Question 1

The Satellite Shoppe has current sales per share of $10.55.The sales per share are expected to increase at an annual rate of 12 percent.The historical P/E ratio is 16.2 and the historical P/S ratio is 9.8.What is the expected price of this stock one year from now?

Accepted Answer

A)  $59.72 
B)  $66.67 
C)  $71.50 
D)  $115.80 
E)  $129.00

Question 2

Home Interiors has net income of $258,000.The firm has decided to pay $140,000 of that income out to the shareholders.What is the firm's retention ratio?

Accepted Answer

A)  0.355 
B)  0.412 
C)  0.457 
D)  0.588 
E)  0.645

Question 3

The Diamond Outlet has current earnings per share of $2.20 and an expected earnings growth rate of 2.3 percent.The required return on the stock is 14 percent and the current book value per share is $15.25.What is the current market value of this stock?

Accepted Answer

A)  $15.07 
B)  $15.62 
C)  $15.96 
D)  $16.24 
E)  $16.67

Question 4

Mountain View Nursery is a relatively young firm which just paid its first annual dividend of $0.35 a share.Management projects dividend increases of 12 percent per year for five years followed by a constant growth rate of 3 percent annually.What is this stock worth today if the applicable discount rate is 11 percent?

Accepted Answer

A)  $3.59 
B)  $4.66 
C)  $5.23 
D)  $6.01 
E)  $6.51

Question 5

Comfort Ice Cream has plans to pay decreasing annual dividends of $1.75,$1.60,and $1.45 over the next three years,respectively.After that,the firm will increase the dividend by 4 percent each year.What is the value of this stock today at a discount rate of 12 percent?

Accepted Answer

A)  $17.29 
B)  $17.54 
C)  $17.69 
D)  $17.93 
E)  $18.92

Question 6

The Barclay House increases its dividend each year.The next annual dividend is expected to be $1.75 a share.Future dividends will increase by 4 percent annually.What is the current value of this stock if the discount rate is 10 percent?

Accepted Answer

A)  $28.91 
B)  $28.05 
C)  $28.78 
D)  $29.00 
E)  $29.17

Question 7

Electronics Galore has historically had a P/E ratio of 22.1.This ratio is considered a good estimate of the future ratio.The firm currently has EPS of $1.78.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)  $40.96 
C)  $41.30 
D)  $42.78 
E)  $43.79

Question 8

Newcomer Mills is a relatively new firm which will retain all of its earnings for the next four years.Four years from now,the firm expects to pay its first dividend of $0.25 a share.After that,it intends to increase the dividend by 4 percent annually.What is the value of this stock today at a discount rate of 12 percent?

Accepted Answer

A)  $1.53 
B)  $1.78 
C)  $2.04 
D)  $2.22 
E)  $2.60

Question 9

The method of valuing a stock based on the present value of the future income derived from that stock is called:

Accepted Answer

A)  technical analysis. 
B)  constant valuation. 
C)  the basic stock valuation method. 
D)  compound dividend analysis. 
E)  the dividend discount model.

Question 10

Which one of the following correctly expresses the clean surplus relationship?

Accepted Answer

A)  The change in book value per share is equal to earnings per share minus dividends. 
B)  The change in retained earnings is equal to net income. 
C)  The change in market value per share is equal to the change in book value per share. 
D)  The change in market value per share is equal to earnings per share minus dividends. 
E)  The rate of change in book value per share is equal to the firm's discount rate.

Question 11

Factory Stores pays annual dividends and increases those dividends by 3 percent each year.The stock is currently valued at $11.80 a share and has a required return of 14 percent.You own 500 shares of this stock.What is the total amount of dividend income you should expect to receive next year?

Accepted Answer

A)  $649 
B)  $659 
C)  $672 
D)  $685 
E)  $699

Question 12

What is beta?

Accepted Answer

A)  a rate of return measure 
B)  the return on a stock relative to the overall market 
C)  the rate of dividend growth 
D)  the percentage of net income paid out as a dividend 
E)  measure of a stock's risk relative to the stock market average

Question 13

Historically,Jones Trucking has had a P/E ratio of 14.6.The firm has current net income of $92,000 with 85,000 shares of stock outstanding.The EPS growth rate is 4.5 percent.What is the expected price of this stock one year from now?

Accepted Answer

A)  $15.32 
B)  $15.85 
C)  $16.41 
D)  $16.51 
E)  $17.10

Question 14

Wholesale Foods common stock is valued at $11.05 per share.The firm pays annual dividends which increase at a constant rate.The last dividend paid was $1.20.The required return is 12 percent.What is the dividend growth rate?

Accepted Answer

A)  1.03 percent 
B)  1.67 percent 
C)  3.47 percent 
D)  3.59 percent 
E)  4.00 percent

Question 15

The current book value per share of B.L.Black & Sons is $5.35 and the required return on the stock is 15.5 percent.The firm expects earnings per share of $2.25 next year with annual earnings growth of 4.5 percent.What is the current market value of this stock?

Accepted Answer

A)  $9.16 
B)  $10.91 
C)  $13.88 
D)  $18.27 
E)  $20.30

Question 16

The portion of net income that is held by a firm,for future growth,comprises which one of the following balance sheet accounts?

Accepted Answer

A)  capital surplus 
B)  common stock 
C)  internal earnings 
D)  retained earnings 
E)  net earnings

Question 17

The Brown Jug has paid annual dividends of $0.61,$0.64,$0.71,$0.82,and $0.88 per share over the past 5 years,respectively.What is the geometric average dividend growth rate for this period?

Accepted Answer

A)  8.51 percent 
B)  8.97 percent 
C)  9.10 percent 
D)  9.59 percent 
E)  10.21 percent

Question 18

Which one of the following is a correct formula for computing a geometric average dividend growth rate?

Accepted Answer

A)  [(1 + D0) + (1 + D1) × (1 + DN)]N + 1 - 1 
B)  [(1 + D0) × (1 + D1) × (1 + DN)]N - 1 - 1 
C)  [DN/D0]1/N - 1 
D)  [D0/DN]N - 1 
E)  [DN/D0]N/1 - 1

Question 19

A decrease in which one of the following will increase a firm's sustainable rate of growth?

Accepted Answer

A)  net income 
B)  dividend payout ratio 
C)  total assets 
D)  retention ratio 
E)  earnings per share

Question 20

A firm has a current book value per share of $21.10 and a market price per share of $37.57.Next year's earnings are expected to be $5.60 per share and the expected earnings growth rate is 2.5 percent.What is the required rate of return on this stock?

Accepted Answer

A)  14 percent 
B)  15 percent 
C)  16 percent 
D)  17 percent 
E)  18 percent

Exam 6: Common Stock Valuation