Question 1

Operating margins are defined as

Accepted Answer

A)  Gross Profit/Sales. 
B)  Operating Profit/Sales. 
C)  Net Income/Sales. 
D)  Sales/Gross Profit. 
E)  Debt/Long-Term Capital. 
A)  Gross Profit/Sales. 
B)  Operating Profit/Sales. 
C)  Net Income/Sales. 
D)  Sales/Gross Profit. 
E)  Debt/Long-Term Capital.

Question 2

Management may "under-reserve" in order to meet earnings expectations, or they may "over-reserve" in order to smooth future earnings.

Accepted Answer

A) True 
 B)False

Question 3

The gross margin is defined as

Accepted Answer

A)  Gross Profit/Sales. 
B)  Operating Profit/Sales. 
C)  Net Income/Sales. 
D)  Sales/Gross Profit. 
E)  Debt/Long-Term Capital. 
A)  Gross Profit/Sales. 
B)  Operating Profit/Sales. 
C)  Net Income/Sales. 
D)  Sales/Gross Profit. 
E)  Debt/Long-Term Capital.

Question 4

The dividend discount model (DDM) can be used to value preferred stock by simply using a growth rate of zero in the DDM model.

Accepted Answer

A) True 
 B)False

Question 5

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The National Motor Company's last dividend was $1.25, and the directors expect to maintain the historic 4 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7 percent for the next three years and the stock will then reach $25.00 per share.
-Refer to Exhibit 8.2. How much should you be willing to pay for the stock if you feel that the 7 percent growth rate can be maintained indefinitely and you require a 16 percent return?

Accepted Answer

A)  $11.15 
B)  $14.44 
C)  $14.86 
D)  $18.90 
E)  $19.24 
A)  $11.15 
B)  $14.44 
C)  $14.86 
D)  $18.90 
E)  $19.24

Question 6

Given an optimistic economic and stock-market outlook for a country, the investor should underweight the allocation to this country in his/her portfolio.

Accepted Answer

A) True 
 B)False

Question 7

The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the firm's

Accepted Answer

A)  required rate of return based on the capital asset pricing model (CAPM). 
B)  required rate of return based on the dividend discount model (DDM). 
C)  weighted average cost of capital (WAC
C) . 
D)  historical cost of debt and equity. 
E)  All of these are correct. 
A)  required rate of return based on the capital asset pricing model (CAPM). 
B)  required rate of return based on the dividend discount model (DDM). 
C)  weighted average cost of capital (WAC
C) . 
D)  historical cost of debt and equity. 
E)  All of these are correct.

Question 8

Which of the following is correct?

Accepted Answer

A)  if estimated value > Market price, you should buy. 
B)  if estimated value > Market price, you should sell. 
C)  if estimated value  Market price, you should do nothing. 
A)  if estimated value > Market price, you should buy. 
B)  if estimated value > Market price, you should sell. 
C)  if estimated value  Market price, you should do nothing.

Question 9

The Absolute Finance Company (AFC) earned $5 a share last year and paid a dividend of $2 per share. Next year, you expect AFC to earn $6 a share next year and continue its payout ratio. Assume that you expect to sell the stock for $45 a year from now. If you require a 13 percent return on this stock, how much would you be willing to pay for it?

Accepted Answer

A)  $41.95 
B)  $43.21 
C)  $45.13 
D)  $46.72 
E)  $47.40 
A)  $41.95 
B)  $43.21 
C)  $45.13 
D)  $46.72 
E)  $47.40

Question 10

Using the constant growth model, an increase in the required rate of return from 17 to 20 percent combined with an increase in the growth rate from 8 to 11 percent would cause the price to

Accepted Answer

A)  rise more than 3%. 
B)  rise less than 3%. 
C)  remain constant. 
D)  fall more than 3%. 
E)  fall less than 3%. 
A)  rise more than 3%. 
B)  rise less than 3%. 
C)  remain constant. 
D)  fall more than 3%. 
E)  fall less than 3%.

Question 11

In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.

Accepted Answer

A) True 
 B)False

Question 12

A high-quality balance sheet typically has

Accepted Answer

A)  limited footnotes. 
B)  a poor reflection of reality. 
C)  repeatable earnings. 
D)  over use of debt or leverage. 
E)  limited use of debt or leverage. 
A)  limited footnotes. 
B)  a poor reflection of reality. 
C)  repeatable earnings. 
D)  over use of debt or leverage. 
E)  limited use of debt or leverage.

Question 13

Using the constant growth model, an increase in the required rate of return from 19 to 17 percent combined with an increase in the growth rate from 11 to 9 percent would cause the price to

Accepted Answer

A)  fall more than 2 percent. 
B)  fall less than 2 percent. 
C)  remain constant. 
D)  rise more than 2 percent. 
E)  rise less than 3 percent. 
A)  fall more than 2 percent. 
B)  fall less than 2 percent. 
C)  remain constant. 
D)  rise more than 2 percent. 
E)  rise less than 3 percent.

Question 14

Operating margins are defined as Operating Profit/Sales

Accepted Answer

A) True 
 B)False

Question 15

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9 percent per year for the next three years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.4. The present value today of dividends for years 1 to 3 is

Accepted Answer

A)  $4.67. 
B)  $3.08. 
C)  $5.67. 
D)  $4.5. 
E)  $1.53. 
A)  $4.67. 
B)  $3.08. 
C)  $5.67. 
D)  $4.5. 
E)  $1.53.

Question 16

If the estimated value of an asset is greater than the market price, you would want to buy the investment.

Accepted Answer

A) True 
 B)False

Question 17

The importance of an industry's performance on an individual stock's performance varies across industries.

Accepted Answer

A) True 
 B)False

Question 18

A relative valuation technique is appropriate to consider when you have a good set of comparable entities.

Accepted Answer

A) True 
 B)False

Question 19

Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you believe that the appropriate discount rate is 15 percent and the long-term growth rate in dividends is 6 percent, and earnings is 6 percent, then the firm's P/E ratio is

Accepted Answer

A)  8.33. 
B)  33.33. 
C)  44.44. 
D)  11.11. 
E)  10.10. 
A)  8.33. 
B)  33.33. 
C)  44.44. 
D)  11.11. 
E)  10.10.

Question 20

Discounted cash flow techniques for equity valuation may use one of the following: (1) dividends, (2) free cash flow, or (3) coupons.

Accepted Answer

A) True 
 B)False

Operating margins are defined as

Management may "under-reserve" in order to meet earnings expectations, or they may "over-reserve" in order to smooth future earnings.

The gross margin is defined as

The dividend discount model (DDM) can be used to value preferred stock by simply using a growth rate of zero in the DDM model.

Given an optimistic economic and stock-market outlook for a country, the investor should underweight the allocation to this country in his/her portfolio.

The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the firm's

Which of the following is correct?

Using the constant growth model, an increase in the required rate of return from 17 to 20 percent combined with an increase in the growth rate from 8 to 11 percent would cause the price to

In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.

A high-quality balance sheet typically has

Using the constant growth model, an increase in the required rate of return from 19 to 17 percent combined with an increase in the growth rate from 11 to 9 percent would cause the price to

Operating margins are defined as Operating Profit/Sales

If the estimated value of an asset is greater than the market price, you would want to buy the investment.

The importance of an industry's performance on an individual stock's performance varies across industries.

A relative valuation technique is appropriate to consider when you have a good set of comparable entities.

Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you believe that the appropriate discount rate is 15 percent and the long-term growth rate in dividends is 6 percent, and earnings is 6 percent, then the firm's P/E ratio is

Discounted cash flow techniques for equity valuation may use one of the following: (1) dividends, (2) free cash flow, or (3) coupons.

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 8: Equity Valuation

Operating margins are defined as

Management may "under-reserve" in order to meet earnings expectations, or they may "over-reserve" in order to smooth future earnings.

The gross margin is defined as

The dividend discount model (DDM) can be used to value preferred stock by simply using a growth rate of zero in the DDM model.

Given an optimistic economic and stock-market outlook for a country, the investor should underweight the allocation to this country in his/her portfolio.

The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the firm's

Which of the following is correct?

Using the constant growth model, an increase in the required rate of return from 17 to 20 percent combined with an increase in the growth rate from 8 to 11 percent would cause the price to

In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.

A high-quality balance sheet typically has

Using the constant growth model, an increase in the required rate of return from 19 to 17 percent combined with an increase in the growth rate from 11 to 9 percent would cause the price to

Operating margins are defined as Operating Profit/Sales

If the estimated value of an asset is greater than the market price, you would want to buy the investment.

The importance of an industry's performance on an individual stock's performance varies across industries.

A relative valuation technique is appropriate to consider when you have a good set of comparable entities.

Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you believe that the appropriate discount rate is 15 percent and the long-term growth rate in dividends is 6 percent, and earnings is 6 percent, then the firm's P/E ratio is

Discounted cash flow techniques for equity valuation may use one of the following: (1) dividends, (2) free cash flow, or (3) coupons.

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters