INVESTMENT

The growth in dividends of ABC, Inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. After this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on ABC, Inc. is 13%. Last year's dividends per share were $1.85. What should the stock sell for today?

$27.74

Suppose that the average P/E multiple in the oil industrt is 22. Exxon is expected to have an EPS of $1.50 in the coming year. The intrinsic value of Exxon stock should be

$33.00 22*1.5=33

Toria Corp has an expected ROE of 15%. The dividend growth rate will be ______ if the firm follow a policy back 75% of earnings.

11.25% 15%*0.75=11.25%

The most popular approach to forecasting the overall stock market is to use

the aggregate earnings multiplier

The most popular approach to forecasting the overall stock market is to use

the aggregate earnings multiplier.

A firm has a market to book value ratio is equivalent to the industry average and a ROe that is less than the insutry average, which implies

the firm has a higher P/E ratio than other firms in the industry.

A firm has a higher quick (or acid test) ratio than the industyr average, which implies

the firm is more likely to aboid insolvency in the short run than the other firms in the inndustry, and the firm may be less profitable than other firms in the industry.

A firm has a higher asset turnover ration than the industry average, which implies

the firm is utilizinf assets more efficiency than the other firms in the industry.

The goal of fundamental analysts is to find securities

whose intrinsic value exceeds market price.

You wish to earn a return of 13% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividend os 9% for stock A and 10% for stock B. The intrinsic value of stock A

will be less than the intrinsic value of stock B.

You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X

will be less than the intrinsic value of stock Y.

___________ is equal to common shareholder's equity divided by common shares outstanding

Book value per share

__________ provides a snapshot of the financial condition of the firm at a particular time.

The balance sheet

High P/E ratios tend to indicate that a company will ______, ceteris paribus.

grow quickly

An analyst has determined that the intrinsic value of Dell stock is $34 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 27, then it would be reasonable to assume the expected EPS of Dell in the coming year will be

$1.26. 34(1/27)=1.26

Thrones Dragon Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of thrones Dragon Company has a beta of -0.22. The intrinsic value of the stock is

$133.33 cost of equity= 16-0.225*(14-6)=0.04 ke=d1/p0+g 8/0.04+0.02)= 8-0.06=133.33

You are considereing acquiring a commons stock that you would like to hold for one year. You exoect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return.

$14.96 0.75/1.12+16/1.12=14.96

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return.

$14.96 0.12 = (16 − P + 0.75)/P; 0.12P = 16 − P + 0.75; 1.12P = 16.75; P = 14.96.

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's require return on equity is 12%, and WACC IS 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is

$18.17 1.6/3.2=$0.50 FCFE 50*1.09=.545 .545/(.12-.09)= 18.17

Salted Chips Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be

$2.69 g = 0.125 × 0.6 = 7.5%; $2.50(1.075) = $2.69.

Salted Chips Company paid a dividend last year of $2.50. The Expected ROE for next year is 12.5%. An appropiate required return on the stock is 11%. If the firm has a plwback ration of 60% the dividend in the coming years should be

$2.69 .6*0.1250=0.075 2.5*(1.075)=2.69

Confusion Corp is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Confusion Corp shares to be $22 a year from now. The beta of Confusion Corp's stock is 1.25. What is the intrinsic value of Confusion's stock today?

$20.60 k = 0.04 + 1.25 (0.14 − 0.04); k = 0.165; 0.165 = (22 − P + 2)/P; 0.165P = 24 − P; 1.165P = 24; P = 20.60.

Confusion Corp is expected to pay a dividend of $2 in the upcoming year. The risk-free rat eof return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Confusion Corp shares to be $22 a year from now. The beta of Confusion Corp's stock is 1.25 What is the intrinsic value of confusion's stock today?

$20.60 4%+1.25*(14%-4%)=16.5% 2+22/(1+0.165)=20.60

Red Stapler Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90.What is Red Stapler's book value per share?

$32.14 $45M/1.4M = $32.14.

Red Stapler Company has a balance sheet that lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90.What is Red Stapler's book value per share?

$32.14 45,000,000/1,400,000 = 32.14 per share

Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends are expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today.

$40.68

A preferred stock will pay a dividend of $6.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsict value of this preferred stock.

$60 6-.1=60

JCPenney Company Is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth ______ today.

