Question 1

Main Street Antiques is planning on paying an annual dividend of $2.20 per share next year.The company is slowly downsizing and is decreasing its dividend by 3 percent annually.What is the current value of this stock at a discount rate of 8 percent?

Accepted Answer

A)   $18.86
B)   $19.12
C)   $19.78
D)   $20.00
E)   $20.57 D

Question 2

The sustainable growth rate is equal to:

Accepted Answer

A)   ROE × (1 - Payout ratio) .
B)   ROA × (1 - Payout ratio) .
C)   ROE × (1 - Retention ratio) .
D)   ROA × (1 - Retention ratio) .
E)   ROE × ROA. A

Question 3

The last dividend paid by New Technologies was an annual dividend of $1.40 a share.Dividends for the next 3 years will be increased at an annual rate of 8 percent.After that,dividends are expected to increase by 3 percent each year.The discount rate is 16 percent.What is the current value of this stock?

Accepted Answer

A)   $10.40
B)   $12.60
C)   $13.33
D)   $14.10
E)   $15.55 B

Question 4

Standard,Inc.reported net income of $35 million for last year.Depreciation expense totaled $20 million and capital expenditures came to $7 million.Free cash flow is expected to grow at a rate of 6% for the foreseeable future.Stuart faces a 40% tax rate and has a 0.40 debt to equity ratio with $120 million (market value)in debt outstanding.Standard's equity beta is 1.25,the risk-free rate is currently 5% and the market risk premium is estimated to be 7.5%.What is the current value (in millions)of Standard's equity?

Accepted Answer

A)   $237.34
B)   $352.42
C)   $427.42
D)   $556.79
E)   $655.55

Question 5

Lansing Corporation reported net income of $65 million for last year.Depreciation expense totaled $15 million and capital expenditures came to $6 million.Free cash flow is expected to grow at a rate of 4.5% for the foreseeable future.Lansing faces a 40% tax rate and has a 0.35 debt to equity ratio with $260 million (market value)in debt outstanding.Lansing's equity beta is 1.35,the risk-free rate is currently 5% and the market risk premium is estimated to be 6.5%.What is the current total value of Lansing's equity (in millions)?

Accepted Answer

A)   $655.90
B)   $737.54
C)   $840.61
D)   $951.26
E)   $1,025.95

Question 6

L.B.Jay has net income of $38,000,total assets of $437,000,total liabilities of $208,000,and a price-book ratio of 3.8.There are 60,000 shares of stock outstanding.What is the firm's price-earnings ratio?

Accepted Answer

A)   18.72
B)   19.11
C)   19.28
D)   20.80
E)   22.90

Question 7

McKenzie,Inc.reported net income of $8.5 million for last year.Depreciation expense totaled $5 million and capital expenditures came to $2 million.Free cash flow is expected to grow at a rate of 2.5% for the foreseeable future.McKenzie faces a 40% tax rate and has a 0.50 debt to equity ratio with $20 million (market value)in debt outstanding.McKenzie's equity beta is 1.4,the risk- free rate is currently 5% and the market risk premium is estimated to be 7.5%.McKenzie has 10 million shares of common stock outstanding.What is the current value of a share of McKenzie stock?

Accepted Answer

A)   $6.62
B)   $7.32
C)   $8.45
D)   $9.12
E)   $10.25

Question 8

Growth stocks are frequently described as having which one of the following characteristics?

Accepted Answer

A)   high dividends
B)   a value orientation
C)   high P/E ratios
D)   low cash flows per share
E)   low retention ratios

Question 9

Georgia Nursery is a relatively young firm which just paid its first annual dividend of $0.50 a share.Management projects dividend increases of 15 percent per year for five years followed by a constant growth rate of 5.0 percent annually.What is this stock worth today if the applicable discount rate is 10 percent?

Accepted Answer

A)   $13.59
B)   $14.66
C)   $15.98
D)   $16.16
E)   $16.51

Question 10

Currently,Southern Foods has sales of $1.32 million,net profit of $521,400,and 125,000 shares of stock outstanding.The sales and net profit are each expected to grow by 6 percent annually.The historical P/S ratio is 7.8.What is the expected price of this stock one year from now?

Accepted Answer

A)   $32.54
B)   $34.49
C)   $82.37
D)   $85.15
E)   $87.31

Question 11

Which one of the following will increase the current residual income of a firm?

Accepted Answer

A)   an increase in required earnings
B)   a decrease in the current earnings per share
C)   a decrease in future earnings per share
D)   a decrease in the required return on the firm's equity
E)   an increase in the firm's beginning book equity per share

Question 12

Leslie Apparel has a current book value per share of $5.15 and current earnings per share of $1.13.The required return is 14 percent and the expected earnings growth rate is 4.5 percent.What is one share of this stock worth today?

Accepted Answer

A)   $7.44
B)   $8.77
C)   $9.99
D)   $10.65
E)   $11.13

Question 13

What is the accounting relationship in which earnings per share minus dividends equal the change in book value per share called?

Accepted Answer

A)   clean surplus relationship
B)   economic value added relationship
C)   accounting earnings identity
D)   payout-retention identity
E)   dividend valuation equation

Question 14

Toys Galore has historically had a P/E ratio of 18.5.This ratio is considered a good estimate of the future ratio.The firm currently has EPS of $2.10.These earnings are expected to increase by 5.0 percent next year.What is the expected price of this stock one year from now?

Accepted Answer

A)   $39.31
B)   $40.79
C)   $41.30
D)   $42.78
E)   $43.79

Question 15

The price-book ratio is computed as the market value per share divided by the per share book value of:

Accepted Answer

A)   total assets.
B)   long-term debt.
C)   equity.
D)   long-term debt plus equity.
E)   net working capital.

Question 16

CB Industries stock is valued at $16.80 a share.The firm pays annual dividends at an increasing rate of 4.5 percent annually.Next year's dividend will be $1.90 per share.What is the required return on this stock?

Accepted Answer

A)   11.03 percent
B)   12.50 percent
C)   13.62 percent
D)   14.00 percent
E)   15.81 percent

Question 17

The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate.

Accepted Answer

A)   diminishing valuation growth model
B)   increasing valuation growth model
C)   constant perpetual growth model
D)   irregular growth perpetual model
E)   two-stage growth model

Question 18

Which one of the following statements related to the price-earnings (P/E)ratio is correct?

Accepted Answer

A)   The earnings yield is the inverse of the P/E ratio.
B)   The P/E ratio is equal to the market price per share divided by total net income.
C)   The P/E ratio shown in The Wall Street Journal is based on next year's estimated earnings per share.
D)   The P/E ratio varies directly with earnings per share.
E)   The earnings for the past twelve months is the method analysts prefer for computing earnings for the P/E ratio.

Question 19

Roy's Markets has net income of $164,000.The firm has 200,000 shares of common stock outstanding.The dividend for this year is $0.61 per share.What is the retention ratio?

Accepted Answer

A)   0.220
B)   0.256
C)   0.314
D)   0.774
E)   0.780

Question 20

Oak Supply has earnings per share of $1.22.The firm has $840,000 in equity and 60,000 shares of stock outstanding.What is the return on equity?

Accepted Answer

A)   7.92 percent
B)   8.71 percent
C)   9.09 percent
D)   9.47 percent
E)   10.36 percent

Exam 6: Common Stock Valuation