Question 1

A common stock pays an annual dividend per share of $1.80.The risk-free rate is 5 percent and the risk premium for this stock is 4 percent.If the annual dividend is expected to remain at $1.80 per share,what is the value of the stock?

Accepted Answer

A)  $17.78 
B)  $20.00 
C)  $40.00 
D)  None of the above

Question 2

A firm that has an ROE of 12% is considering cutting its dividend payout.The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%.Given this information which of the following statement(s)is/are correct?
I.All else equal the firm's growth rate will accelerate after the payout change
II.All else equal the firm's stock price will go up after the payout change
III.All else equal the firm's P/E ratio will increase after the payout change

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II and III

Question 3

The EBIT of a firm is $300,the tax rate is 35%,the depreciation is $20,capital expenditures are $60 and the increase in net working capital is $30.What is the free cash flow to the firm?

Accepted Answer

A)  $85 
B)  $125 
C)  $185 
D)  $305

Question 4

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)  1.50 
B)  1.25 
C)  1.10 
D)  1.00

Question 5

A firm cuts its dividend payout ratio.As a result you know that the firm's _______.

Accepted Answer

A)  return on assets will increase 
B)  earnings retention ratio will increase 
C)  earnings growth rate will fall 
D)  stock price will fall

Question 6

New-economy companies generally have higher _______ than old-economy companies.

Accepted Answer

A)  book value per share 
B)  P/E multiples 
C)  profits 
D)  asset values

Question 7

Bill,Jim and Shelly are all looking to buy the same stock that pays dividends.Bill plans on holding the stock for one year.Jim plans on holding the stock for three years.Shelly plans on holding the stock until she retires in 10 years.Which one of the following statements is correct?

Accepted Answer

A)  Bill will be willing to pay the most for the stock because he will get his money back in one year when he sells. 
B)  Jim should be willing to pay three times as much for the stock as Bill because his expected holding period is three times as long as Bill's. 
C)  Shelly should be willing to pay the most for the stock because she will hold it the longest and hence she will get the most dividends. 
D)  All three should be willing to pay the same amount for the stock regardless of their holding period.

Question 8

Firm A is high risk and Firm B is low risk.Everything else equal,which firm would you expect to have a higher P/E ratio?

Accepted Answer

A)  Firm A 
B)  Firm B 
C)  Both would have the same P/E if they were in the same industry 
D)  There is not any necessary linkage between risk and P/E ratios

Question 9

The free cash flow to the firm is reported as $198 million.The interest expense to the firm is $15 million.If the tax rate is 35% and the net debt of the firm increased by $20 million,what is the market value of the firm if the FCFE grows at 3% and the cost of equity is 14%?

Accepted Answer

A)  $1,893 billion 
B)  $2,497 billion 
C)  $2,585 billion 
D)  $3,098 billion

Question 10

Interior Airline is expected to pay a dividend of $3 in the upcoming year.Dividends are expected to grow at the rate of 10% per year.The risk-free rate of return is 4% and the expected return on the market portfolio is 13%.The stock of Interior Airline has a beta of 4.00.Using the constant growth DDM,the intrinsic value of the stock is _________.

Accepted Answer

A)  $10.00 
B)  $22.73 
C)  $27.78 
D)  $41.67

Question 11

If a firm increases its plowback ratio this will probably result in a(n)_______ P/E ratio.

Accepted Answer

A)  higher 
B)  lower 
C)  unchanged 
D)  unable to determine

Question 12

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 riskfree 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 the constant growth DDM to determine the value of the stock.The stock's current price is $84.00.Using the constant growth DDM,the market capitalization rate is _________.

Accepted Answer

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

Question 13

A preferred share of Coquihalla Corporation will pay a dividend of $8.00 in the upcoming year,and every year thereafter,i.e.,dividends are not expected to grow.You require a return of 7% on this stock.Using the constant growth DDM to calculate the intrinsic value,a preferred share of Coquihalla Corporation is worth _________.

Accepted Answer

A)  $13.50 
B)  $45.50 
C)  $91.00 
D)  $114.29

Question 14

Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%.Earnings are expected to grow at 5% per year indefinitely.The firm has a 40% plowback ratio.By how much does the firm's ROE exceed the market capitalization rate?

Accepted Answer

A)  0.5% 
B)  1.0% 
C)  1.5% 
D)  2.0%

Question 15

Transportation stocks currently provide an expected rate of return of 15%.TTT,a large transportation company,will pay a year-end dividend of $3 per share.If the stock is selling at $60 per share,what must be the market's expectation of the constant growth rate of TTT dividends?

Accepted Answer

A)  5% 
B)  10% 
C)  20% 
D)  None of the above

Question 16

Earnings yields tend to _______ when Treasury yields fall.

Accepted Answer

A)  fall 
B)  rise 
C)  remain unchanged 
D)  fluctuate wildly

Question 17

Sanders,Inc.,paid a $4.00 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

Question 18

When Google's share price reached $475 per share Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%.Google pays no dividends.What percentage of Google's stock price was represented by PVGO?

Accepted Answer

A)  92% 
B)  87% 
C)  77% 
D)  64%

Question 19

Todd Mountain development Corporation is expected to pay a dividend of $2.50 in the upcoming year.Dividends are expected to grow at the rate of 8% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 12%.The stock of Todd Mountain Development Corporation has a beta of 0.75.Using the CAPM,the return you should require on the stock is _________.

Accepted Answer

A)  7.25% 
B)  10.25% 
C)  14.75% 
D)  21.00%

Question 20

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

Exam 13: Equity Valuation