Question 1

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model.

Accepted Answer

A) FCFE 
B) FCEF 
C) DDM 
D) FCEF or DDM 
E) P/E 
A) FCFE 
B) FCEF 
C) DDM 
D) FCEF or DDM 
E) P/E

Question 2

A firm has a return on equity of 14% and a dividend payout ratio of 60%.The firm's anticipated growth rate is

Accepted Answer

A) 5.6%. 
B) 10%. 
C) 14%. 
D) 20%. 
A) 5.6%. 
B) 10%. 
C) 14%. 
D) 20%.

Question 3

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year.The risk-free rate of return is 4% and the expected return on the market portfolio is 14%.Analysts expect the price of Sure Tool Company shares to be $22 a year from now.The beta of Sure Tool Company's stock is 1.25. What is the intrinsic value of Sure's stock today

Accepted Answer

A) $20.60 
B) $20.00 
C) $12.12 
D) $22.00 
A) $20.60 
B) $20.00 
C) $12.12 
D) $22.00

Question 4

Because the DDM requires multiple estimates, investors should

Accepted Answer

A) carefully examine inputs to the model. 
B) perform sensitivity analysis on price estimates. 
C) not use this model without expert assistance. 
D) feel confident that DDM estimates are correct. 
E) carefully examine inputs to the model and perform sensitivity analysis on price estimates. 
A) carefully examine inputs to the model. 
B) perform sensitivity analysis on price estimates. 
C) not use this model without expert assistance. 
D) feel confident that DDM estimates are correct. 
E) carefully examine inputs to the model and perform sensitivity analysis on price estimates.

Question 5

If a firm has a required rate of return equal to the ROE

Accepted Answer

A) the firm can increase market price and P/E by retaining more earnings. 
B) the firm can increase market price and P/E by increasing the growth rate. 
C) the amount of earnings retained by the firm does not affect market price or the P/E. 
D) the firm can increase market price and P/E by retaining more earnings and increasing the growth rate. 
E) None of the options 
A) the firm can increase market price and P/E by retaining more earnings. 
B) the firm can increase market price and P/E by increasing the growth rate. 
C) the amount of earnings retained by the firm does not affect market price or the P/E. 
D) the firm can increase market price and P/E by retaining more earnings and increasing the growth rate. 
E) None of the options

Question 6

The growth in dividends of XYZ, Inc.is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years; after this five-year period, the growth in dividends is expected to be 2% per year, indefinitely.The required rate of return on XYZ, Inc.is 12%.Last year's dividends per share were $2.00.What should the stock sell for today

Accepted Answer

A) $8.99 
B) $25.21 
C) $40.00 
D) $110.00 
E) None of the options 
A) $8.99 
B) $25.21 
C) $40.00 
D) $110.00 
E) None of the options

Question 7

The _________ is the fraction of earnings reinvested in the firm.

Accepted Answer

A) dividend payout ratio 
B) retention rate 
C) plowback ratio 
D) dividend payout ratio and plowback ratio 
E) retention rate and plowback ratio 
A) dividend payout ratio 
B) retention rate 
C) plowback ratio 
D) dividend payout ratio and plowback ratio 
E) retention rate and plowback ratio

Question 8

Consider the free cash flow approach to stock valuation.Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year.The firm's corporate tax rate is 30%.It is expected that $200,000 of operating cash flow will be invested in new fixed assets.Depreciation for the year will be $100,000.After the coming year, cash flows are expected to grow at 6% per year.The appropriate market capitalization rate for unleveraged cash flow is 15% per year.The firm has no outstanding debt.The projected free cash flow of Utica Manufacturing Company for the coming year is

Accepted Answer

A) $150,000. 
B) $180,000. 
C) $300,000. 
D) $380,000. 
A) $150,000. 
B) $180,000. 
C) $300,000. 
D) $380,000.

Question 9

The ______ is a common term for the market consensus value of the required return on a stock.