$71.80 2.54*(1+8%)/(11%-8%)=2.54*1.08)/(0.03)=91.44 1.65/(1+11%)^1+1.97/(1+11%)^2+2.54/(1+11%)^3+91.44/(1+11%)^3

Suppose that the average P/E multiple in the oil industry is 16. Graphite Corp is expected to have an EPS of $4.50 in the coming year. The intrinsic value of Graphite Corp stock should be

$72.00.

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00.What is the approximate beta of Risk Metrics's stock?

1.1

A firm has a return on equity of 20% and a dividend-payout ratio of 30%. The firm's anticipated growth rate is

14% 20% × 0.70 = 14%.

The Wrench Company is expected to pay a dividednof $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk free rate of return is 5% and the expected return on the market portoflio is 13%. The stock of the Wrench Company has a beta of 1.2 What is the return you should require on The Wrench's stock?

14.6% 5%+1.2*1.13%-5%)=14.60%

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be

2,000,000 Unleverage CF / market cap %) * (1-T)

SGA Consulting a FCFE of $3.2M last year and has 3.2M shares outstanding. SGA's required return on equity is 13%, and WACC is 11.5%. If FCFE is expected to grow at 8.5% forever, the intrinsic value of SGA's shares is

24.11 $3.2M/3.2M = $1.00 FCFE per share; 1.00 × 1.085 = 1.085; 1.085/(0.13 − 0.085) = 24.11.

Northern Train Corp is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Northern Train Corp has a beta of 3.00. The return you should require on the stock is

30%. 0.06+3*(0.14-0.06)=30%

Melody Corp. has an expected ROE of 14%. The dividend growth rate will be ______ if the firm follows a policy of paying 60% of earnings in the form of dividends

5.6% 14%*0.40=5.6%

The market-capitalization rate on the stock of Fast Growing Company is 20%. The expected ROE is 22%, and the expected EPS are $6.10. If the firm's plwback ratio is 90%, the P/E ratio will be

50 Growth rate= 0.90*0.22=1.98 PE ratio= (1-0.90)/ (0.20-0.198) =0.10/0.002 = 50

A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 2, a (pretax profit/EBIT) of 6.0, an assets turnover ratio of 2.5, a current ratio of 1.5, and a return on sales ratio of 4%. The firm's ROE is

7.2% =0.6*0.6*0.04*2.5*2=7.2%

Juice & Fruit Corp has an expected ROE of 9%. The dividend growth rate will be ____ if the firm follows a policy of plowing back 10% of earnings.

9%*10%=0.9%

The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13% and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be

9.09 (1-50%)/(12%-13%*50%)=9.09

To create a common size balance sheet, ____________ all items on the balance sheet by ____________.

Divide;total assets

To create a coomon size income stetement, _____________ all items on the income staement by _____________

Divide;total revenue

______ is a measure of what the firm would have earned if it didn't have any obligations to creditors or tax authorities.

Earnings before interest and taxes.

WACC is the most apporpiate discount rate to use when applying a ______ valuation model

FCFF

Divindend discount models and P/E ratios are used by ________ to try to find mispriced securities.

Fundamental Analysts

______ are analysts who use information concerning the current and prospective profitability of a firm to assess the firm's fair market value.

Fundamental analysts

_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.

Liquidation value per share

Common size financial statements make it easier to compare firms

Of different sizes

In the dividend discount model, which of the followugn are NOT incorporated into the discount rate?

Return on assets

A measure of asset utilization is

Return on total assets

Which of the financial statements recognizes only transactions in which cash changes hands?

Statement of Cash Flows

One problem with comparing financial ratio prepared by different reporting agencies is

agencies vary in their policies as to what is included in specific calculations.

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings.

dividend-payout ratio

How do you calculate P/E Ratio with the Balance and Income Sheet?

eps= net income /no. of shares outstanding price/eps= P/E Ratio

High P/E ratios tend to indicate that a company will paribus.

grow quickly

A firms current ratio is above the industry average. However, the firm;s quick ratio is below the industry average. These ratios suggest tha the firm

has a relative more total current assets and even more inventory than the other firms in the industry.

The Gordon model

is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k.

Common size financial statements make it easier to compare firms

of differnet sizes

Economic value added (EVA) is also knows as

residual income

Economic value added (EVA) was coined by Stern & Stewart. The concept, however, has been around for many years but referred to as _______________________.

residual income

The _________ is the fraction of earnings reinvested in the firm

retention rate or plowback ratio

A messure of asset utilization is

return on total assets