent plowback = 1 - payout ratio
= 1 -

Question 16

Show the breakdown of stock price between a firm's assets that are already in place and its present value of growth opportunities, assuming: next year's expected earnings equal $5.00, 13 percent required rate of return, 17 percent return on equity, 45 percent plowback ratio.

Accepted Answer

Present value of assets in pla

Question 17

What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40?

Accepted Answer

A) 2.5% 
B) 4.0% 
C) 10.0% 
D) 15.0% $1 dividend per quarter = $4 annually. 
A) 2.5% 
B) 4.0% 
C) 10.0% 
D) 15.0% $1 dividend per quarter = $4 annually.

Question 18

A "round lot" on the stock exchange signifies 100 shares of common stock.

Accepted Answer

A) True 
 B)False

Question 19

If the market is efficient, stock prices should only be expected to react to new information that is released.

Accepted Answer

A) True 
 B)False

Question 20

What is the value of the expected dividend per share for a stock that has a required return of 16 percent, a price of $45, and a constant growth rate of 10 percent?

Accepted Answer

A) $2.70 
B) $3.60 
C) $4.50 
D) $7.20 $45 = DIV./(.16 - .10)
$45 x .06 = DIV. 
A) $2.70 
B) $3.60 
C) $4.50 
D) $7.20 $45 = DIV./(.16 - .10)
$45 x .06 = DIV.

Exam 7: Valuing Stocks

Explain the relationship between earnings-price ratio, required rate of return, and present value of growth opportunities.

In general, if a firm has positive present value of growth opportunities, then its price-earnings ratio:

How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:

Dividends that are expected to be paid far into the future have:

For a firm that expects earnings next year of $10.00 per share, has a plowback ratio of 35 percent, a return on equity of 20 percent, and a required return of 15 percent, show the current stock value and next year's expected stock value, assuming that growth is to be constant.

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's current price?

A positive value for PVGO suggests that the firm has:

The terminal value of a share of stock:

What rate of return is expected from a stock that sells for $30 per share, pays $1.50 annually in dividends, and is expected to sell for $33 per share in one year?

Which of the following is true for a firm having a stock price of $42, and expected dividend of $3, and a sustainable growth rate of 8 percent?

Which of the following statements is correct about a stock currently selling for $50 per share that has a 16 percent expected return and a 10 percent expected capital appreciation?

Given the efficiency of our financial markets,

For a firm that expects earnings next year of $10.00 per share, has a plowback ratio of 35%, a return on equity of 20%, and a required return of 15%, show the current stock value and next year's expected stock value, assuming that growth is to be constant.

What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

Show the breakdown of stock price between a firm's assets that are already in place and its present value of growth opportunities, assuming: next year's expected earnings equal $5.00, 13 percent required rate of return, 17 percent return on equity, 45 percent plowback ratio.

What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40?

A "round lot" on the stock exchange signifies 100 shares of common stock.

If the market is efficient, stock prices should only be expected to react to new information that is released.

What is the value of the expected dividend per share for a stock that has a required return of 16 percent, a price of $45, and a constant growth rate of 10 percent?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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