Ch18 - investments

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

A. FCFE

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

A. FCFF

3. _________ is equal to (common shareholders' equity/common shares outstanding). A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of these is correct

A. Book value per share

76. Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends. A. dividend payout ratio B. degree of financial leverage C. variability of earnings D. inflation rate E. None of these is correct

A. dividend payout ratio

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

A. grow quickly

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

A. required rate of return on equity

73. A firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90. Given this information, it follows that _______. A. the stock experienced a drop in the P/E ratio B. the firm had a decrease in dividend payout ratio C. the firm increased the number of shares outstanding D. the required rate of return decreased E. None of these is correct

A. the stock experienced a drop in the P/E ratio

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

A. whose intrinsic value exceeds market price.

16. Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A ____. A. will be greater than the intrinsic value of stock B B. will be the same as the intrinsic value of stock B C. will be less than the intrinsic value of stock B D. cannot be calculated without knowing the market rate of return E. None of these is correct.

A. will be greater than the intrinsic value of stock B

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

B. Fundamental analysts

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

B. Liquidation value

6. _______ 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. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of these is correct

B. Liquidation value per share

18. If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to A. V0= (Expected Dividend Per Share in Year 1)/k B. V0= (Expected EPS in Year 1)/k C. V0= (Treasury Bond Yield in Year 1)/k D. V0= (Market return in Year 1)/k E. None of these is correct

B. V0= (Expected EPS in Year 1)/k

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

B. WACC

75. 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. 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 C. less predictable earnings growth than that of the average firm D. greater cyclicality of earnings growth than that of the average firm E. None of these is correct.

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

5. The _______ is defined as the present value of all cash proceeds to the investor in the stock. A. dividend payout ratio B. intrinsic value C. market capitalization rate D. plowback ratio E. None of these is correct

B. intrinsic value

8. Historically, P/E ratios have tended to be ________. A. higher when inflation has been high B. lower when inflation has been high C. uncorrelated with inflation rates but correlated with other macroeconomic variables D. uncorrelated with any macroeconomic variables including inflation rates E. None of these is correct

B. lower when inflation has been high

106. FCF and DDM valuations should be ____________ if the assumptions used are consistent. A. very different for all firms B. similar for all firms C. similar only for unlevered firms D. similar only for levered firms E. None of these is correct

B. similar for all firms

92. For most firms, P/E ratios and risk A. will be directly related. B. will have an inverse relationship. C. will be unrelated. D. will both increase as inflation increases. E. None of these is correct.

B. will have an inverse relationship.

97. 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. I and IV B. II and IV C. I, III, and IV D. II, III, and IV E. III and IV

C. I, III, and IV

7. Since 1955, Treasury bond yields and earnings yields on stocks were _______. A. identical B. negatively correlated C. positively correlated D. uncorrelated

C. positively correlated

74. In the dividend discount model, which of the following are not incorporated into the discount rate? A. Real risk-free rate B. Risk premium for stocks C. Return on assets D. Expected inflation rate E. None of these is correct

C. Return on assets

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

C. considerable leeway to manage earnings.

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

C. fundamental analysts

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

C. grow slowly

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

C. includes capital gains implicitly.

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

C. market capitalization rate

84. 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 firm can increase market price and P/E by increasing the growth rate. C. the amount of earnings retained by the firm does not affect market price or the P/E. D. the firm can increase market price and P/E by retaining more earnings and the firm can increase market price and P/E by increasing the growth rate. E. None of these is correct.

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

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

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

14. You wish to earn a return of 12% 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 dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A ____. A. will be greater than the intrinsic value of stock B B. will be the same as the intrinsic value of stock B C. will be less than the intrinsic value of stock B D. will be greater than the intrinsic value of stock B or will be the same as the intrinsic value of stock B E. None of these is correct.

C. will be less than the intrinsic value of stock B

12. 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 _____. A. will be greater than the intrinsic value of stock Y B. will be the same as the intrinsic value of stock Y C. will be less than the intrinsic value of stock Y D. will be greater than the intrinsic value of stock Y or will be the same as the intrinsic value of stock Y E. None of these is correct.

C. will be less than the intrinsic value of stock Y

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

D. gradually approach its intrinsic value over several years.

96. 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, higher B. lower, lower C. lower, higher D. higher, lower E. It is not possible to tell.

D. higher, lower

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

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

D. the aggregate earnings multiplier.

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

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

99. 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 increase too rapidly. C. when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly. D. the practice of using flexible accounting rules to improve the apparent profitability of the firm. E. None of these is correct.

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

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

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

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

E. retention rate and plowback ratio