Question 1

P/E ratios are influenced by a company's

Accepted Answer

A) growth rate. 
B) risk. 
C) capital structure. 
D) management. 
E) All of the above and more 
A) growth rate. 
B) risk. 
C) capital structure. 
D) management. 
E) All of the above and more E

Question 2

Under the constant dividend growth model, it is possible for a negative stock value to result.

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following statements about stock valuation based on asset value is NOT true?

Accepted Answer

A) Natural resources often give a company value, even if an income stream is not produced 
B) The value of the assets may not even appear on the balance sheet 
C) Current assets are usually excluded from the valuation process, since they will be used up in the next business cycle 
D) Hidden assets can add substantial value to the firm 
A) Natural resources often give a company value, even if an income stream is not produced 
B) The value of the assets may not even appear on the balance sheet 
C) Current assets are usually excluded from the valuation process, since they will be used up in the next business cycle 
D) Hidden assets can add substantial value to the firm C

Question 4

Least squares trend analysis involves fitting a straight line through a series of data, which, by definition:

Accepted Answer

A) minimizes the distance of each data point from the line, and minimizes the squared area above and below the trendline. 
B) minimizes the distance between each data point. 
C) must include at least one peak and at least one trough. 
D) must include a minimum of 20 points to get a usable trendline. 
A) minimizes the distance of each data point from the line, and minimizes the squared area above and below the trendline. 
B) minimizes the distance between each data point. 
C) must include at least one peak and at least one trough. 
D) must include a minimum of 20 points to get a usable trendline.

Question 5

A good example of an industry that has a lot of growth companies in it is the:

Accepted Answer

A) automobile industry. 
B) biotechnology industry. 
C) food and beverage industry. 
D) consumer products industry. 
A) automobile industry. 
B) biotechnology industry. 
C) food and beverage industry. 
D) consumer products industry.

Question 6

Stock valuation based on the relationship between a stock's P/E ratio and the market may result in superior returns if:

Accepted Answer

A) the firm is riskier than the market. 
B) the firm has a high P/E ratio, relative to the market. 
C) the stock is trading at the low end of its P/E ratio, relative to the market. 
D) More than one of the above 
A) the firm is riskier than the market. 
B) the firm has a high P/E ratio, relative to the market. 
C) the stock is trading at the low end of its P/E ratio, relative to the market. 
D) More than one of the above

Question 7

The best time period for use in the combined earnings and dividend valuation model is:

Accepted Answer

A) 2 years. 
B) 5 years. 
C) 10 years. 
D) Any time period is acceptable 
A) 2 years. 
B) 5 years. 
C) 10 years. 
D) Any time period is acceptable

Question 8

Hidden assets refer to assets that are not readily apparent to investors in a traditional sense, but add substantial value to the firm.

Accepted Answer

A) True 
 B)False

Question 9

All things being equal, the more rapid growth a firm enjoys, the higher the P/E ratio.

Accepted Answer

A) True 
 B)False

Question 10

Every valuation method has its limitations.

Accepted Answer

A) True 
 B)False

Question 11

The reason price-earnings ratios and inflation are related is because:

Accepted Answer

A) as inflation increases, the required return in the market rises, pushing down the prices of securities. 
B) as inflation increases, the required return in the market rises, pushing up the prices of securities. 
C) as price-earnings ratios fall, the market changes its expectations about the future rate of inflation. 
D) as price-earnings ratio rise, the market anticipates that inflation will decrease, sending stock prices higher. 
A) as inflation increases, the required return in the market rises, pushing down the prices of securities. 
B) as inflation increases, the required return in the market rises, pushing up the prices of securities. 
C) as price-earnings ratios fall, the market changes its expectations about the future rate of inflation. 
D) as price-earnings ratio rise, the market anticipates that inflation will decrease, sending stock prices higher.

Question 12

If the company's profit margin is constant over time, the number of common shares remains the same, and the dividend payout ratio stays the same, the price to sales ratio, the price to earnings ratio and the price to book value ratio should:

Accepted Answer

A) provide similar valuations for the company's stock value. 
B) provide very different valuations for the company's stock value. 
C) not be related in any way. 
D) None of the above are true 
A) provide similar valuations for the company's stock value. 
B) provide very different valuations for the company's stock value. 
C) not be related in any way. 
D) None of the above are true

Question 13

Between 1926 and 2009, the mean return of large company stocks was:

Accepted Answer

A) 8.4%. 
B) 9.4%. 
C) 10.4%. 
D) 11.4%. 
E) 12.4%. 
A) 8.4%. 
B) 9.4%. 
C) 10.4%. 
D) 11.4%. 
E) 12.4%.

Question 14

In the formula P0 = D1/(Ke - g), if Ke rises while dividends and growth stay the same, the stock price will decline.

Accepted Answer

A) True 
 B)False

Question 15

Under a non-constant growth model, Ke (required rate of return) is varied from time period to time period.

Accepted Answer

A) True 
 B)False

Question 16

All things being equal, the less debt that a firm has, the more likely it is to be highly valued in the marketplace.

Accepted Answer

A) True 
 B)False

Question 17

The combined earnings and dividend model considers the present value of dividends, plus the present value of a future P/E ratio times future projected earnings.

Accepted Answer

A) True 
 B)False

Question 18

The required rate of return is intended to provide

Accepted Answer

A) compensation for expected inflation. 
B) a premium for risk assumed. 
C) a minimum real rate of return. 
D) All of the above 
A) compensation for expected inflation. 
B) a premium for risk assumed. 
C) a minimum real rate of return. 
D) All of the above

Question 19

Forecasts for companies that follow economic cycles are best based on analysis of

Accepted Answer

A) 2 economic peaks and troughs. 
B) 1 economic peak and trough. 
C) the last 3 to 5 years of data. 
D) None of the above 
A) 2 economic peaks and troughs. 
B) 1 economic peak and trough. 
C) the last 3 to 5 years of data. 
D) None of the above

Question 20

If the equity risk premium (ERP) expands, Ke will:

Accepted Answer

A) increase by beta times the equity risk premium. 
B) not be affected. 
C) go down. 
D) decrease by beta times the equity risk premium. 
E) increase by beta minus the equity risk premium. 
A) increase by beta times the equity risk premium. 
B) not be affected. 
C) go down. 
D) decrease by beta times the equity risk premium. 
E) increase by beta minus the equity risk premium.

Exam 7: Valuation of the Individual Firm

P/E ratios are influenced by a company's

Under the constant dividend growth model, it is possible for a negative stock value to result.

Which of the following statements about stock valuation based on asset value is NOT true?

Least squares trend analysis involves fitting a straight line through a series of data, which, by definition:

A good example of an industry that has a lot of growth companies in it is the:

Stock valuation based on the relationship between a stock's P/E ratio and the market may result in superior returns if:

The best time period for use in the combined earnings and dividend valuation model is:

Hidden assets refer to assets that are not readily apparent to investors in a traditional sense, but add substantial value to the firm.

All things being equal, the more rapid growth a firm enjoys, the higher the P/E ratio.

Every valuation method has its limitations.

The reason price-earnings ratios and inflation are related is because:

If the company's profit margin is constant over time, the number of common shares remains the same, and the dividend payout ratio stays the same, the price to sales ratio, the price to earnings ratio and the price to book value ratio should:

Between 1926 and 2009, the mean return of large company stocks was:

In the formula P0 = D1/(Ke - g), if Ke rises while dividends and growth stay the same, the stock price will decline.

Under a non-constant growth model, Ke (required rate of return) is varied from time period to time period.

All things being equal, the less debt that a firm has, the more likely it is to be highly valued in the marketplace.

The combined earnings and dividend model considers the present value of dividends, plus the present value of a future P/E ratio times future projected earnings.

The required rate of return is intended to provide

Forecasts for companies that follow economic cycles are best based on analysis of

If the equity risk premium (ERP) expands, Ke will:

The Investment Setting

Security Markets

Participating in the Market

Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts

Economic Activity

Industry Analysis

Financial Statement Analysis

Efficient Markets and Anomalies

Behavioral Finance and Technical Analysis

Bond and Fixed-Income Fundamentals

Principles of Bond Valuation and Investment

Convertible Securities and Warrants

Put and Call Options

Commodities and Financial Futures

Stock Index Futures and Options

A Basic Look at Portfolio Management and Capital Market Theory

Duration and Bond Portfolio Management

International Securities Markets

Investments in Real Assets

Alternative Investments: Private Equity and Hedge Funds

Measuring Risks and Returns of Portfolio Managers

A Comprehensive Analysis for Real Estate Investment Decisions

The Makeup of Institutional Investors

Filters

In the formula P₀ = D₁/(K_e - g), if K_e rises while dividends and growth stay the same, the stock price will decline.

Under a non-constant growth model, K_e (required rate of return) is varied from time period to time period.

If the equity risk premium (ERP) expands, K_e will: