Question 1

A high P/E ratio for any individual stock may be misleading

Accepted Answer

A) in an inflationary economy. 
B) if the firm is in a cyclical industry, like automobiles. 
C) if the firm has a strong future growth rate. 
D) More than one of the above 
A) in an inflationary economy. 
B) if the firm is in a cyclical industry, like automobiles. 
C) if the firm has a strong future growth rate. 
D) More than one of the above

Question 2

Under a non-constant growth model, the growth rate (g) is varied from time period to time period.

Accepted Answer

A) True 
 B)False

Question 3

Beta measures:

Accepted Answer

A) the relationship of the P/E ratio to the earnings growth rate. 
B) individual company stock price risk, relative to the market. 
C) the risk within a portfolio than cannot be diversified away. 
D) the stock price growth of one company compared to that of a second company. 
A) the relationship of the P/E ratio to the earnings growth rate. 
B) individual company stock price risk, relative to the market. 
C) the risk within a portfolio than cannot be diversified away. 
D) the stock price growth of one company compared to that of a second company.

Question 4

In the formula P0 = D1/(Ke - g), if D1= $2.00, Ke= .10, and g = .06, P0 is equal to $55.

Accepted Answer

A) True 
 B)False

Question 5

Least squares trend analysis is the only method of obtaining a completely objective estimate of future earnings per share.

Accepted Answer

A) True 
 B)False

Question 6

If the Treasury bill rate (RF) increases, then Ke will

Accepted Answer

A) decrease. 
B) increase. 
C) stay the same. 
D) go up by beta times the Treasury bill rate. 
A) decrease. 
B) increase. 
C) stay the same. 
D) go up by beta times the Treasury bill rate.

Question 7

The P/E ratio approach to stock valuation is based on:

Accepted Answer

A) a yearly range of historical P/E ratios resulting in an average expected P/E ratio, an earnings forecast derived from expected growth rates in earnings, and the stock's current P/E ratio. 
B) the average yearly P/E ratio, relative to the market; a yearly range of P/E ratios; and earnings based on an assumed constant growth rate. 
C) an increasing yearly range of P/E ratios and an earnings forecast based on the EPS of previous years. 
D) The current P/E ratio, compared to the P/E ratio of some market index. 
A) a yearly range of historical P/E ratios resulting in an average expected P/E ratio, an earnings forecast derived from expected growth rates in earnings, and the stock's current P/E ratio. 
B) the average yearly P/E ratio, relative to the market; a yearly range of P/E ratios; and earnings based on an assumed constant growth rate. 
C) an increasing yearly range of P/E ratios and an earnings forecast based on the EPS of previous years. 
D) The current P/E ratio, compared to the P/E ratio of some market index.

Question 8

The strong inverse relationship between P/E ratios and changes in the Consumer Price Index can be directly traced to investors' required rate of return.

Accepted Answer

A) True 
 B)False

Question 9

The nonconstant dividend discount model is best applied to companies in the:

Accepted Answer

A) maturity stage of their life cycle. 
B) development stage of their life cycle. 
C) expansion stage of their life cycle. 
D) A and B 
A) maturity stage of their life cycle. 
B) development stage of their life cycle. 
C) expansion stage of their life cycle. 
D) A and B

Question 10

The current price of a stock should equal the future value of the expected dividend stream.

Accepted Answer

A) True 
 B)False

Question 11

The primary difference between dividend valuation models and earnings valuation models is:

Accepted Answer

A) selecting the appropriate discount rate. 
B) dividends are not considered in earnings models. 
C) whether the investor's income stream or the firm's income stream is measured. 
D) More than one of the above 
A) selecting the appropriate discount rate. 
B) dividends are not considered in earnings models. 
C) whether the investor's income stream or the firm's income stream is measured. 
D) More than one of the above

Question 12

Dividend models are best suited for those companies that are in the:

Accepted Answer

A) introduction phase of the life cycle. 
B) expansion phase of the life cycle. 
C) maturity phase of the life cycle. 
D) Both B and C 
A) introduction phase of the life cycle. 
B) expansion phase of the life cycle. 
C) maturity phase of the life cycle. 
D) Both B and C

Question 13

If the company's profit margin is constant over time, and the number of shares of stock remains the same, the price to sales ratio and the price to earnings ratio:

Accepted Answer

A) should provide similar valuations for the company's stock value. 
B) should provide very different valuations for the company's stock value. 
C) should not be related in any way. 
D) All of the above are true 
A) should provide similar valuations for the company's stock value. 
B) should provide very different valuations for the company's stock value. 
C) should not be related in any way. 
D) All of the above are true

Question 14

Short-term speculators would probably NOT use _________ to develop a stock value.

Accepted Answer

A) dividend growth rates 
B) discount rates 
C) a stream of earnings or dividends 
D) the income-statement method 
E) any of the above 
A) dividend growth rates 
B) discount rates 
C) a stream of earnings or dividends 
D) the income-statement method 
E) any of the above

Question 15

The appropriate price-earnings ratio (P/E ratio) to be used for stock valuation can be calculated at any time by dividing the current stock price by the last twelve months of earnings per share.

Accepted Answer

A) True 
 B)False

Question 16

All dividend valuation models are based on the present value of a future income stream.

Accepted Answer

A) True 
 B)False

Question 17

In the non-constant growth model where the first phase of growth is 5 years, followed by a second phase of constant growth:

Accepted Answer

A) P5= D6/(Ke-g). 
B) P0 = the present value of dividends from years 1 - 5 plus the present value of P5. 
C) the company's growth rate is probably higher than Ke during the first 5 years. 
D) All of the above are correct 
A) P5= D6/(Ke-g). 
B) P0 = the present value of dividends from years 1 - 5 plus the present value of P5. 
C) the company's growth rate is probably higher than Ke during the first 5 years. 
D) All of the above are correct

Question 18

The basis of stock valuation includes an analysis of

Accepted Answer

A) economic variables. 
B) industry variables. 
C) financial statements. 
D) All of the following 
A) economic variables. 
B) industry variables. 
C) financial statements. 
D) All of the following

Question 19

In developing a least squares trend line, the analyst should:

Accepted Answer

A) include several business cycles. 
B) fit the trendline between a peak and a trough, or vice versa. 
C) use as many data points as are practical. 
D) All of the above 
A) include several business cycles. 
B) fit the trendline between a peak and a trough, or vice versa. 
C) use as many data points as are practical. 
D) All of the above

Question 20

The pure, short-term earnings model:

Accepted Answer

A) ignores present value analysis and its long-term forecasts of dividends and earnings per share. 
B) uses the past three months to estimate earnings per share. 
C) disregards the long-term growth forecasts for earnings per share. 
D) uses the payout ratio and return on equity to derive the P/E ratio. 
A) ignores present value analysis and its long-term forecasts of dividends and earnings per share. 
B) uses the past three months to estimate earnings per share. 
C) disregards the long-term growth forecasts for earnings per share. 
D) uses the payout ratio and return on equity to derive the P/E ratio.

Exam 7: Valuation of the Individual Firm

A high P/E ratio for any individual stock may be misleading

Under a non-constant growth model, the growth rate (g) is varied from time period to time period.

Beta measures:

In the formula P0 = D1/(Ke - g), if D1= $2.00, Ke= .10, and g = .06, P0 is equal to $55.

Least squares trend analysis is the only method of obtaining a completely objective estimate of future earnings per share.

If the Treasury bill rate (RF) increases, then Ke will

The P/E ratio approach to stock valuation is based on:

The strong inverse relationship between P/E ratios and changes in the Consumer Price Index can be directly traced to investors' required rate of return.

The nonconstant dividend discount model is best applied to companies in the:

The current price of a stock should equal the future value of the expected dividend stream.

The primary difference between dividend valuation models and earnings valuation models is:

Dividend models are best suited for those companies that are in the:

If the company's profit margin is constant over time, and the number of shares of stock remains the same, the price to sales ratio and the price to earnings ratio:

Short-term speculators would probably NOT use _________ to develop a stock value.

The appropriate price-earnings ratio (P/E ratio) to be used for stock valuation can be calculated at any time by dividing the current stock price by the last twelve months of earnings per share.

All dividend valuation models are based on the present value of a future income stream.

In the non-constant growth model where the first phase of growth is 5 years, followed by a second phase of constant growth:

The basis of stock valuation includes an analysis of

In developing a least squares trend line, the analyst should:

The pure, short-term earnings model:

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In the formula P₀ = D₁/(K_e - g), if D₁= $2.00, K_e= .10, and g = .06, P₀ is equal to $55.

If the Treasury bill rate (R_F) increases, then K_e will