Question 1

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% 
A)  6.0% 
B)  4.8% 
C)  7.2% 
D)  3.0%

Question 2

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required return on equity is 12%, and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is

Accepted Answer

A)  $68.13. 
B)  $18.17. 
C)  $26.35. 
D)  $14.76. 
E)  None of the options are correct. 
A)  $68.13. 
B)  $18.17. 
C)  $26.35. 
D)  $14.76. 
E)  None of the options are correct.

Question 3

A preferred stock will pay a dividend of $2.75 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Accepted Answer

A)  $0.275 
B)  $27.50 
C)  $31.82 
D)  $56.25 
A)  $0.275 
B)  $27.50 
C)  $31.82 
D)  $56.25

Question 4

Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of 1.2. What is the return you should require on Torque's stock?

Accepted Answer

A)  12.0% 
B)  14.6% 
C)  15.6% 
D)  20% 
E)  None of the options are correct. 
A)  12.0% 
B)  14.6% 
C)  15.6% 
D)  20% 
E)  None of the options are correct.

Question 5

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%. The beta of Sure Tool Company's stock is 1.25. If Sure's intrinsic value is $21.00 today, what must be its growth rate?

Accepted Answer

A)  0.0% 
B)  10% 
C)  4% 
D)  6% 
E)  7% 
A)  0.0% 
B)  10% 
C)  4% 
D)  6% 
E)  7%

Question 6

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 options are correct. 
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 options are correct.

Question 7

Sales Company paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of earnings as dividends for the foreseeable future. If the firm is expected to generate a 10% return on equity in the future, and if you require a 12% return on the stock, the value of the stock is

Accepted Answer

A)  $17.67. 
B)  $13.00. 
C)  $16.67. 
D)  $18.67. 
A)  $17.67. 
B)  $13.00. 
C)  $16.67. 
D)  $18.67.

Question 8

Investors want high plowback ratios

Accepted Answer

A)  for all firms. 
B)  whenever ROE > k. 
C)  whenever k > ROE. 
D)  only when they are in low tax brackets. 
E)  whenever bank interest rates are high. 
A)  for all firms. 
B)  whenever ROE > k. 
C)  whenever k > ROE. 
D)  only when they are in low tax brackets. 
E)  whenever bank interest rates are high.

Question 9

The growth in dividends of ABC, Inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. After this five-year period, the growth in dividends is expected to be 3% per 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 options are correct. 
A)  $8.99 
B)  $25.21 
C)  $40.00 
D)  $27.74 
E)  None of the options are correct.

Question 10

If a firm has a required rate of return equal to the ROE,

Accepted Answer

A)  the firm can increase market price and P/E by retaining more earnings. 
B)  the firm can increase market price and P/E by increasing the growth rate. 
C)  the amount of earnings retained by the firm does not affect market price or the P/E. 
D)  the firm can increase market price and P/E by retaining more earnings and increasing the growth rate. 
E)  None of the options are correct. 
A)  the firm can increase market price and P/E by retaining more earnings. 
B)  the firm can increase market price and P/E by increasing the growth rate. 
C)  the amount of earnings retained by the firm does not affect market price or the P/E. 
D)  the firm can increase market price and P/E by retaining more earnings and increasing the growth rate. 
E)  None of the options are correct.

Question 11

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

Accepted Answer

A)  $28.99 
B)  $24.47 
C)  $26.84 
D)  $27.74 
E)  $19.18 
A)  $28.99 
B)  $24.47 
C)  $26.84 
D)  $27.74 
E)  $19.18

Question 12

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% 
A)  3.0% 
B)  6.0% 
C)  7.2% 
D)  4.8%

Question 13

Lamm Corporation is expected have EBIT of $6.2M this year. Lamm Corporation is in the 40% tax bracket, will report $1.2M in depreciation, will make $1.4M in capital expenditures, and will have a $160,000 increase in net working capital this year. What is Lamm's FCFF?

Accepted Answer

A)  6,200,000 
B)  6,160,000 
C)  3,360,000 
D)  3,680,000 
E)  4,625,000 
A)  6,200,000 
B)  6,160,000 
C)  3,360,000 
D)  3,680,000 
E)  4,625,000

Question 14

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

Accepted Answer

A)  $23.91 
B)  $24.11 
C)  $26.52 
D)  $27.50 
E)  None of the options are correct. 
A)  $23.91 
B)  $24.11 
C)  $26.52 
D)  $27.50 
E)  None of the options are correct.

Question 15

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

Accepted Answer

A)  Credit analysts 
B)  Fundamental analysts 
C)  Systems analysts 
D)  Technical analysts 
E)  Specialists 
A)  Credit analysts 
B)  Fundamental analysts 
C)  Systems analysts 
D)  Technical analysts 
E)  Specialists

Question 16

Suppose that the average P/E multiple in the oil industry is 22. Exxon is expected to have an EPS of $1.50 in the coming year. The intrinsic value of Exxon stock should be

Accepted Answer

A)  $33.00. 
B)  $35.55. 
C)  $63.00. 
D)  $72.00. 
E)  None of the options are correct. 
A)  $33.00. 
B)  $35.55. 
C)  $63.00. 
D)  $72.00. 
E)  None of the options are correct.

Question 17

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 options are correct. 
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 options are correct.

Question 18

_______ 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 
A)  Book value per share 
B)  Liquidation value per share 
C)  Market value per share 
D)  Tobin's Q

Question 19

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. 
A)  $80.00. 
B)  $133.33. 
C)  $200.00. 
D)  $400.00.

Question 20

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.

Exam 18: Equity Valuation Models

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.

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required return on equity is 12%, and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is

A preferred stock will pay a dividend of $2.75 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

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%. The beta of Sure Tool Company's stock is 1.25. If Sure's intrinsic value is $21.00 today, what must be its growth rate?

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

Sales Company paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of earnings as dividends for the foreseeable future. If the firm is expected to generate a 10% return on equity in the future, and if you require a 12% return on the stock, the value of the stock is

Investors want high plowback ratios

If a firm has a required rate of return equal to the ROE,

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.

Lamm Corporation is expected have EBIT of $6.2M this year. Lamm Corporation is in the 40% tax bracket, will report $1.2M in depreciation, will make $1.4M in capital expenditures, and will have a $160,000 increase in net working capital this year. What is Lamm's FCFF?

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

Suppose that the average P/E multiple in the oil industry is 22. Exxon is expected to have an EPS of $1.50 in the coming year. The intrinsic value of Exxon stock should be

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

_______ 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.

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

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

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

Macroeconomic and Industry Analysis

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters