Question 1

The most popular approach to forecasting the overall stock market is to use

Accepted Answer

A)  the dividend multiplier. 
B)  the aggregate return on assets. 
C)  the historical ratio of book value to market value. 
D)  the aggregate earnings multiplier. 
E)  Tobin's Q. 
A)  the dividend multiplier. 
B)  the aggregate return on assets. 
C)  the historical ratio of book value to market value. 
D)  the aggregate earnings multiplier. 
E)  Tobin's Q.

Question 2

An analyst has determined that the intrinsic value of IBM stock is $80 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 22, then it would be reasonable to assume the expected EPS of IBM in the coming year is

Accepted Answer

A)  $3.64. 
B)  $4.44. 
C)  $14.40. 
D)  $22.50. 
A)  $3.64. 
B)  $4.44. 
C)  $14.40. 
D)  $22.50.

Question 3

________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities).

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 options are correct. 
A)  Book value per share 
B)  Liquidation value per share 
C)  Market value per share 
D)  Tobin's Q 
E)  None of the options are correct.

Question 4

_________ is equal to common shareholders'equity divided by common shares outstanding.

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 5

Suppose that the average P/E multiple in the oil industry is 20. Dominion Oil is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Dominion Oil stock should be

Accepted Answer

A)  $28.12. 
B)  $35.55. 
C)  $60.00. 
D)  $72.00. 
E)  None of the options are correct. 
A)  $28.12. 
B)  $35.55. 
C)  $60.00. 
D)  $72.00. 
E)  None of the options are correct.

Question 6

The most appropriate discount rate to use when applying a FCFE valuation model is the

Accepted Answer

A)  required rate of return on equity. 
B)  WACC. 
C)  risk-free rate. 
D)  None of the options are correct. 
A)  required rate of return on equity. 
B)  WACC. 
C)  risk-free rate. 
D)  None of the options are correct.

Question 7

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

Accepted Answer

A)  $22.73. 
B)  $27.50. 
C)  $28.57. 
D)  $38.46. 
A)  $22.73. 
B)  $27.50. 
C)  $28.57. 
D)  $38.46.

Question 8

Assume that Bolton Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, the value of the stock is

Accepted Answer

A)  $28.57. 
B)  $28.79. 
C)  $30.00. 
D)  $31.78. 
E)  None of the options are correct. 
A)  $28.57. 
B)  $28.79. 
C)  $30.00. 
D)  $31.78. 
E)  None of the options are correct.

Question 9

The growth in per share FCFE of CBS, Inc. is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years. After this five-year period, the growth in per share FCFE is expected to be 2% per year, indefinitely. The required rate of return on CBS, Inc. is 12%. Last year's per share FCFE was $2.00. What should the stock sell for today?

Accepted Answer

A)  $8.99 
B)  $22.51 
C)  $40.00 
D)  $25.21 
E)  $27.12 
A)  $8.99 
B)  $22.51 
C)  $40.00 
D)  $25.21 
E)  $27.12

Question 10

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 options are correct. 
A)  13.6% 
B)  13.9% 
C)  15.6% 
D)  16.9% 
E)  None of the options are correct.

Question 11

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 will 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 12

A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Accepted Answer

A)  $33.33 
B)  $0.27 
C)  $31.82 
D)  $56.25 
A)  $33.33 
B)  $0.27 
C)  $31.82 
D)  $56.25

Question 13

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be

Accepted Answer

A)  $1,000,000. 
B)  $2,000,000. 
C)  $3,000,000. 
D)  $4,000,000. 
A)  $1,000,000. 
B)  $2,000,000. 
C)  $3,000,000. 
D)  $4,000,000.

Question 14

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 
A)  dividend-payout ratio 
B)  intrinsic value 
C)  market-capitalization rate 
D)  plowback ratio

Question 15

High Speed Company has an expected ROE of 15%. The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

Accepted Answer

A)  3.0% 
B)  4.8% 
C)  7.5% 
D)  6.0% 
A)  3.0% 
B)  4.8% 
C)  7.5% 
D)  6.0%

Question 16

The goal of fundamental analysts is to find securities

Accepted Answer

A)  whose intrinsic value exceeds market price. 
B)  with a positive present value of growth opportunities. 
C)  with high market capitalization rates. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  whose intrinsic value exceeds market price. 
B)  with a positive present value of growth opportunities. 
C)  with high market capitalization rates. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 17

The _________ is the fraction of earnings reinvested in the firm.

Accepted Answer

A)  dividend payout ratio 
B)  retention rate 
C)  plowback ratio 
D)  dividend payout ratio and plowback ratio 
E)  retention rate or plowback ratio 
A)  dividend payout ratio 
B)  retention rate 
C)  plowback ratio 
D)  dividend payout ratio and plowback ratio 
E)  retention rate or plowback ratio

Question 18

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)  $8.98. 
B)  $10.57. 
C)  $20.00. 
D)  $22.22. 
A)  $8.98. 
B)  $10.57. 
C)  $20.00. 
D)  $22.22.

Question 19

A preferred stock will pay a dividend of $3.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Accepted Answer

A)  $0.39 
B)  $0.56 
C)  $31.82 
D)  $56.25 
A)  $0.39 
B)  $0.56 
C)  $31.82 
D)  $56.25

Question 20

Who popularized the dividend discount model, which is sometimes referred to by his name?

Accepted Answer

A)  Burton Malkiel 
B)  Frederick Macaulay 
C)  Harry Markowitz 
D)  Marshall Blume 
E)  Myron Gordon 
A)  Burton Malkiel 
B)  Frederick Macaulay 
C)  Harry Markowitz 
D)  Marshall Blume 
E)  Myron Gordon

Exam 18: Equity Valuation Models

The most popular approach to forecasting the overall stock market is to use

An analyst has determined that the intrinsic value of IBM stock is $80 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 22, then it would be reasonable to assume the expected EPS of IBM in the coming year is

________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities).

_________ is equal to common shareholders'equity divided by common shares outstanding.

Suppose that the average P/E multiple in the oil industry is 20. Dominion Oil is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Dominion Oil stock should be

The most appropriate discount rate to use when applying a FCFE valuation model is the

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

Assume that Bolton Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, the value of the stock is

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 will have a $16,000 increase in net working capital this year. What is Fly Boy's FCFF?

A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

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

High Speed Company has an expected ROE of 15%. The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

The goal of fundamental analysts is to find securities

The _________ is the fraction of earnings reinvested in the firm.

A preferred stock will pay a dividend of $3.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Who popularized the dividend discount model, which is sometimes referred to by his name?

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