Question 1

The GAP's most recent earnings per share were $1.75.Analysts forecast next year's earnings per share at $1.88.If the appropriate P/E ratio is 15,a share of GAP stock should be valued at:

Accepted Answer

A)  $28.20.
B)  $26.25.
C)  $27.23.
D)  $8.57. A

Question 2

You are evaluating the purchase of Cellars,Inc.common stock that just paid a dividend of $1.80.You expect the dividend to grow at a rate of 12% for the next three years.You plan to hold the stock for three years and then sell it.You estimate that a required rate of return of 17.5% will be adequate compensation for this investment.Calculate the present value of the expected dividends.Round to the nearest $0.10.

Accepted Answer

A)  $4.90
B)  $11.50
C)  $9.80
D)  $6.10 A

Question 3

Listing requirements for the New York Stock Exchange include:

Accepted Answer

A)  profitability.
B)  market value.
C)  breadth of ownership.
D)  all of the above. D

Question 4

Miller/Hershey's preferred stock is selling at $54 on the market and pays an annual dividend of $4.20 per share.
a.What is the expected rate of return on the stock?
b.If an investor's required rate of return is 9%,what is the value of the stock for that investor?
c.Considering the investor's required rate of return,does this stock seem to be a desirable investment?

Accepted Answer

The answer of Miller/Hershey's preferred stock is selling at $54...

Question 5

If a company has a return on equity of 25% and wants a growth rate of 10%,how much of ROE should be retained?

Accepted Answer

A)  40%
B)  50%
C)  60%
D)  70%

Question 6

Green Company's common stock is currently selling at $24.00 per share.The company recently paid dividends of $1.92 per share and projects growth at a rate of 4%.At this rate,what is the stock's expected rate of return?

Accepted Answer

A)  4.08%
B)  8.00%
C)  12.00%
D)  8.80%

Question 7

Apple stock is now selling for $315.32 per share.The P/E ratio based on current earnings is 23.72 and the P/E ratio based on expected earnings is 17.48.The expected growth rate in Apples earnings must be:

Accepted Answer

A)  -26%.
B)  36%.
C)  7.6%.
D)  5.5%.

Question 8

The stockholder's expected rate of return consists of a dividend yield and interest.

Accepted Answer

A) True 
 B)False

Question 9

Marjen,Inc.just paid a dividend of $5.Marjen stock currently sells for $73.57.The return on stocks like Marjen,Inc.is around 10%.What is the implied growth rate of dividends.

Accepted Answer

A)  1%
B)  3%
C)  5%
D)  7%

Question 10

Fris B.Corporation stock is currently selling for $42.86.It is expected to pay a dividend of $3.00 at the end of the year.Dividends are expected to grow at a constant rate of 3% indefinitely.Compute the required rate of return on FBC stock.

Accepted Answer

A)  10%
B)  33%
C)  7%
D)  4.3%

Question 11

P/E ratios found in published sources or on the internet are always computed by dividing the next period's expected earnings into the current price of the stock.

Accepted Answer

A) True 
 B)False

Question 12

The higher the investor's required rate of return,the higher the P/E ratio will be.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following formulas is appropriate to find the value of preferred stock with a fixed dividend?

Accepted Answer

A)  Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate) /Market's Required Yield on Preferred Stock
B)  Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate) /Market's Required Yield on Preferred Stock - growth rate
C)  Value of preferred stock = Annual Preferred Stock Dividend/Market's Required Yield on Preferred Stock
D)  Value of preferred stock = Annual Preferred Stock Dividend/Investor's Required Yield on Preferred Stock

Question 14

If a stock has a much higher than normal P/E ratio,investors probably expect:

Accepted Answer

A)  slow growth in earnings.
B)  rapid growth in earnings.
C)  large increases in the price of the stock.
D)  a declining stock price

Question 15

The retail analyst at Morgan-Sachs values stock of the GAP at $28.00 per share.They are using the average industry P/E ratio of 15.Their forecasted earnings per share for next year is:

Accepted Answer

A)  $0.54.
B)  $1.50.
C)  $1.87.
D)  There is not enough information calculate earnings per share.

Question 16

Texon's preferred stock sells for $85 and pays $11 each year in dividends.What is the expected rate of return?

Accepted Answer

The answer of Texon's preferred stock sells for $85 and...

Question 17

Zorba's is a small chain of of restaurants whose stock is not publicly traded.The average P/E ratio for similar restaurant chains is 16.5;the P/E ratio for the S&P 500 Index is 15.2.This year's earnings were $1.10 per share;next's earnings are expected to be $1.21 per share.A reasonable price for a share of Zorba's stock is:

Accepted Answer

A)  $19.97.
B)  $18.15.
C)  $20.23.
D)  $16.72.

Question 18

The P/E ratio is the market price of a share of stock divided by book equity per share.

Accepted Answer

A) True 
 B)False

Question 19

World Wide Interlink Corp.has decided to undertake a large project.Consequently,there is a need for additional funds.The financial manager plans to issue preferred stock with an annual dividend of $5 per share.The stock will have a par value of $30.If investors' required rate of return on this investment is currently 20%,what should the preferred stock's market value be?

Accepted Answer

A)  $10
B)  $15
C)  $20
D)  $25

Question 20

Preferred stock is similar to common stock in that:

Accepted Answer

A)  it has no fixed maturity date.
B)  the nonpayment of dividends can bring on bankruptcy.
C)  dividends are limited in amount.
D)  all of the above.

Exam 10: Stock Valuation

The GAP's most recent earnings per share were $1.75.Analysts forecast next year's earnings per share at $1.88.If the appropriate P/E ratio is 15,a share of GAP stock should be valued at:

Listing requirements for the New York Stock Exchange include:

If a company has a return on equity of 25% and wants a growth rate of 10%,how much of ROE should be retained?

Green Company's common stock is currently selling at $24.00 per share.The company recently paid dividends of $1.92 per share and projects growth at a rate of 4%.At this rate,what is the stock's expected rate of return?

Apple stock is now selling for $315.32 per share.The P/E ratio based on current earnings is 23.72 and the P/E ratio based on expected earnings is 17.48.The expected growth rate in Apples earnings must be:

The stockholder's expected rate of return consists of a dividend yield and interest.

Marjen,Inc.just paid a dividend of $5.Marjen stock currently sells for $73.57.The return on stocks like Marjen,Inc.is around 10%.What is the implied growth rate of dividends.

Fris B.Corporation stock is currently selling for $42.86.It is expected to pay a dividend of $3.00 at the end of the year.Dividends are expected to grow at a constant rate of 3% indefinitely.Compute the required rate of return on FBC stock.

P/E ratios found in published sources or on the internet are always computed by dividing the next period's expected earnings into the current price of the stock.

The higher the investor's required rate of return,the higher the P/E ratio will be.

Which of the following formulas is appropriate to find the value of preferred stock with a fixed dividend?

If a stock has a much higher than normal P/E ratio,investors probably expect:

The retail analyst at Morgan-Sachs values stock of the GAP at $28.00 per share.They are using the average industry P/E ratio of 15.Their forecasted earnings per share for next year is:

Texon's preferred stock sells for $85 and pays $11 each year in dividends.What is the expected rate of return?

The P/E ratio is the market price of a share of stock divided by book equity per share.

Preferred stock is similar to common stock in that: