Question 1

By definition growth companies have growth stocks.

Accepted Answer

A) True 
 B)False

Question 2

In a(n) _______________ strategy, a firm seeks to identify itself as unique within its industry.

Accepted Answer

A)  Defensive 
B)  Offensive 
C)  Low-cost 
D)  Differentiation 
E)  None of the above 
A)  Defensive 
B)  Offensive 
C)  Low-cost 
D)  Differentiation 
E)  None of the above

Question 3

Which of the following is not considered in the price-earnings ratio technique?

Accepted Answer

A)  Firm's required rate of return on equity (k) 
B)  Firm's dividend payout ratio (D/
E)  
C)  Firm's expected growth rate of dividends (g) 
D)  All of the above are components of P/E ratio 
E)  None of the above are components of P/E ratio 
A)  Firm's required rate of return on equity (k) 
B)  Firm's dividend payout ratio (D/
E)  
C)  Firm's expected growth rate of dividends (g) 
D)  All of the above are components of P/E ratio 
E)  None of the above are components of P/E ratio

Question 4

What is the implied growth duration of Casey Industries given the following: $\begin{array}{lcc} 
& \text { S\&P/TSX Industrials } & \text { Casey Industries } \
\hline  \text { P/E Ratios } & 15 & 20 \
\text { Average Growth }(\%) & 5.0 & 15.0 \
\text { Dividend Yield } & .04 & 06
\end{array}$

Accepted Answer

A)  3.2 years 
B)  2.8 years 
C)  4.8 years 
D)  9.6 years 
E)  13.2 years 
A)  3.2 years 
B)  2.8 years 
C)  4.8 years 
D)  9.6 years 
E)  13.2 years

Question 5

Exhibit 9-1
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) (1) The firm's expected rate of growth of earning per share
(2) The amount of capital invested in growth investments
(3) The rate of return earned on the funds relative to the required rate of return
(4) The required rate of return on the security based on its systematic risk
(5) The firm's dividend payout ratio
(6) The time horizon when these growth investments will be available
-Refer to Exhibit 9-1. In the listing above, which three factors influence the earnings multiple for a stock?

Accepted Answer

A)  1, 4, and 5 
B)  1, 4, and 6 
C)  2, 4, and 6 
D)  2, 5, and 6 
E)  4, 5, and 6 
A)  1, 4, and 5 
B)  1, 4, and 6 
C)  2, 4, and 6 
D)  2, 5, and 6 
E)  4, 5, and 6

Question 6

A growth company is one whose stock is undervalued by the market.

Accepted Answer

A) True 
 B)False

Question 7

Exhibit 9-7
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE. $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 10 \% \
2011 & 15 \% \
2012 & 20 \% \
2013 & 25 \% \
2014 & 20 \% \
2015 & 15 \% \
2016 & 10 \% \
2017 & 7 \%
\end{array}$$ 
From year 2018 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 9-7. Calculate the present value now (Year 2009) of FCFE during the period of increasing growth (that is for years 2010 to 2013).

Accepted Answer

A)  $1,719,119 
B)  $1,715,784 
C)  $1,115,195 
D)  $1,434,903 
E)  $1,809,171 
A)  $1,719,119 
B)  $1,715,784 
C)  $1,115,195 
D)  $1,434,903 
E)  $1,809,171

Question 8

Exhibit 9-8
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 25 \% \
2011 & 20 \% \
2012 & 15 \% \
2013 & 10 \% \
2014 & 12 \% \
2015 & 14 \% \
2016 & 16 \% \
2017 & 198
\end{array}$$ 
From year 2018 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 9-8. Calculate the weighted average cost of capital (WACC).

Accepted Answer

A)  8.2% 
B)  9.4% 
C)  9.0% 
D)  10.3% 
E)  7.3% 
A)  8.2% 
B)  9.4% 
C)  9.0% 
D)  10.3% 
E)  7.3%

Question 9

A firm has a current price of $40 per share, an expected growth rate of 11% and expected dividend per share (D1) of $2. Given its risk you have a required rate of return for it of 12%. Your expected rate of return and investment decision is as follows:

Accepted Answer

A)  10% - do not buy 
B)  12% - do not buy 
C)  14% - buy 
D)  16% - buy 
E)  18% - buy 
A)  10% - do not buy 
B)  12% - do not buy 
C)  14% - buy 
D)  16% - buy 
E)  18% - buy

Question 10

Exhibit 9-8
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 25 \% \
2011 & 20 \% \
2012 & 15 \% \
2013 & 10 \% \
2014 & 12 \% \
2015 & 14 \% \
2016 & 16 \% \
2017 & 198
\end{array}$$ 
From year 2018 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 9-8. Calculate the present value now (Year 2009) of OFCF during the period of constant growth (that is for years 2018 onwards).

Accepted Answer

A)  $19,644,612 
B)  $15,558,546 
C)  $17,377,494 
D)  $20,779,025 
E)  $10,779,025 
A)  $19,644,612 
B)  $15,558,546 
C)  $17,377,494 
D)  $20,779,025 
E)  $10,779,025

Question 11

A negative EVA (Economic Value Added) for the year implies that the firm has not earned enough during the year to cover its capital of capital and the value of the firm has declined.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is not considered when looking at free cash flow to equity technique?

Accepted Answer

A)  Depreciation expense 
B)  Change in working capital 
C)  Principal debt repayments 
D)  Change in competitive environment 
E)  Net income 
A)  Depreciation expense 
B)  Change in working capital 
C)  Principal debt repayments 
D)  Change in competitive environment 
E)  Net income

Question 13

Porter contends that _________ and ______________ are two important competitive strategies.

Accepted Answer

A)  Low cost leadership, barrier to entry 
B)  New entrant deterrent, differentiation 
C)  Low cost leadership, differentiation 
D)  Differentiation, monopolistic 
E)  Monopolistic simulation, differentiation 
A)  Low cost leadership, barrier to entry 
B)  New entrant deterrent, differentiation 
C)  Low cost leadership, differentiation 
D)  Differentiation, monopolistic 
E)  Monopolistic simulation, differentiation

Question 14

Refer to Exhibit 9-5. What are the expected sustainable growth rates for Wal-Blue and its industry?

Accepted Answer

A)  25.2% and 15.0% 
B)  30.0% and 17.5% 
C)  25.2% and 17.5% 
D)  27.5% and 12.5% 
E)  30.0% and 15.0% 
A)  25.2% and 15.0% 
B)  30.0% and 17.5% 
C)  25.2% and 17.5% 
D)  27.5% and 12.5% 
E)  30.0% and 15.0%

Question 15

Given Gitech's beta of 1.55 and a risk free rate of 8%, what is the expected rate of return assuming a 14% market return?

Accepted Answer

A)  12.4% 
B)  14.3% 
C)  17.3% 
D)  20.4% 
E)  29.7% 
A)  12.4% 
B)  14.3% 
C)  17.3% 
D)  20.4% 
E)  29.7%

Question 16

What is the implied growth duration of Howard Industries given the following: $\begin{array}{lcc} 
& \text { S\&P/TSX Industrials } & \text { Howard Industries } \
\hline  \text { P/E Ratios } & 14 & 24 \
\text { Average Growth }(\%) & 6.0 & 12.0 \
\text { Dividend Yield } & 07 & .04
\end{array}$

Accepted Answer

A)  11.5 years 
B)  16.8 years 
C)  22.6 years 
D)  18.4 years 
E)  20.6 years 
A)  11.5 years 
B)  16.8 years 
C)  22.6 years 
D)  18.4 years 
E)  20.6 years

Question 17

A growth company is one that has the ability to

Accepted Answer

A)  Acquire capital at a low cost and is able to invest in projects that yield an average return. 
B)  Acquire capital at a low cost and is able to invest in projects that yield a below average return. 
C)  Acquire capital at an average cost and is able to invest in projects that yield an above average return. 
D)  Acquire capital at an average cost and is able to invest in projects that yield an average return. 
E)  Acquire capital at an above average cost and is able to invest in projects that yield an average return. 
A)  Acquire capital at a low cost and is able to invest in projects that yield an average return. 
B)  Acquire capital at a low cost and is able to invest in projects that yield a below average return. 
C)  Acquire capital at an average cost and is able to invest in projects that yield an above average return. 
D)  Acquire capital at an average cost and is able to invest in projects that yield an average return. 
E)  Acquire capital at an above average cost and is able to invest in projects that yield an average return.

Question 18

A growth company can invest in projects that generate a return greater than the firm's

Accepted Answer

A)  Return on equity. 
B)  Cost of debt. 
C)  Cost of equity. 
D)  Cost of capital. 
E)  Return on assets. 
A)  Return on equity. 
B)  Cost of debt. 
C)  Cost of equity. 
D)  Cost of capital. 
E)  Return on assets.

Question 19

Price-to-sales ratio is still considered the predominant firm valuation technique.

Accepted Answer

A) True 
 B)False

Question 20

A speculative stock possesses a ____ probability of ____ return and is currently ____.

Accepted Answer

A)  High, negative, underpriced. 
B)  High, negative, overpriced. 
C)  High, positive, overpriced. 
D)  Low, negative, overpriced. 
E)  Low, positive, underpriced. 
A)  High, negative, underpriced. 
B)  High, negative, overpriced. 
C)  High, positive, overpriced. 
D)  Low, negative, overpriced. 
E)  Low, positive, underpriced.

By definition growth companies have growth stocks.

In a(n) _______________ strategy, a firm seeks to identify itself as unique within its industry.

Which of the following is not considered in the price-earnings ratio technique?

What is the implied growth duration of Casey Industries given the following: S\&P/TSX Industrials Casey Industries P/E Ratios 15 20 Average Growth (\%) 5.0 15.0 Dividend Yield .04 06

A growth company is one whose stock is undervalued by the market.

A firm has a current price of $40 per share, an expected growth rate of 11% and expected dividend per share (D1) of $2. Given its risk you have a required rate of return for it of 12%. Your expected rate of return and investment decision is as follows:

A negative EVA (Economic Value Added) for the year implies that the firm has not earned enough during the year to cover its capital of capital and the value of the firm has declined.

Which of the following is not considered when looking at free cash flow to equity technique?

Porter contends that _ and ______ are two important competitive strategies.

Refer to Exhibit 9-5. What are the expected sustainable growth rates for Wal-Blue and its industry?

Given Gitech's beta of 1.55 and a risk free rate of 8%, what is the expected rate of return assuming a 14% market return?

What is the implied growth duration of Howard Industries given the following: S\&P/TSX Industrials Howard Industries P/E Ratios 14 24 Average Growth (\%) 6.0 12.0 Dividend Yield 07 .04

A growth company is one that has the ability to

A growth company can invest in projects that generate a return greater than the firm's

Price-to-sales ratio is still considered the predominant firm valuation technique.

A speculative stock possesses a probability of return and is currently .

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

Exam 9: Company Analysis and Stock Valuation

By definition growth companies have growth stocks.

In a(n) _______________ strategy, a firm seeks to identify itself as unique within its industry.

Which of the following is not considered in the price-earnings ratio technique?

What is the implied growth duration of Casey Industries given the following: S\&P/TSX Industrials Casey Industries P/E Ratios 15 20 Average Growth (\%) 5.0 15.0 Dividend Yield .04 06

A growth company is one whose stock is undervalued by the market.

A firm has a current price of $40 per share, an expected growth rate of 11% and expected dividend per share (D1) of $2. Given its risk you have a required rate of return for it of 12%. Your expected rate of return and investment decision is as follows:

A negative EVA (Economic Value Added) for the year implies that the firm has not earned enough during the year to cover its capital of capital and the value of the firm has declined.

Which of the following is not considered when looking at free cash flow to equity technique?

Porter contends that _________ and ______________ are two important competitive strategies.

Refer to Exhibit 9-5. What are the expected sustainable growth rates for Wal-Blue and its industry?

Given Gitech's beta of 1.55 and a risk free rate of 8%, what is the expected rate of return assuming a 14% market return?

What is the implied growth duration of Howard Industries given the following: S\&P/TSX Industrials Howard Industries P/E Ratios 14 24 Average Growth (\%) 6.0 12.0 Dividend Yield 07 .04

A growth company is one that has the ability to

A growth company can invest in projects that generate a return greater than the firm's

Price-to-sales ratio is still considered the predominant firm valuation technique.

A speculative stock possesses a ____ probability of ____ return and is currently ____.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

Porter contends that _ and ______ are two important competitive strategies.

A speculative stock possesses a probability of return and is currently .