Question 1

If you purchase TrisCorp stock at $71 a share and the firm pays a $5.20 dividend which is expected to grow at 7.5 percent, what is the implied annual rate of return on the investment?

Accepted Answer

The answer of If you purchase TrisCorp stock at $71...

Question 2

A P/E ratio depends on
1. the firm's dividends
2. the price of the stock
3. the firm's per-share earnings

Accepted Answer

A) 1 and 2 
B) 1 and 3 
C) 2 and 3 
D) all of the above

Question 3

High P/E stocks should be preferred because they pay larger dividends.

Accepted Answer

A) True 
 B)False

Question 4

If the financial markets were not efficient,

Accepted Answer

A) all investors would profit 
B) prices indicate the proper valuation of securities 
C) prices would adjust rapidly 
D) an investor may consistently outperform the market

Question 5

According to the dividend-growth model, the valuation of common stock depends on
1. the firm's dividends
2. investors' required rate of return
3. the prior year's dividends

Accepted Answer

A) 1 and 2 
B) 1 and 3 
C) 2 and 3 
D) all of the above

Question 6

A higher beta decreases the required rate of return.

Accepted Answer

A) True 
 B)False

Question 7

According to the efficient market hypothesis, purchasing low P/S stocks should produce superior investment results.

Accepted Answer

A) True 
 B)False

Question 8

The use of P/E ratios to select stocks suggests that

Accepted Answer

A) high P/E stocks should be purchased 
B) low P/E ratio stocks are overvalued 
C) a stock should be purchased if it is selling near its historic low P/E 
D) a stock should be purchased if it is selling near its historic high P/E

Question 9

Value investors tend to prefer stocks with low price to sales and price to book ratios.

Accepted Answer

A) True 
 B)False

Question 10

The risk-adjusted required rate of return includes
1. the firm's earnings
2. the firm's beta coefficient
3. the treasury bill rate (i.e., the risk-free rate)

Accepted Answer

A) 1 and 2 
B) 1 and 3 
C) 2 and 3 
D) all of the above

Question 11

The expected return depends on future dividends and future price appreciation.

Accepted Answer

A) True 
 B)False

Question 12

A stock's price will tend to fall if
1. the firm's beta declines
2. the firm's beta increases
3. the risk-free rate declines
4. the risk-free rate increases

Accepted Answer

A) 1 and 3 
B) 1 and 4 
C) 2 and 3 
D) 2 and 4

Question 13

Investors may use P/E and price/sales ratios to value stocks. If this analysis is used, which of the following is desirable?

Accepted Answer

A) a high P/E and a low price/sales ratio 
B) a high P/E and a high price/sales ratio 
C) a low P/E and a low price/sales ratio 
D) a low P/E and a high price/sales ratio

Question 14

Your broker recommends that you purchase XYZ Inc. at $60. The stock pays a $2.40 dividend which (like its per-share earnings)is expected to grow annually at 8 percent. If you want to earn 12 percent on your funds, is this a good buy?

Accepted Answer

The answer of Your broker recommends that you purchase XYZ...

Question 15

Two stocks each pay a $1 dividend that is growing annually at 8 percent. Stock A has a beta of 1.3; stock B's beta is 0.8. 
 
a. Which stock is more volatile? 
 
b. If treasury bills yield 6 percent and you expect the market to rise by 12 percent, what is your risk-adjusted required rate of return? 
 
c. Using the dividend-growth model, what is the maximum amount you would be willing to pay for each stock? 
 
d. Why are your valuations different?

Accepted Answer

The answer of Two stocks each pay a $1 dividend...

Exam 9: The Valuation of Common Stock

If you purchase TrisCorp stock at $71 a share and the firm pays a $5.20 dividend which is expected to grow at 7.5 percent, what is the implied annual rate of return on the investment?

A P/E ratio depends on 1. the firm's dividends 2. the price of the stock 3. the firm's per-share earnings

High P/E stocks should be preferred because they pay larger dividends.

If the financial markets were not efficient,

According to the dividend-growth model, the valuation of common stock depends on 1. the firm's dividends 2. investors' required rate of return 3. the prior year's dividends

A higher beta decreases the required rate of return.

According to the efficient market hypothesis, purchasing low P/S stocks should produce superior investment results.

The use of P/E ratios to select stocks suggests that

Value investors tend to prefer stocks with low price to sales and price to book ratios.

The risk-adjusted required rate of return includes 1. the firm's earnings 2. the firm's beta coefficient 3. the treasury bill rate (i.e., the risk-free rate)

The expected return depends on future dividends and future price appreciation.

A stock's price will tend to fall if 1. the firm's beta declines 2. the firm's beta increases 3. the risk-free rate declines 4. the risk-free rate increases

Investors may use P/E and price/sales ratios to value stocks. If this analysis is used, which of the following is desirable?

Your broker recommends that you purchase XYZ Inc. at $60. The stock pays a $2.40 dividend which (like its per-share earnings)is expected to grow annually at 8 percent. If you want to earn 12 percent on your funds, is this a good buy?