Question 1

The term "residual claimant" refers to

Accepted Answer

A)  bond holders. 
B)  option holders. 
C)  equity/shareholders. 
D)  suppliers. 
A)  bond holders. 
B)  option holders. 
C)  equity/shareholders. 
D)  suppliers.

Question 2

Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?

Accepted Answer

A)  $6 
B)  $24.50 
C)  $44.44 
D)  $75 
A)  $6 
B)  $24.50 
C)  $44.44 
D)  $75

Question 3

A firm increases its dividend plowback ratio. All else equal, you know that ________.

Accepted Answer

A)  earnings growth will increase and the stock's P/E will increase 
B)  earnings growth will decrease and the stock's P/E will increase 
C)  earnings growth will increase and the stock's P/E will decrease 
D)  earnings growth will increase and the stock's P/E may or may not increase 
A)  earnings growth will increase and the stock's P/E will increase 
B)  earnings growth will decrease and the stock's P/E will increase 
C)  earnings growth will increase and the stock's P/E will decrease 
D)  earnings growth will increase and the stock's P/E may or may not increase

Question 4

Suppose that in 2018 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market will change by ________.

Accepted Answer

A)  -10% 
B)  -20% 
C)  -25% 
D)  -33% 
A)  -10% 
B)  -20% 
C)  -25% 
D)  -33%

Question 5

The greatest value to an analyst from calculating a stock's intrinsic value is ________.

Accepted Answer

A)  how easy it is to come up with accurate model inputs 
B)  the precision of the value estimate 
C)  how the process forces analysts to understand the critical variables that have the greatest impact on value 
D)  how all the different models typically yield identical value results 
A)  how easy it is to come up with accurate model inputs 
B)  the precision of the value estimate 
C)  how the process forces analysts to understand the critical variables that have the greatest impact on value 
D)  how all the different models typically yield identical value results

Question 6

Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of 0.5. Using the CAPM, the return you should require on the stock is ________.

Accepted Answer

A)  2% 
B)  5% 
C)  8% 
D)  9% 
A)  2% 
B)  5% 
C)  8% 
D)  9%

Question 7

Cash Cow, Inc. earned $750,000,000 last year. If it retains 40% of its earnings, and has 100 million shares outstanding, what was its dividend last year?

Accepted Answer

A)  $3.00 
B)  $3.75 
C)  $4.50 
D)  $7.50 
A)  $3.00 
B)  $3.75 
C)  $4.50 
D)  $7.50

Question 8

Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on ________.

Accepted Answer

A)  the terminal value used 
B)  whether one uses FCFF or FCFE 
C)  the time period used to estimate the cash flows 
D)  whether the firm is currently paying dividends 
A)  the terminal value used 
B)  whether one uses FCFF or FCFE 
C)  the time period used to estimate the cash flows 
D)  whether the firm is currently paying dividends

Question 9

The value of Internet companies is based primarily on ________.

Accepted Answer

A)  current profits 
B)  Tobin's q 
C)  growth opportunities 
D)  replacement cost 
A)  current profits 
B)  Tobin's q 
C)  growth opportunities 
D)  replacement cost

Question 10

You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is ________ if you wanted to earn a 12% return.

Accepted Answer

A)  $31.25 
B)  $32.37 
C)  $38.47 
D)  $41.32 
A)  $31.25 
B)  $32.37 
C)  $38.47 
D)  $41.32

Question 11

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

Accepted Answer

A)  book value 
B)  market value 
C)  liquidation value 
D)  Tobin's q 
A)  book value 
B)  market value 
C)  liquidation value 
D)  Tobin's q

Question 12

You are considering purchasing the Zions Bank $4.50 preferred stock. If you require a 4% return on this investment, what should you be willing to pay for this stock?

Accepted Answer

A)  $11.25 
B)  $112.50 
C)  $4.50 
D)  $45.00 
A)  $11.25 
B)  $112.50 
C)  $4.50 
D)  $45.00

Question 13

Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is ________.

Accepted Answer

A)  9% 
B)  12% 
C)  14% 
D)  18% 
A)  9% 
B)  12% 
C)  14% 
D)  18%

Question 14

A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio?

Accepted Answer

A)  1.5 
B)  1.25 
C)  1.1 
D)  1 
A)  1.5 
B)  1.25 
C)  1.1 
D)  1

Question 15

Ace Frisbee Corporation produces a good that is very mature in the firm's product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth ________ today.

Accepted Answer

A)  $13.07 
B)  $13.58 
C)  $18.25 
D)  $18.78 
A)  $13.07 
B)  $13.58 
C)  $18.25 
D)  $18.78

Question 16

Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is ________.

Accepted Answer

A)  $26.67 
B)  $35.19 
C)  $42.94 
D)  $59.89 
A)  $26.67 
B)  $35.19 
C)  $42.94 
D)  $59.89

Question 17

Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is ________.

Accepted Answer

A)  $24.29 
B)  $27.39 
C)  $31.13 
D)  $34.52 
A)  $24.29 
B)  $27.39 
C)  $31.13 
D)  $34.52

Question 18

A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

Accepted Answer

A)  $27.27 
B)  $37.50 
C)  $66.67 
D)  $70 
A)  $27.27 
B)  $37.50 
C)  $66.67 
D)  $70

Question 19

Which one of the following statements about market and book value is correct?

Accepted Answer

A)  All firms sell at a market-to-book ratio above 1. 
B)  All firms sell at a market-to-book ratio greater than or equal to 1. 
C)  All firms sell at a market-to-book ratio below 1. 
D)  Most firms have a market-to-book ratio above 1, but not all. 
A)  All firms sell at a market-to-book ratio above 1. 
B)  All firms sell at a market-to-book ratio greater than or equal to 1. 
C)  All firms sell at a market-to-book ratio below 1. 
D)  Most firms have a market-to-book ratio above 1, but not all.

Question 20

________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its 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

The term "residual claimant" refers to

Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?

A firm increases its dividend plowback ratio. All else equal, you know that ________.

The greatest value to an analyst from calculating a stock's intrinsic value is ________.

Cash Cow, Inc. earned $750,000,000 last year. If it retains 40% of its earnings, and has 100 million shares outstanding, what was its dividend last year?

Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on ________.

The value of Internet companies is based primarily on ________.

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

You are considering purchasing the Zions Bank $4.50 preferred stock. If you require a 4% return on this investment, what should you be willing to pay for this stock?

A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio?

A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

Which one of the following statements about market and book value is correct?

________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters

Exam 13: Equity Valuation

The term "residual claimant" refers to

Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?

A firm increases its dividend plowback ratio. All else equal, you know that ________.

The greatest value to an analyst from calculating a stock's intrinsic value is ________.

Cash Cow, Inc. earned $750,000,000 last year. If it retains 40% of its earnings, and has 100 million shares outstanding, what was its dividend last year?

Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on ________.

The value of Internet companies is based primarily on ________.

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

You are considering purchasing the Zions Bank $4.50 preferred stock. If you require a 4% return on this investment, what should you be willing to pay for this stock?

A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio?

A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

Which one of the following statements about market and book value is correct?

________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters