Question 1

If the expected ROE on reinvested earnings is equal to k,the multistage DDM reduces to

Accepted Answer

A) V0= (Expected Dividend Per Share in Year 1)/k 
B) V0= (Expected EPS in Year 1)/k 
C) V0= (Treasury Bond Yield in Year 1)/k 
D) V0= (Market return in Year 1)/k 
E) none of the above 
A) V0= (Expected Dividend Per Share in Year 1)/k 
B) V0= (Expected EPS in Year 1)/k 
C) V0= (Treasury Bond Yield in Year 1)/k 
D) V0= (Market return in Year 1)/k 
E) none of the above

Question 2

In the dividend discount model,which of the following are not incorporated into the discount rate?

Accepted Answer

A) Real risk-free rate 
B) Risk premium for stocks 
C) Return on assets 
D) Expected inflation rate 
E) None of the above 
A) Real risk-free rate 
B) Risk premium for stocks 
C) Return on assets 
D) Expected inflation rate 
E) None of the above

Question 3

The ______ is a common term for the market consensus value of the required return on a stock.

Accepted Answer

A) dividend payout ratio 
B) intrinsic value 
C) market capitalization rate 
D) plowback rate 
E) none of the above 
A) dividend payout ratio 
B) intrinsic value 
C) market capitalization rate 
D) plowback rate 
E) none of the above

Question 4

An analyst has determined that the intrinsic value of HPQ stock is $20 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 25,then it would be reasonable to assume the expected EPS of HPQ in the coming year is ______.

Accepted Answer

A) $3.63 
B) $4.44 
C) $0.80 
D) $22.50 
E) none of the above 
A) $3.63 
B) $4.44 
C) $0.80 
D) $22.50 
E) none of the above

Question 5

High 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) not grow 
E) none of the above 
A) grow quickly 
B) grow at the same speed as the average company 
C) grow slowly 
D) not grow 
E) none of the above

Question 6

The _______ is defined as the present value of all cash proceeds to the investor in the stock.

Accepted Answer

A) dividend payout ratio 
B) intrinsic value 
C) market capitalization rate 
D) plowback ratio 
E) none of the above 
A) dividend payout ratio 
B) intrinsic value 
C) market capitalization rate 
D) plowback ratio 
E) none of the above

Question 7

J.C.Penney Company is expected to pay a dividend in year 1 of $1.65,a dividend in year 2 of $1.97,and a dividend in year 3 of $2.54.After year 3,dividends are expected to grow at the rate of 8% per year.An appropriate required return for the stock is 11%.The stock should be worth _______ today.

Accepted Answer

A) $33.00 
B) $40.67 
C) $71.80 
D) $66.00 
E) none of the above 
A) $33.00 
B) $40.67 
C) $71.80 
D) $66.00 
E) none of the above

Question 8

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 market capitalization rate for Risk Metrics?

Accepted Answer

A) 13.6% 
B) 13.9% 
C) 15.6% 
D) 16.9% 
E) none of the above 
A) 13.6% 
B) 13.9% 
C) 15.6% 
D) 16.9% 
E) none of the above

Question 9

Highpoint had a FCFE of $246M last year and has 123M shares outstanding.Highpoint's required return on equity is 10% and WACC is 9%.If FCFE is expected to grow at 8.0% forever,the intrinsic value of Highpoint's shares are ____________.

Accepted Answer

A) $21.60 
B) $108 
C) $244.42 
D) $216.00 
E) none of the above 
A) $21.60 
B) $108 
C) $244.42 
D) $216.00 
E) none of the above

Question 10

Because the DDM requires multiple estimates,investors should

Accepted Answer

A) carefully examine inputs to the model. 
B) perform sensitivity analysis on price estimates. 
C) not use this model without expert assistance. 
D) feel confident that DDM estimates are correct. 
E) both A and B. 
A) carefully examine inputs to the model. 
B) perform sensitivity analysis on price estimates. 
C) not use this model without expert assistance. 
D) feel confident that DDM estimates are correct. 
E) both A and B.

Question 11

Suppose that the average P/E multiple in the oil industry is 16.Shell Oil is expected to have an EPS of $4.50 in the coming year.The intrinsic value of Shell Oil stock should be _____.

Accepted Answer

A) $28.12 
B) $35.55 
C) $63.00 
D) $72.00 
E) none of the above 
A) $28.12 
B) $35.55 
C) $63.00 
D) $72.00 
E) none of the above

Question 12

_________ is equal to (common shareholders' equity/common shares outstanding).

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 13

The Gordon model

Accepted Answer

A) is a generalization of the perpetuity formula to cover the case of a growing perpetuity. 
B) is valid only when g is less than k. 
C) is valid only when k is less than g. 
D) A and B. 
E) A and C. 
A) is a generalization of the perpetuity formula to cover the case of a growing perpetuity. 
B) is valid only when g is less than k. 
C) is valid only when k is less than g. 
D) A and B. 
E) A and C.

Question 14

Suppose that the average P/E multiple in the gas industry is 17.KMP is expected to have an EPS of $5.50 in the coming year.The intrinsic value of KMP stock should be _____.

Accepted Answer

A) $28.12 
B) $93.50 
C) $63.00 
D) $72.00 
E) none of the above 
A) $28.12 
B) $93.50 
C) $63.00 
D) $72.00 
E) none of the above

Question 15

You wish to earn a return of 10% on each of two stocks,C and D.Each of the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock C and 10% for stock D.The intrinsic value of stock C _____.

Accepted Answer

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

Question 16

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25.
-What is the intrinsic value of Sure's stock today?

Accepted Answer

A) $20.60 
B) $20.00 
C) $12.12 
D) $22.00 
E) none of the above 
A) $20.60 
B) $20.00 
C) $12.12 
D) $22.00 
E) none of the above

Question 17

Midwest Airline is expected to pay a dividend of $7 in the coming year.Dividends are expected to grow at the rate of 15% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Midwest Airline has a beta of 3.00.The return you should require on the stock is ________.

Accepted Answer

A) 10% 
B) 18% 
C) 30% 
D) 42% 
E) none of the above 
A) 10% 
B) 18% 
C) 30% 
D) 42% 
E) none of the above

Question 18

The growth in dividends of ABC,Inc.is expected to be 15%/year for the next three years,followed by a growth rate of 8%/year for two years; after this five year period,the growth in dividends is expected to be 3%/year,indefinitely.The required rate of return on ABC,Inc.is 13%.Last year's dividends per share were $1.85.What should the stock sell for today?

Accepted Answer

A) $8.99 
B) $25.21 
C) $40.00 
D) $27.74 
E) none of the above 
A) $8.99 
B) $25.21 
C) $40.00 
D) $27.74 
E) none of the above

Question 19

Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90.
-What is Paper Express's market value per share?

Accepted Answer

A) $1.68 
B) $2.60 
C) $32.14 
D) $60.71 
E) none of the above 
A) $1.68 
B) $2.60 
C) $32.14 
D) $60.71 
E) none of the above

Question 20

For most firms,P/E ratios and risk

Accepted Answer

A) will be directly related. 
B) will have an inverse relationship. 
C) will be unrelated. 
D) will both increase as inflation increases. 
E) none of the above. 
A) will be directly related. 
B) will have an inverse relationship. 
C) will be unrelated. 
D) will both increase as inflation increases. 
E) none of the above.

Exam 18: Option Valuation

If the expected ROE on reinvested earnings is equal to k,the multistage DDM reduces to

In the dividend discount model,which of the following are not incorporated into the discount rate?

The ______ is a common term for the market consensus value of the required return on a stock.

An analyst has determined that the intrinsic value of HPQ stock is $20 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 25,then it would be reasonable to assume the expected EPS of HPQ in the coming year is ______.

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

The _______ is defined as the present value of all cash proceeds to the investor in the stock.

J.C.Penney Company is expected to pay a dividend in year 1 of $1.65,a dividend in year 2 of $1.97,and a dividend in year 3 of $2.54.After year 3,dividends are expected to grow at the rate of 8% per year.An appropriate required return for the stock is 11%.The stock should be worth _______ today.

Highpoint had a FCFE of $246M last year and has 123M shares outstanding.Highpoint's required return on equity is 10% and WACC is 9%.If FCFE is expected to grow at 8.0% forever,the intrinsic value of Highpoint's shares are ____________.

Because the DDM requires multiple estimates,investors should

Suppose that the average P/E multiple in the oil industry is 16.Shell Oil is expected to have an EPS of $4.50 in the coming year.The intrinsic value of Shell Oil stock should be _____.

_________ is equal to (common shareholders' equity/common shares outstanding).

The Gordon model

Suppose that the average P/E multiple in the gas industry is 17.KMP is expected to have an EPS of $5.50 in the coming year.The intrinsic value of KMP stock should be _____.

You wish to earn a return of 10% on each of two stocks,C and D.Each of the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock C and 10% for stock D.The intrinsic value of stock C _____.

For most firms,P/E ratios and risk

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

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