Question 1

A fundamental analyst:

Accepted Answer

A)  relies on the same information as the technical analyst, but believes in the random walk. 
B)  studies a firm's financial statements to determine pricing inefficiencies. 
C)  believes that the market is strong-form efficient. 
D) performs an unnecessary function, since markets are efficient. 
A)  relies on the same information as the technical analyst, but believes in the random walk. 
B)  studies a firm's financial statements to determine pricing inefficiencies. 
C)  believes that the market is strong-form efficient. 
D) performs an unnecessary function, since markets are efficient.

Question 2

Which of the following is inconsistent with a firm that sells for very near book value?

Accepted Answer

A)  Low current earnings 
B)  Few, if any, intangible assets 
C)  High future earning power 
D) Low, unstable dividend payment 
A)  Low current earnings 
B)  Few, if any, intangible assets 
C)  High future earning power 
D) Low, unstable dividend payment

Question 3

Explain the relationships among the earnings-price (E/P) ratio, required rate of return, and present value of growth opportunities.

Accepted Answer

The inverse of the price-earnings (P/E)

Question 4

What constant-growth rate in dividends is expected for a stock valued at $32.40 if next year's dividend is forecast at $2.20 and the appropriate discount rate is 13.6%?

Accepted Answer

A)  7.02% 
B)  6.59% 
C)  6.81% 
D) 7.38% 
A)  7.02% 
B)  6.59% 
C)  6.81% 
D) 7.38%

Question 5

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

Accepted Answer

A) True 
 B)False

Question 6

The sustainable growth rate represents the ____ rate at which a firm can grow:

Accepted Answer

A)  maximum; while maintaining a constant debt-equity ratio. 
B)  maximum; based solely on internal financing. 
C)  minimum; while maintaining a constant debt-equity ratio. 
D) minimum; based solely on internal financing. 
A)  maximum; while maintaining a constant debt-equity ratio. 
B)  maximum; based solely on internal financing. 
C)  minimum; while maintaining a constant debt-equity ratio. 
D) minimum; based solely on internal financing.

Question 7

Show numerically that the investment horizon has no bearing on current stock price. For your illustration assume investment horizons of 2 versus 3 years and the following facts: The stock has a required return of 17%, a growth rate of 7%, and has just paid a $3.74 dividend.

Accepted Answer

2-year time horizon:
P = ($3.74 × 1.07)/

Question 8

Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?

Accepted Answer

A)  A firm with PVGO = $0. 
B)  A firm with investment opportunities yielding 10%. 
C)  A firm with investment opportunities yielding 15%. 
D) A firm with PVGO < $0. 
A)  A firm with PVGO = $0. 
B)  A firm with investment opportunities yielding 10%. 
C)  A firm with investment opportunities yielding 15%. 
D) A firm with PVGO < $0.

Question 9

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

Accepted Answer

A)  $22.86 
B)  $28.00 
C)  $42.00 
D) $43.75 
A)  $22.86 
B)  $28.00 
C)  $42.00 
D) $43.75

Question 10

If the price of a stock falls on 4 consecutive days of trading, then stock prices:

Accepted Answer

A)  cannot be following a random walk. 
B)  can still be following a random walk. 
C)  are almost certain to increase the following day. 
D) are almost certain to decrease the following day. 
A)  cannot be following a random walk. 
B)  can still be following a random walk. 
C)  are almost certain to increase the following day. 
D) are almost certain to decrease the following day.

Question 11

An analyst who relies on past cycles of stock pricing to make investment decisions is:

Accepted Answer

A)  performing fundamental analysis. 
B)  relying on strong-form market efficiency. 
C)  assuming that the market is not even weak-form efficient. 
D) relying on the random walk of stock prices. 
A)  performing fundamental analysis. 
B)  relying on strong-form market efficiency. 
C)  assuming that the market is not even weak-form efficient. 
D) relying on the random walk of stock prices.

Question 12

Research indicates that the correlation coefficient between successive days' stock price changes is:

Accepted Answer

A)  quite close to +1. 
B)  quite close to -1. 
C)  quite close to zero. 
D) directly related to the stock's beta. 
A)  quite close to +1. 
B)  quite close to -1. 
C)  quite close to zero. 
D) directly related to the stock's beta.

Question 13

A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8, and $648,200 in free cash flows. What value would you place on a share of this firm's stock if you require a 14% rate of return?

Accepted Answer

A)  $48.09 
B)  $52.96 
C)  $54.02 
D) $61.58 
A)  $48.09 
B)  $52.96 
C)  $54.02 
D) $61.58

Question 14

Which one of the following is more likely to be responsible for a firm having a low PVGO?

Accepted Answer

A)  ROE exceeds required return. 
B)  Plowback is very high. 
C)  Payout is very high. 
D) Book value of equity is low. 
A)  ROE exceeds required return. 
B)  Plowback is very high. 
C)  Payout is very high. 
D) Book value of equity is low.

Question 15

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%?

Accepted Answer

A)  60% 
B)  80% 
C)  20% 
D) 40% 
A)  60% 
B)  80% 
C)  20% 
D) 40%

Question 16

What is the difference between a fundamental analyst and a technical analyst?

Accepted Answer

A)  Only a fundamental analyst believes markets are inefficient. 
B)  A technical analyst focuses on financial statement analysis. 
C)  Only a technical analyst helps keep the market efficient. 
D) A fundamental analyst analyzes information such as earnings and asset values. 
A)  Only a fundamental analyst believes markets are inefficient. 
B)  A technical analyst focuses on financial statement analysis. 
C)  Only a technical analyst helps keep the market efficient. 
D) A fundamental analyst analyzes information such as earnings and asset values.

Question 17

A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant-growth rate of:

Accepted Answer

A)  4%. 
B)  9%. 
C)  21%. 
D) 25%. 
A)  4%. 
B)  9%. 
C)  21%. 
D) 25%.

Question 18

What is the current price of a share of stock for a firm with $5 million in balance-sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4?

Accepted Answer

A)  $2.50 
B)  $10.00 
C)  $20.00 
D) $40.00 
A)  $2.50 
B)  $10.00 
C)  $20.00 
D) $40.00

Question 19

Which one of these probably contributed the least to the dot.com bubble?

Accepted Answer

A)  Investors putting too much weight on recent performance 
B)  Investor risk aversion 
C)  Investor overconfidence 
D) Professional managers desiring to outperform their competitors 
A)  Investors putting too much weight on recent performance 
B)  Investor risk aversion 
C)  Investor overconfidence 
D) Professional managers desiring to outperform their competitors

Question 20

Securities with the same expected risk should offer the same expected rate of return.

Accepted Answer

A) True 
 B)False

Exam 7: Valuing Stocks

A fundamental analyst:

Which of the following is inconsistent with a firm that sells for very near book value?

Explain the relationships among the earnings-price (E/P) ratio, required rate of return, and present value of growth opportunities.

What constant-growth rate in dividends is expected for a stock valued at $32.40 if next year's dividend is forecast at $2.20 and the appropriate discount rate is 13.6%?

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

The sustainable growth rate represents the ____ rate at which a firm can grow:

Show numerically that the investment horizon has no bearing on current stock price. For your illustration assume investment horizons of 2 versus 3 years and the following facts: The stock has a required return of 17%, a growth rate of 7%, and has just paid a $3.74 dividend.

Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

If the price of a stock falls on 4 consecutive days of trading, then stock prices:

An analyst who relies on past cycles of stock pricing to make investment decisions is:

Research indicates that the correlation coefficient between successive days' stock price changes is:

A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8, and $648,200 in free cash flows. What value would you place on a share of this firm's stock if you require a 14% rate of return?

Which one of the following is more likely to be responsible for a firm having a low PVGO?

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%?

What is the difference between a fundamental analyst and a technical analyst?

A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant-growth rate of:

What is the current price of a share of stock for a firm with $5 million in balance-sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4?

Which one of these probably contributed the least to the dot.com bubble?

Securities with the same expected risk should offer the same expected rate of return.

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

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

Filters