Question 1

According to Peter Lynch, a rough rule of thumb for security analysis is that

Accepted Answer

A)  the growth rate should be equal to the plowback rate. 
B)  the growth rate should be equal to the dividend-payout rate. 
C)  the growth rate should be low for emerging industries. 
D)  the growth rate should be equal to the P/E ratio. 
E)  None of the options are correct. 
A)  the growth rate should be equal to the plowback rate. 
B)  the growth rate should be equal to the dividend-payout rate. 
C)  the growth rate should be low for emerging industries. 
D)  the growth rate should be equal to the P/E ratio. 
E)  None of the options are correct.

Question 2

Earnings management is

Accepted Answer

A)  when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly. 
B)  when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly. 
C)  when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly. 
D)  the practice of using flexible accounting rules to improve the apparent profitability of the firm. 
A)  when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly. 
B)  when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly. 
C)  when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly. 
D)  the practice of using flexible accounting rules to improve the apparent profitability of the firm.

Question 3

A firm has a return on equity of 20% and a dividend-payout ratio of 30%. The firm's anticipated growth rate is

Accepted Answer

A)  6%. 
B)  10%. 
C)  14%. 
D)  20%. 
A)  6%. 
B)  10%. 
C)  14%. 
D)  20%.

Question 4

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See's required return on equity is 10.6%, and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever, the intrinsic value of See's shares is

Accepted Answer

A)  $108.00. 
B)  $68.30. 
C)  $26.35. 
D)  $14.76. 
A)  $108.00. 
B)  $68.30. 
C)  $26.35. 
D)  $14.76.

Question 5

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. 
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.

Question 6

Zero had a FCFE of $4.5M last year and has 2.25M shares outstanding. Zero's required return on equity is 10%, and WACC is 8.2%. If FCFE is expected to grow at 8% forever, the intrinsic value of Zero's shares is

Accepted Answer

A)  $108.00. 
B)  $1080.00. 
C)  $26.35. 
D)  $14.76. 
E)  None of the options are correct. 
A)  $108.00. 
B)  $1080.00. 
C)  $26.35. 
D)  $14.76. 
E)  None of the options are correct.

Question 7

A preferred stock will pay a dividend of $6.00 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)  $0.60 
B)  $6.00 
C)  $600 
D)  $60.00 
E)  None of the options are correct. 
A)  $0.60 
B)  $6.00 
C)  $600 
D)  $60.00 
E)  None of the options are correct.

Question 8

A preferred stock will pay a dividend of $7.50 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)  $0.75 
B)  $7.50 
C)  $64.12 
D)  $56.25 
E)  None of the options are correct. 
A)  $0.75 
B)  $7.50 
C)  $64.12 
D)  $56.25 
E)  None of the options are correct.

Question 9

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 75%, the P/E ratio will be

Accepted Answer

A)  7.69. 
B)  8.33. 
C)  9.09. 
D)  11.11. 
E)  None of the options are correct. 
A)  7.69. 
B)  8.33. 
C)  9.09. 
D)  11.11. 
E)  None of the options are correct.

Question 10

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.

Accepted Answer

A)  technical analysts 
B)  statistical analysts 
C)  fundamental analysts 
D)  dividend analysts 
E)  psychoanalysts 
A)  technical analysts 
B)  statistical analysts 
C)  fundamental analysts 
D)  dividend analysts 
E)  psychoanalysts

Question 11

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 book value per share?

Accepted Answer

A)  $1.68 
B)  $2.60 
C)  $32.14 
D)  $60.71 
E)  None of the options are correct. 
A)  $1.68 
B)  $2.60 
C)  $32.14 
D)  $60.71 
E)  None of the options are correct.

Question 12

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 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 15% 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 13

Mature Products Corporation produces goods that are very mature in their product life cycles. Mature Products Corporation is expected to pay a dividend in year 1 of $2.00, a dividend of $1.50 in year 2, and a dividend of $1.00 in year 3. After year 3, dividends are 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)  $10.57. 
C)  $20.00. 
D)  $22.22. 
A)  $9.00. 
B)  $10.57. 
C)  $20.00. 
D)  $22.22.

Question 14

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. The market's required rate of return on Sure's stock is

Accepted Answer

A)  14.0%. 
B)  17.5%. 
C)  16.5%. 
D)  15.25%. 
E)  None of the options are correct. 
A)  14.0%. 
B)  17.5%. 
C)  16.5%. 
D)  15.25%. 
E)  None of the options are correct.

Question 15

Stingy Corporation is expected have EBIT of $1.2M this year. Stingy Corporation is in the 30% tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and will have a $24,000 increase in net working capital this year. What is Stingy's FCFF?

Accepted Answer

A)  1,139,000 
B)  1,200,000 
C)  1,025,000 
D)  921,000 
E)  873,000 
A)  1,139,000 
B)  1,200,000 
C)  1,025,000 
D)  921,000 
E)  873,000

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 
A)  $20.60 
B)  $20.00 
C)  $12.12 
D)  $22.00

Question 17

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 
A)  Real risk-free rate 
B)  Risk premium for stocks 
C)  Return on assets 
D)  Expected inflation rate

Question 18

Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Sunshine Corporation has a beta of 0.75. The intrinsic value of the stock is

Accepted Answer

A)  $10.71. 
B)  $15.00. 
C)  $17.75. 
D)  $25.00. 
A)  $10.71. 
B)  $15.00. 
C)  $17.75. 
D)  $25.00.

Question 19

Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding. Seaman's required return on equity is 11.6%, and WACC is 10.4%. If FCFE is expected to grow at 5% forever, the intrinsic value of Seaman's shares is

Accepted Answer

A)  $646.48. 
B)  $64.66. 
C)  $6,464.80 
D)  $6.46. 
A)  $646.48. 
B)  $64.66. 
C)  $6,464.80 
D)  $6.46.

Question 20

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

Exam 18: Equity Valuation Models

According to Peter Lynch, a rough rule of thumb for security analysis is that

Earnings management is

A firm has a return on equity of 20% and a dividend-payout ratio of 30%. The firm's anticipated growth rate is

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See's required return on equity is 10.6%, and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever, the intrinsic value of See's shares is

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

Zero had a FCFE of $4.5M last year and has 2.25M shares outstanding. Zero's required return on equity is 10%, and WACC is 8.2%. If FCFE is expected to grow at 8% forever, the intrinsic value of Zero's shares is

A preferred stock will pay a dividend of $6.00 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.

A preferred stock will pay a dividend of $7.50 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.

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 75%, the P/E ratio will be

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 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 15% return.

Stingy Corporation is expected have EBIT of $1.2M this year. Stingy Corporation is in the 30% tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and will have a $24,000 increase in net working capital this year. What is Stingy's FCFF?

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

Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding. Seaman's required return on equity is 11.6%, and WACC is 10.4%. If FCFE is expected to grow at 5% forever, the intrinsic value of Seaman's shares is

The Gordon model

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

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