Accepted Answer

A) dividend payout ratio 
B) intrinsic value 
C) market capitalization rate 
D) plowback rate 
E) None of the options 
A) dividend payout ratio 
B) intrinsic value 
C) market capitalization rate 
D) plowback rate 
E) None of the options

Question 10

The market capitalization rate on the stock of Flexsteel Company is 12%.The expected ROE is 13% and the expected EPS are $3.60.If the firm's plowback ratio is 50%, the P/E ratio will be

Accepted Answer

A) 7.69. 
B) 8.33. 
C) 9.09. 
D) 11.11. 
E) None of the options 
A) 7.69. 
B) 8.33. 
C) 9.09. 
D) 11.11. 
E) None of the options

Question 11

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

Accepted Answer

A) $23.91 
B) $24.11 
C) $26.52 
D) $27.50 
E) None of the options 
A) $23.91 
B) $24.11 
C) $26.52 
D) $27.50 
E) None of the options

Question 12

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

Accepted Answer

A) Credit analysts 
B) Fundamental analysts 
C) Systems analysts 
D) Technical analysts 
E) Specialists 
A) Credit analysts 
B) Fundamental analysts 
C) Systems analysts 
D) Technical analysts 
E) Specialists

Question 13

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year.The risk-free rate of return is 4% and the expected return on the market portfolio is 14%.Analysts expect the price of Sure Tool Company shares to be $22 a year from now.The beta of Sure Tool Company's stock is 1.25. The market's required rate of return on Sure's stock is

Accepted Answer

A) 14.0%. 
B) 17.5%. 
C) 16.5%. 
D) 15.25%. 
E) None of the options 
A) 14.0%. 
B) 17.5%. 
C) 16.5%. 
D) 15.25%. 
E) None of the options

Question 14

A version of earnings management that became common in the 1990s was

Accepted Answer

A) when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly. 
B) reporting "pro forma earnings." 
C) when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly. 
D) when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly. 
A) when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly. 
B) reporting "pro forma earnings." 
C) when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly. 
D) when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly.

Question 15

Describe the free cash flow approach to firm valuation.How does it compare to the dividend discount model (DDM)

Accepted Answer

The free cash flow approach is an altern

Question 16

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year.The expected ROE is 14%.An appropriate required return on the stock is 11%.If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

Accepted Answer

A) $22.73. 
B) $27.50. 
C) $28.57. 
D) $38.46. 
A) $22.73. 
B) $27.50. 
C) $28.57. 
D) $38.46.

Question 17

Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year.Dividends are expected to grow at the rate of 6% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 13%.The stock of Torque Corporation has a beta of 1.2. What is the return you should require on Torque's stock

Accepted Answer

A) 12.0% 
B) 14.6% 
C) 15.6% 
D) 20% 
E) None of the options 
A) 12.0% 
B) 14.6% 
C) 15.6% 
D) 20% 
E) None of the options

Question 18

You wish to earn a return of 12% on each of two stocks, A and B.Each of the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock A and 10% for stock B.The intrinsic value of stock A

Accepted Answer

A) will be greater than the intrinsic value of stock B. 
B) will be the same as the intrinsic value of stock B. 
C) will be less than the intrinsic value of stock B. 
D) will be the same or greater than the intrinsic value of stock B. 
E) None of the options 
A) will be greater than the intrinsic value of stock B. 
B) will be the same as the intrinsic value of stock B. 
C) will be less than the intrinsic value of stock B. 
D) will be the same or greater than the intrinsic value of stock B. 
E) None of the options

Question 19

Which of the following is the best measure of the floor for a stock price

Accepted Answer

A) Book value 
B) Liquidation value 
C) Replacement cost 
D) Market value 
E) Tobin's Q 
A) Book value 
B) Liquidation value 
C) Replacement cost 
D) Market value 
E) Tobin's Q

Question 20

If Sure's intrinsic value is $21.00 today, what must be its growth rate

Accepted Answer

A) 0.0% 
B) 10% 
C) 4% 
D) 6% 
E) 7% 
A) 0.0% 
B) 10% 
C) 4% 
D) 6% 
E) 7%

Exam 18: Equity Valuation Models

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model.

A firm has a return on equity of 14% and a dividend payout ratio of 60%.The firm's anticipated growth rate is

Because the DDM requires multiple estimates, investors should

If a firm has a required rate of return equal to the ROE

The _________ is the fraction of earnings reinvested in the firm.

The ______ is a common term for the market consensus value of the required return on a stock.

The market capitalization rate on the stock of Flexsteel Company is 12%.The expected ROE is 13% and the expected EPS are $3.60.If the firm's plowback ratio is 50%, the P/E ratio will be

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

A version of earnings management that became common in the 1990s was

Describe the free cash flow approach to firm valuation.How does it compare to the dividend discount model (DDM)

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year.The expected ROE is 14%.An appropriate required return on the stock is 11%.If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

You wish to earn a return of 12% on each of two stocks, A and B.Each of the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock A and 10% for stock B.The intrinsic value of stock A

Which of the following is the best measure of the floor for a stock price

If Sure's intrinsic value is $21.00 today, what must be its growth rate

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters