Question 1

An individual investor could rely on earnings forecasts from any of the following, except:

Accepted Answer

A) Standard and Poor's earnings forecaster. 
B) a firm's annual report. 
C) Value Line Investment Survey. 
D) Zacks, I/B/E/S, or other professional consensus reporting firms. 
A) Standard and Poor's earnings forecaster. 
B) a firm's annual report. 
C) Value Line Investment Survey. 
D) Zacks, I/B/E/S, or other professional consensus reporting firms.

Question 2

The P/E ratio of a particular firm would probably be affected by which of the following?

Accepted Answer

A) Investors' perception of the quality of the firm's management 
B) The firm's accounting practices 
C) Supply and demand for the security 
D) All of the above 
A) Investors' perception of the quality of the firm's management 
B) The firm's accounting practices 
C) Supply and demand for the security 
D) All of the above

Question 3

Using pro forma income statements to estimate earnings per share instead of using regression analysis has several advantages, except which one of the following?

Accepted Answer

A) The analyst is able to study profitability and the effects of taxes on profit margins 
B) Interest expense and debt and equity financing can be factored into the analysis 
C) Hidden problems in stable growth firms would be brought out 
D) Effects of the business cycle on profit margins can be included in the forecast 
A) The analyst is able to study profitability and the effects of taxes on profit margins 
B) Interest expense and debt and equity financing can be factored into the analysis 
C) Hidden problems in stable growth firms would be brought out 
D) Effects of the business cycle on profit margins can be included in the forecast

Question 4

The use of many valuation models provides the analyst with

Accepted Answer

A) one model that gives the right answer. 
B) multiple models of how the market might value the firm's stock price. 
C) a confusing array of answers. 
D) the ability to choose the best model that matches his or her previous judgment. 
A) one model that gives the right answer. 
B) multiple models of how the market might value the firm's stock price. 
C) a confusing array of answers. 
D) the ability to choose the best model that matches his or her previous judgment.

Question 5

Valuation models using average price ratios and 10-year averages can be more useful with cyclical companies, because valuation of cyclical companies benefits from an analysis of longer time periods including at least one business cycle.

Accepted Answer

A) True 
 B)False

Question 6

In general, if the market perceives that the direction of interest rates and inflation is down, this perception will have a positive effect on price-earnings ratios.

Accepted Answer

A) True 
 B)False

Question 7

Firms with highly liquid cash positions may be attractive merger candidates, mainly because their cash can be used to pay dividends.

Accepted Answer

A) True 
 B)False

Question 8

The general dividend valuation model assumes the investor knows the _______ and the discount rate.

Accepted Answer

A) exact dividend to be paid in each and every year 
B) current year's dividend, the anticipated annual dividend growth rate 
C) investor's required rate of return 
D) book value per share of the company 
A) exact dividend to be paid in each and every year 
B) current year's dividend, the anticipated annual dividend growth rate 
C) investor's required rate of return 
D) book value per share of the company

Question 9

The value of common stock can be viewed as:

Accepted Answer

A) a dividend stream, plus a market price at the end of the dividend stream. 
B) a present value of a dividend stream, plus a market price at the end of the dividend stream. 
C) the terminal value of the dividend stream. 
D) the sum of the dividend stream, taken to infinity. 
A) a dividend stream, plus a market price at the end of the dividend stream. 
B) a present value of a dividend stream, plus a market price at the end of the dividend stream. 
C) the terminal value of the dividend stream. 
D) the sum of the dividend stream, taken to infinity.

Question 10

Empirical evidence indicates that rising dividends are no guarantee that the associated common stock price will also rise in the short run.

Accepted Answer

A) True 
 B)False

Question 11

Studies generally show that the price-earnings ratio is a function of:

Accepted Answer

A) expected changes in interest rates. 
B) future estimated growth of earnings for the individual company. 
C) expected changes in the required rate of return, Ke. 
D) All of the above impact price-earnings ratios 
A) expected changes in interest rates. 
B) future estimated growth of earnings for the individual company. 
C) expected changes in the required rate of return, Ke. 
D) All of the above impact price-earnings ratios

Question 12

A growth stock is sometimes defined as the common stock of a company which is growing faster than the economy in general.

Accepted Answer

A) True 
 B)False

Question 13

The first step in using the income-statement method of estimating earnings per share (EPS) is to develop an accurate sales forecast.

Accepted Answer

A) True 
 B)False

Question 14

Under most dividend valuation models, a stock with an expected level dividend (zero dividend growth) would have no value.

Accepted Answer

A) True 
 B)False

Question 15

Widji Outfitters is expected to pay a dividend (D1) of $1.00 next year, with an expected constant growth in dividends of 5%. The required rate of return is 11%.
a) Calculate the present value of this stock.
b) What will be the new price of this stock if the discount rate rises to 12%?
c) What will be the new price of this stock if the discount rate falls to 10%?

Accepted Answer

a) $16.66 per share
b) $14.28 per share

Question 16

The problem with the pure short-term earnings model is that the stock value is highly sensitive to short-term swings in earnings per share (EPS).

Accepted Answer

A) True 
 B)False

Question 17

Dividend valuation models are best suited for firms in the expansion or maturity phase of their life cycle.

Accepted Answer

A) True 
 B)False

Question 18

Inflation has an indirect effect on price-earnings ratios through its impact on Ke.

Accepted Answer

A) True 
 B)False

Question 19

It is thought that historical growth rates have more impact on an individual company's P/E ratio than expected future growth rate.

Accepted Answer

A) True 
 B)False

Question 20

Tate Realty is expected to pay a dividend (D1) of $3.00 next year, with the growth in dividends expected to remain constant at 5%. The required rate of return, Ke, is 10%. Calculate P0.

Accepted Answer

$60.00 per share
Explanation:

Exam 7: Valuation of the Individual Firm

An individual investor could rely on earnings forecasts from any of the following, except:

The P/E ratio of a particular firm would probably be affected by which of the following?

Using pro forma income statements to estimate earnings per share instead of using regression analysis has several advantages, except which one of the following?

The use of many valuation models provides the analyst with

Valuation models using average price ratios and 10-year averages can be more useful with cyclical companies, because valuation of cyclical companies benefits from an analysis of longer time periods including at least one business cycle.

In general, if the market perceives that the direction of interest rates and inflation is down, this perception will have a positive effect on price-earnings ratios.

Firms with highly liquid cash positions may be attractive merger candidates, mainly because their cash can be used to pay dividends.

The general dividend valuation model assumes the investor knows the _______ and the discount rate.

The value of common stock can be viewed as:

Empirical evidence indicates that rising dividends are no guarantee that the associated common stock price will also rise in the short run.

Studies generally show that the price-earnings ratio is a function of:

A growth stock is sometimes defined as the common stock of a company which is growing faster than the economy in general.

The first step in using the income-statement method of estimating earnings per share (EPS) is to develop an accurate sales forecast.

Under most dividend valuation models, a stock with an expected level dividend (zero dividend growth) would have no value.

The problem with the pure short-term earnings model is that the stock value is highly sensitive to short-term swings in earnings per share (EPS).

Dividend valuation models are best suited for firms in the expansion or maturity phase of their life cycle.

Inflation has an indirect effect on price-earnings ratios through its impact on Ke.

It is thought that historical growth rates have more impact on an individual company's P/E ratio than expected future growth rate.

Tate Realty is expected to pay a dividend (D1) of $3.00 next year, with the growth in dividends expected to remain constant at 5%. The required rate of return, Ke, is 10%. Calculate P0.

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

Inflation has an indirect effect on price-earnings ratios through its impact on K_e.

Tate Realty is expected to pay a dividend (D₁) of $3.00 next year, with the growth in dividends expected to remain constant at 5%. The required rate of return, K_e, is 10%. Calculate P₀.