Question 1

Low P/E ratios tend to indicate that a company will _______,ceteris paribus.

Accepted Answer

A) grow quickly 
B) grow at the same speed as the average company 
C) grow slowly 
D) P/E ratios are unrelated to growth 
E) none of the above 
A) grow quickly 
B) grow at the same speed as the average company 
C) grow slowly 
D) P/E ratios are unrelated to growth 
E) none of the above

Question 2

According to James Tobin,the long run value of Tobin's Q should tend toward

Accepted Answer

A) 0. 
B) 1. 
C) 2. 
D) infinity. 
E) none of the above. 
A) 0. 
B) 1. 
C) 2. 
D) infinity. 
E) none of the above.

Question 3

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00.
-What is the approximate beta of Risk Metrics's stock?

Accepted Answer

A) 0.8 
B) 1.0 
C) 1.1 
D) 1.4 
E) none of the above 
A) 0.8 
B) 1.0 
C) 1.1 
D) 1.4 
E) none of the above

Question 4

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _________.

Accepted Answer

A) an anticipated earnings growth rate which is less than that of the average firm 
B) a dividend yield which is less than that of the average firm 
C) less predictable earnings growth than that of the average firm 
D) greater cyclicality of earnings growth than that of the average firm 
E) none of the above. 
A) an anticipated earnings growth rate which is less than that of the average firm 
B) a dividend yield which is less than that of the average firm 
C) less predictable earnings growth than that of the average firm 
D) greater cyclicality of earnings growth than that of the average firm 
E) none of the above.

Question 5

The market capitalization rate on the stock of Fast Growing Company is 20%.The expected ROE is 22% and the expected EPS are $6.10.If the firm's plowback ratio is 90%,the P/E ratio will be ________.

Accepted Answer

A) 7.69 
B) 8.33 
C) 9.09 
D) 11.11 
E) 50 
A) 7.69 
B) 8.33 
C) 9.09 
D) 11.11 
E) 50

Question 6

Goodie Corporation produces goods that are very mature in their product life cycles.Goodie Corporation is expected to have per share FCFE in year 1 of $2.00,per share FCFE of $1.50 in year 2,and per share FCFE of $1.00 in year 3.After year 3,per share FCFE is expected to decline at a rate of 1% per year.An appropriate required rate of return for the stock is 10%.The stock should be worth ______.

Accepted Answer

A) $9.00 
B) $101.57 
C) $10.57 
D) $22.22 
E) $47.23 
A) $9.00 
B) $101.57 
C) $10.57 
D) $22.22 
E) $47.23

Question 7

A firm's earnings per share increased from $10 to $12,dividends increased from $4.00 to $4.80,and the share price increased from $80 to $90.Given this information,it follows that ________.

Accepted Answer

A) the stock experienced a drop in the P/E ratio 
B) the firm had a decrease in dividend payout ratio 
C) the firm increased the number of shares outstanding 
D) the required rate of return decreased 
E) none of the above 
A) the stock experienced a drop in the P/E ratio 
B) the firm had a decrease in dividend payout ratio 
C) the firm increased the number of shares outstanding 
D) the required rate of return decreased 
E) none of the above

Question 8

Antiquated Products Corporation produces goods that are very mature in their product life cycles.Antiquated Products Corporation is expected to pay a dividend in year 1 of $1.00,a dividend of $0.90 in year 2,and a dividend of $0.85 in year 3.After year 3,dividends are expected to decline at a rate of 2% per year.An appropriate required rate of return for the stock is 8%.The stock should be worth ______.

Accepted Answer

A) $8.49 
B) $10.57 
C) $20.00 
D) $22.22 
E) none of the above 
A) $8.49 
B) $10.57 
C) $20.00 
D) $22.22 
E) none of the above

Question 9

Medtronic Company has an expected ROE of 16%.The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends.

Accepted Answer

A) 3.0% 
B) 6.0% 
C) 7.2% 
D) 4.8% 
E) none of the above 
A) 3.0% 
B) 6.0% 
C) 7.2% 
D) 4.8% 
E) none of the above

Question 10

Low Tech Company has an expected ROE of 10%.The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

Accepted Answer

A) 6.0% 
B) 4.8% 
C) 7.2% 
D) 3.0% 
E) none of the above 
A) 6.0% 
B) 4.8% 
C) 7.2% 
D) 3.0% 
E) none of the above

Question 11

Bubba Gumm Company has an expected ROE of 9%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 10% of earnings.

Accepted Answer

A) 90% 
B) 10% 
C) 9% 
D) 0.9% 
E) none of the above 
A) 90% 
B) 10% 
C) 9% 
D) 0.9% 
E) none of the above

Question 12

Fly Boy Corporation is expected have EBIT of $800k this year.Fly Boy Corporation is in the 30% tax bracket,will report $52,000 in depreciation,will make $86,000 in capital expenditures,and have a $16,000 increase in net working capital this year.What is Fly Boy's FCFF?

Accepted Answer

A) 510,000 
B) 406,000 
C) 542,000 
D) 596,000 
E) 682,000 
A) 510,000 
B) 406,000 
C) 542,000 
D) 596,000 
E) 682,000

Question 13

_______ is the amount of money per common share that could be realized by breaking up the firm,selling the assets,repaying the debt,and distributing the remainder to shareholders.

Accepted Answer

A) Book value per share 
B) Liquidation value per share 
C) Market value per share 
D) Tobin's Q 
E) None of the above 
A) Book value per share 
B) Liquidation value per share 
C) Market value per share 
D) Tobin's Q 
E) None of the above

Question 14

GAAP allows

Accepted Answer

A) no leeway to manage earnings. 
B) minimal leeway to manage earnings. 
C) considerable leeway to manage earnings. 
D) earnings management if it is beneficial in increasing stock price. 
E) none of the above. 
A) no leeway to manage earnings. 
B) minimal leeway to manage earnings. 
C) considerable leeway to manage earnings. 
D) earnings management if it is beneficial in increasing stock price. 
E) none of the above.

Question 15

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 above 
A) 7.69 
B) 8.33 
C) 9.09 
D) 11.11 
E) none of the above

Question 16

One of the problems with attempting to forecast stock market values is that

Accepted Answer

A) there are no variables that seem to predict market return. 
B) the earnings multiplier approach can only be used at the firm level. 
C) the level of uncertainty surrounding the forecast will always be quite high. 
D) dividend payout ratios are highly variable. 
E) none of the above. 
A) there are no variables that seem to predict market return. 
B) the earnings multiplier approach can only be used at the firm level. 
C) the level of uncertainty surrounding the forecast will always be quite high. 
D) dividend payout ratios are highly variable. 
E) none of the above.

Question 17

You wish to earn a return of 13% on each of two stocks,X and Y.Stock X is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year.The expected growth rate of dividends for both stocks is 7%.The intrinsic value of stock X ______.

Accepted Answer

A) will be greater than the intrinsic value of stock Y 
B) will be the same as the intrinsic value of stock Y 
C) will be less than the intrinsic value of stock Y 
D) A or B 
E) none of the above is a correct answer. 
A) will be greater than the intrinsic value of stock Y 
B) will be the same as the intrinsic value of stock Y 
C) will be less than the intrinsic value of stock Y 
D) A or B 
E) none of the above is a correct answer.

Question 18

Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year.Dividends are expected to decline at the rate of 2% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Old Quartz Gold Mining Company has a beta of -0.25.The intrinsic value of the stock is ______.

Accepted Answer

A) $80.00 
B) $133.33 
C) $200.00 
D) $400.00 
E) none of the above 
A) $80.00 
B) $133.33 
C) $200.00 
D) $400.00 
E) none of the above

Question 19

Discuss the Gordon,or constant discounted dividend,model of common stock valuation.Include in your discussion the advantages,disadvantages,and assumptions of the model.

Accepted Answer

The Gordon model discounts the expected

Question 20

The growth in per share FCFE of SYNK,Inc.is expected to be 8%/year for the next two years,followed by a growth rate of 4%/year for three years; after this five year period,the growth in per share FCFE is expected to be 3%/year,indefinitely.The required rate of return on SYNC,Inc.is 11%.Last year's per share FCFE was $2.75.What should the stock sell for today?

Accepted Answer

A) $28.99 
B) $35.21 
C) $54.67 
D) $56.37 
E) $39.71 
A) $28.99 
B) $35.21 
C) $54.67 
D) $56.37 
E) $39.71

Exam 18: Option Valuation

Low P/E ratios tend to indicate that a company will _______,ceteris paribus.

According to James Tobin,the long run value of Tobin's Q should tend toward

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _________.

The market capitalization rate on the stock of Fast Growing Company is 20%.The expected ROE is 22% and the expected EPS are $6.10.If the firm's plowback ratio is 90%,the P/E ratio will be ________.

A firm's earnings per share increased from $10 to $12,dividends increased from $4.00 to $4.80,and the share price increased from $80 to $90.Given this information,it follows that ________.

Medtronic Company has an expected ROE of 16%.The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends.

Low Tech Company has an expected ROE of 10%.The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

Bubba Gumm Company has an expected ROE of 9%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 10% of earnings.

Fly Boy Corporation is expected have EBIT of $800k this year.Fly Boy Corporation is in the 30% tax bracket,will report $52,000 in depreciation,will make $86,000 in capital expenditures,and have a $16,000 increase in net working capital this year.What is Fly Boy's FCFF?

_______ is the amount of money per common share that could be realized by breaking up the firm,selling the assets,repaying the debt,and distributing the remainder to shareholders.

GAAP allows

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 _________.

One of the problems with attempting to forecast stock market values is that

You wish to earn a return of 13% on each of two stocks,X and Y.Stock X is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year.The expected growth rate of dividends for both stocks is 7%.The intrinsic value of stock X ______.

Discuss the Gordon,or constant discounted dividend,model of common stock valuation.Include in your discussion the advantages,disadvantages,and assumptions of the model.

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters