Question 1

One basic problem with the application of the Capital Asset Pricing Model when computing Ke is that

Accepted Answer

A) (Km- RF) is not observable in the market. 
B) the analyst needs to forecast dividends for next year. 
C) beta is a historical number. 
D) the risk-free rate changes every day. 
A) (Km- RF) is not observable in the market. 
B) the analyst needs to forecast dividends for next year. 
C) beta is a historical number. 
D) the risk-free rate changes every day.

Question 2

History shows that, as inflation increases, price-earnings ratios increase along with inflation.

Accepted Answer

A) True 
 B)False

Question 3

In order for any dividend valuation model to reflect a valid stock price for a company,

Accepted Answer

A) the company must pay dividends. 
B) the dividend growth rate must remain constant. 
C) the required rate of return (discount rate) must remain constant. 
D) More than one of the above is true 
A) the company must pay dividends. 
B) the dividend growth rate must remain constant. 
C) the required rate of return (discount rate) must remain constant. 
D) More than one of the above is true

Question 4

Mathematically, the price-earnings ratio (P/E) is simply the price per share divided by earnings per share.

Accepted Answer

A) True 
 B)False

Question 5

The general dividend model assumes the value of a firm is equal to the present value of future dividends.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is NOT a characteristic of a growth company?

Accepted Answer

A) The company has a relatively high average expenditure on research and development 
B) The company usually pays a dividend equal to 40-50% of earnings 
C) The company has consistently stable and high profit margins 
D) The company has a growth rate that is significantly higher than the growth of GDP 
A) The company has a relatively high average expenditure on research and development 
B) The company usually pays a dividend equal to 40-50% of earnings 
C) The company has consistently stable and high profit margins 
D) The company has a growth rate that is significantly higher than the growth of GDP

Question 7

The key to firms having assets as sources of value is their current return on these assets.

Accepted Answer

A) True 
 B)False

Question 8

Least squares trend analysis is used to take a simple average of past data.

Accepted Answer

A) True 
 B)False

Question 9

The constant growth dividend valuation model assumes

Accepted Answer

A) a constant annual dividend. 
B) a constant dividend growth rate for no more than the first 10 years. 
C) that the discount rate must be greater than the dividend growth rate. 
D) that the dividend growth rate must be greater that the discount rate. 
E) A and B are true assumptions 
A) a constant annual dividend. 
B) a constant dividend growth rate for no more than the first 10 years. 
C) that the discount rate must be greater than the dividend growth rate. 
D) that the dividend growth rate must be greater that the discount rate. 
E) A and B are true assumptions

Question 10

The purpose of stock valuation is

Accepted Answer

A) to set the fair market price for a given common stock. 
B) to determine whether the common stock's value is fairly represented by its market price. 
C) of limited value, since the efficient market hypothesis proves that all common stock is always fairly priced. 
D) to find common stocks whose market price equals the intrinsic value. 
A) to set the fair market price for a given common stock. 
B) to determine whether the common stock's value is fairly represented by its market price. 
C) of limited value, since the efficient market hypothesis proves that all common stock is always fairly priced. 
D) to find common stocks whose market price equals the intrinsic value.

Question 11

What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.

Accepted Answer

A) $26.75 
B) $30.00 
C) $32.10 
D) $21.42 
E) $13.38 
A) $26.75 
B) $30.00 
C) $32.10 
D) $21.42 
E) $13.38

Question 12

There is little relationship between R&D expenditures as a percent of sales, and growth of earnings per share.

Accepted Answer

A) True 
 B)False

Question 13

When an analyst uses the income statement method of forecasting earnings, she has a limited amount of flexibility in adjusting the inputs.

Accepted Answer

A) True 
 B)False

Question 14

In the formula P0 = D1/(Ke - g), if g decreases, the price of the stock will go down.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following would most likely affect the P/E ratio of the market in general?

Accepted Answer

A) A significant change in government fiscal policy 
B) Declining earnings of the S&P 500 companies 
C) Investors' expectations about inflation changes and becomes either more positive or more negative 
D) All of the above could have a significant impact. 
A) A significant change in government fiscal policy 
B) Declining earnings of the S&P 500 companies 
C) Investors' expectations about inflation changes and becomes either more positive or more negative 
D) All of the above could have a significant impact.

Question 16

In general, the P/E ratio of a stock _______________ as inflation _____________.

Accepted Answer

A) increases; decreases 
B) increases; increases 
C) decreases; decreases 
D) none of the above 
A) increases; decreases 
B) increases; increases 
C) decreases; decreases 
D) none of the above

Question 17

With the income-statement method of forecasting earnings per share (EPS), you start with a forecast of profits.

Accepted Answer

A) True 
 B)False

Question 18

The final value calculated in dividend valuation models is typically very accurate.

Accepted Answer

A) True 
 B)False

Question 19

The value of the price-earnings ratio is affected by:

Accepted Answer

A) the earnings period used for its calculation. 
B) expected growth in earnings per share. 
C) overall conditions in the stock market. 
D) inflationary expectations. 
E) All of the above 
A) the earnings period used for its calculation. 
B) expected growth in earnings per share. 
C) overall conditions in the stock market. 
D) inflationary expectations. 
E) All of the above

Question 20

As inflation increases, the required rate of return on common stocks falls, as well as the prices.

Accepted Answer

A) True 
 B)False

Exam 7: Valuation of the Individual Firm

One basic problem with the application of the Capital Asset Pricing Model when computing Ke is that

History shows that, as inflation increases, price-earnings ratios increase along with inflation.

In order for any dividend valuation model to reflect a valid stock price for a company,

Mathematically, the price-earnings ratio (P/E) is simply the price per share divided by earnings per share.

The general dividend model assumes the value of a firm is equal to the present value of future dividends.

Which of the following is NOT a characteristic of a growth company?

The key to firms having assets as sources of value is their current return on these assets.

Least squares trend analysis is used to take a simple average of past data.

The constant growth dividend valuation model assumes

The purpose of stock valuation is

What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.

There is little relationship between R&D expenditures as a percent of sales, and growth of earnings per share.

When an analyst uses the income statement method of forecasting earnings, she has a limited amount of flexibility in adjusting the inputs.

In the formula P0 = D1/(Ke - g), if g decreases, the price of the stock will go down.

Which of the following would most likely affect the P/E ratio of the market in general?

In general, the P/E ratio of a stock _______________ as inflation _____________.

With the income-statement method of forecasting earnings per share (EPS), you start with a forecast of profits.

The final value calculated in dividend valuation models is typically very accurate.

The value of the price-earnings ratio is affected by:

As inflation increases, the required rate of return on common stocks falls, as well as the prices.

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

One basic problem with the application of the Capital Asset Pricing Model when computing K_e is that

What is the value of a stock which has a current dividend (D₀) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.

In the formula P₀ = D₁/(K_e - g), if g decreases, the price of the stock will go down.

In general, the P/E ratio of a stock ___ as inflation _.