Investments: Chapter 18

_________ is equal to common shareholders' equity divided by common shares outstanding. A) Book value per share B) Liquidation value per share C) Tobin's Q D) Market value per share

A) Book value per share

Which of the following is the best measure of the floor for a stock price? A) Liquidation value B) Replacement cost C) Book value D) Market value E) Tobin's Q

A) Liquidation value

_______ 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. A) Liquidation value per share B) Market value per share C) Book value per share D) Tobin's Q

A) Liquidation value per share

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings. A) dividend-payout ratio B) variability of earnings C) degree of financial leverage D) inflation rate

A) dividend-payout ratio

If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan. A) higher; lower B) It is not possible to tell. C) lower; higher D) lower; lower E) higher; higher

A) higher; lower

The Gordon model A) 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. B) is valid only when g is less than k. C) is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when k is less than g. D) is valid only when k is less than g. E) is a generalization of the perpetuity formula to cover the case of a growing perpetuity.

A) 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.

In a multi stage growth model, the majority of the value can be found in the ______________. A) terminal growth rate B) None of the options are correct. C) dividend growth D) discount rate E) near term dividends

A) terminal growth rate

The most popular approach to forecasting the overall stock market is to use A) the aggregate earnings multiplier. B) Tobin's Q. C) the aggregate return on assets. D) the historical ratio of book value to market value. E) the dividend multiplier.

A) the aggregate earnings multiplier.

According to Peter Lynch, a rough rule of thumb for security analysis is that A) the growth rate should be equal to the P/E ratio. B) the growth rate should be low for emerging industries. C) the growth rate should be equal to the dividend-payout rate. D) the growth rate should be equal to the plowback rate. E) None of the options are correct.

A) the growth rate should be equal to the P/E ratio.

WACC is the most appropriate discount rate to use when applying a ______ valuation model. A) P/E B) FCFF C) DDM D) FCFF or DDM, depending on the debt level of the firm, E) FCFE

B) FCFF

Who popularized the dividend discount model, which is sometimes referred to by his name? A) Marshall Blume B) Myron Gordon C) Frederick Macaulay D) Harry Markowitz E) Burton Malkiel

B) Myron Gordon

________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities). A) Book value per share B) Tobin's Q C) Market value per share D) Liquidation value per share E) None of the options are correct.

B) Tobin's Q

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has A) greater cyclicality of earnings growth than that of the average firm. B) a dividend yield which is less than that of the average firm. C) less predictable earnings growth than that of the average firm. D) an anticipated earnings growth rate which is less than that of the average firm.

B) a dividend yield which is less than that of the average firm.

Because the DDM requires multiple estimates, investors should A) not use this model without expert assistance. B) carefully examine inputs to the model and perform sensitivity analysis on price estimates. C) perform sensitivity analysis on price estimates. D) carefully examine inputs to the model. E) feel confident that DDM estimates are correct.

B) carefully examine inputs to the model and perform sensitivity analysis on price estimates.

When valuing a stock, an overestimated terminal growth rate can might not be noticed if the ____________ is also higher? A) terminal cash flow B) discount rate C) earnings D) plowback ratio

B) discount rate

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities. A) technical analysts B) fundamental analysts C) statistical analysts D) psychoanalysts E) dividend analysts

B) fundamental analysts

High P/E ratios tend to indicate that a company will _______, ceteris paribus. A) not grow B) grow quickly C) grow at the same speed as the average company D) grow slowly E) None of the options are correct.

B) grow quickly

Since 1955, Treasury bond yields and earnings yields on stocks have been A) negatively correlated. B) positively correlated. C) identical. D) uncorrelated.

B) positively correlated.

The _________ is the fraction of earnings reinvested in the firm. A) retention rate B) retention rate or plowback ratio C) dividend payout ratio and plowback ratio D) dividend payout ratio E) plowback ratio

B) retention rate or plowback ratio

If a firm has a required rate of return equal to the ROE, A) the firm can increase market price and P/E by retaining more earnings. B) the amount of earnings retained by the firm does not affect market price or the P/E. C) None of the options are correct. D) the firm can increase market price and P/E by retaining more earnings and increasing the growth rate. E) the firm can increase market price and P/E by increasing the growth rate.

B) the amount of earnings retained by the firm does not affect market price or the P/E.

One of the problems with attempting to forecast stock market values is that A) dividend-payout ratios are highly variable. B) the level of uncertainty surrounding the forecast will always be quite high. C) None of the options are correct. D) there are no variables that seem to predict market return. E) the earnings multiplier approach can only be used at the firm level.

B) the level of uncertainty surrounding the forecast will always be quite high.

Investors want high plowback ratios A) for all firms. B) whenever ROE > k. C) only when they are in low tax brackets. D) whenever bank interest rates are high. E) whenever k > ROE.

B) whenever ROE > k

The goal of fundamental analysts is to find securities A) All of the options are correct. B) whose intrinsic value exceeds market price. C) with a positive present value of growth opportunities. D) None of the options are correct. E) with high market capitalization rates.

B) whose intrinsic value exceeds market price.

According to James Tobin, the long-run value of Tobin's Q should move toward A) 0. B) infinity. C) 1. D) 2. E) None of the options are correct.

C) 1.

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value. A) Systems analysts B) Credit analysts C) Fundamental analysts D) Specialists E) Technical analysts

C) Fundamental analysts

GAAP allows A) minimal leeway to manage earnings. B) None of the options are correct. C) considerable leeway to manage earnings. D) no leeway to manage earnings. E) earnings management if it is beneficial in increasing stock price.

C) considerable leeway to manage earnings.

The announcement of a dividend increase by a growth company may have what impact? A) increase in price due to enhanced growth rate. B) increase in price due to expectation of increased cash flow. C) drop in price due to lower perceived growth opportunities. D) drop in price from higher shareholder scrutiny.

C) drop in price due to lower perceived growth opportunities

Many stock analysts assume that a mispriced stock will A) never return to its intrinsic value. B) None of the options are correct. C) gradually approach its intrinsic value over several years. D) immediately return to its intrinsic value. E) return to its intrinsic value within a few days.

C) gradually approach its intrinsic value over several years.

High present value of growth opportunities most likely will correspond with _______________. A) low plowback ratios. B) decreased volatility. C) high PE ratios. D) high asset turnover.

C) high PE ratios.

The most appropriate discount rate to use when applying a FCFE valuation model is the A) risk-free rate. B) None of the options are correct. C) required rate of return on equity. D) WACC.

C) required rate of return on equity.

Earnings management is A) when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly. B) when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly. C) the practice of using flexible accounting rules to improve the apparent profitability of the firm. D) when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly.

C) the practice of using flexible accounting rules to improve the apparent profitability of the firm.

In the dividend discount model, which of the following are not incorporated into the discount rate? A) Real risk-free rate B) Expected inflation rate C) Risk premium for stocks D) Return on assets

D) Return on assets

If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to A) V0 = (Treasury bond yield in year 1)/k.. B) V0 = (Market return in year 1)/k. C) V0 = (Expected dividend yield in year 1)/k. D) V0 = (Expected EPS in year 1)/k.

D) V0 = (Expected EPS in year 1)/k.

The most appropriate discount rate to use when applying a FCFF valuation model is the A) required rate of return on equity or risk-free rate, depending on the debt level of the firm. B) required rate of return on equity. C) risk-free rate. D) WACC. E) None of the options are correct.

D) WACC.

The dividend discount model A) restricts capital gains to a minimum. B) ignores capital gains. C) incorporates the after-tax value of capital gains. D) includes capital gains implicitly. E) None of the options are correct.

D) includes capital gains implicitly.

The _______ is defined as the present value of all cash proceeds to the investor in the stock. A) plowback ratio B) dividend-payout ratio C) market-capitalization rate D) intrinsic value

D) intrinsic value

Historically, P/E ratios have tended to be A) higher when inflation has been high. B) uncorrelated with any macroeconomic variables, including inflation rates. C) uncorrelated with inflation rates but correlated with other macroeconomic variables. D) lower when inflation has been high.

D) lower when inflation has been high.

A perpetuity growth rate that is higher than the combined population growth and inflation rate might casue what result? A) under-priced stock B) increased discount rate C) lower terminal value D) over-priced stock

D) over-priced stock

A version of earnings management that became common in the 1990s was A) when management made changes in the operations of the firm to ensure that earnings did not increase or decrease too rapidly. B) when management made changes in the operations of the firm to ensure that earnings did not increase too rapidly. C) when management made changes in the operations of the firm to ensure that earnings did not decrease too rapidly. D) reported "pro forma earnings."

D) reported "pro forma earnings."

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model. A) FCEF B) FCEF or DDM C) P/E D) DDM E) FCFE

E) FCFE

The present value of growth opportunities (PVGO) is equal to I) the difference between a stock's price and its no-growth value per share. II) the stock's price. III) zero if its return on equity equals the discount rate. IV) the net present value of favorable investment opportunities. A) II, III, and IV B) II and IV C) I and IV D) III and IV E) I, III, and IV

E) I, III, and IV I) the difference between a stock's price and its no-growth value per share. III) zero if its return on equity equals the discount rate. IV) the net present value of favorable investment opportunities.

Low P/E ratios tend to indicate that a company will _______, ceteris paribus. A) grow quickly B) P/E ratios are unrelated to growth. C) grow at the same speed as the average company D) None of the options are correct. E) grow slowly

E) grow slowly

The ______ is a common term for the market consensus value of the required return on a stock. A) dividend payout ratio B) None of the options are correct. C) intrinsic value D) plowback rate E) market capitalization rate

E) market capitalization rate