FIN 322 Ch. 18

fundamental

Research to predict stock value that focuses on such determinants as earnings and dividends prospects, expectations for future interest rates, and risk evaluation of the firm is referred to as _______analysis.

Gordon model, after Myron J. Gordon

What is another name for the constant-growth DDM equation? - Smith model, after Roger B. Smith - Roberts model, after William C. Roberts - Gordon model, after Myron J. Gordon - Samuel model, after Robert G. Samuel

D1/P0 + g

What is the formula for the market capitalization rate using the constant-growth dividend discount model? Define P0 as the current price, D1 as the dividend in a year, and g as the growth rate.

price-to-book

What is the ratio of share price divided by the accounting value of common equity per share called?

market capitalization

When its assumptions are satisfied and a stock is selling for its intrinsic value, the constant-growth dividend discount formula can be inverted to infer ________ __________the rate for the stock.

Market Capitalization

When its assumptions are satisfied and a stock is selling for its intrinsic value, the constant-growth dividend discount formula can be inverted to infer the _____ _____ rate for the stock.

zero

When the ROE from a firm's possible investments equals its market capitalization rate, the PVGO is ______.

- Free cash flow model - P/E ratio - Dividend discount model moving average is used by technical analysts

Which are methods or tools of fundamental analysis? - Free cash flow model - P/E ratio - Moving average - Dividend discount model

Price/EPS

Which is the P/E ratio of a share of stock?

FCFF − Interest expense × (1 − tc) + Increases in net debt

Which is the formula for the free cash flow to equityholders?

price-to-sales

Which ratio became a popular valuation benchmark for many start-up firms which had no earnings?

- Earnings in high inflation periods tend to be higher because of inflation. - Earnings may be managed for profitability. - Higher P/E multiples are associated with higher levels of growth.

Which statements about P/E multiples are correct? - Earnings in high inflation periods tend to be higher because of inflation. - When earnings of a firm are temporarily depressed, its P/E ratio should tend to be low. - Earnings may be managed for profitability. - Higher P/E multiples are associated with higher levels of growth.

- It is useful for firms that pay no dividends. - Free cash flow models use a terminal value to avoid adding the present values of an infinite sum of cash flow. - Free cash flow models may be applied to any firm and can provide useful insights about firm value beyond the DDM.

Which statements about the free cash flow approach to firm valuation are correct? - It is useful for firms that pay no dividends. - It is not consistent with the dividend discount model. - Free cash flow models use a terminal value to avoid adding the present values of an infinite sum of cash flow. - Free cash flow models may be applied to any firm and can provide useful insights about firm value beyond the DDM.

- Riskier stocks will have lower P/E multiples. - Riskier firms have higher required rates of return.

Which statements are generally true about the P/E ratio and stock risk? - Riskier stocks will have higher P/E multiples. - Riskier stocks will have lower P/E multiples. - Riskier firms have higher required rates of return.

- Even minor mispricings can be very profitable. - If there were no search for mispriced securities, securities would be mispriced.

Which statements are true about market efficiency and its implications? - If there were no search for mispriced securities, securities would be mispriced. - It should be easy to find undervalued securities. - Even minor mispricings can be very profitable. - Since there are no reasons to doubt the efficient markets hypothesis, the search for mispriced securities is unjustifiable.

- It is adjusted for depreciation. - It is based on historical value.

Which statements are true about the book value of an asset on a firm's balance sheet? - It is based on historical value. - It is adjusted for depreciation. - It is the same as market value. - It is based on current value.

Capital gains are based on future dividends.

Why does the dividend discount model not include capital gains in its formula?

pro forma

earnings are calculated ignoring certain expenses, such as restructuring charges or write-downs of assets from continuing operations.

market; liquidation

If the ______ value of a firm drops below its ______ value, the firm becomes attractive as a takeover target.

- below; overvalued - above; undervalued

If the intrinsic value is ______ the market price, the stock is considered ______.

- Discount free cash flows to equity using the cost of equity capital. - Discount free cash flows to the firm using the weighted average cost of capital and subtract the existing market value of debt.

In what ways can the equity value of a firm be calculated for a firm with debt? - Discount free cash flows to equity using the cost of equity capital. - Discount free cash flows to the firm using the weighted average cost of capital and subtract the existing market value of debt. - Discount free cash flows to the firm using the weighted average cost of capital. - Discount free cash flows to equity using the cost of equity capital and subtract the existing market value of debt.

Tobin's q (equation)

(market value) / replacement cost

infinite

If a firm's dividend were to grow faster than its market capitalization rate forever, its value would be ______.

market capitalization rate

A common term for the market-consensus value of the appropriate discount rate for a firm's cash flows is the

dividend discount model

According to which theory is the value of a firm equal to D1/1+k + D2/(1+k)2 + D3/(1+k)3 + ...? Define Dt as the dividend in year t and k as the market capitalization rate.

pro forma earnings

An example of earnings management is the reporting of "________________________."

price-to-cash-flow

Earnings as reported on the income statement can be affected by the company's choice of accounting practices, and thus are commonly viewed as subject to some imprecision and even manipulation. As a result, some analysts prefer to use what type of comparative valuation ratio?

ROE x b

If a company has a plowback ratio of b and a fixed return on equity, what is its growth rate of dividends?

residual

Since the value of their stake is what is left over when the liabilities of the firm are subtracted from its assets, the shareholders of a firm are considered to be _________ claimants.

earnings multiplier

Some analysts use an aggregate version of the dividend discount model rather than an ________ _________ approach.

( (D1) / (1+k) ) + ((D2 + P2) / ( (1+k)2) )

Suppose a firm will pay dividend D1 in one year, D2 in two years, and can be sold for P2 in two years. Further suppose the market capitalization rate is k and the risk-free rate is r. What is the formula for the value of the firm?

replacement

The cost of purchasing all of the assets of a firm less its liabilities is referred to as its replacement ________ cost (or its reproduction cost).

low; high

The earnings multiplier approach applied at the aggregate level suggest that, all else equal, when Treasury rates are low, the market's earnings yield will be ______ and the level of the market will be ______.

P/E = (1-b)/(k-g)

The formula for the P/E ratio is

fundamental

The identification of stocks that are mispriced relative to some measure of "true" value that can be derived from observable financial data is the purpose of _________analysis.

liquidation

The net amount that could be realized by selling the assets of a firm after paying its debt is the firm's _________ value.

Plowback ratio

The percentage increase in assets is the rate at which income was generated (ROE) times the____________ ____________ (the fraction of earnings reinvested in the firm), which is denoted as b.

Dividend payout ratio

The percentage of earnings returned to shareholders as dividends is called the

earnings management

The practice of using flexibility in accounting rules to improve the apparent profitability of the firm is referred to as

intrinsic

The present value of a firm's expected future net cash flows discounted by the required rate of return is the firm's ______ value.

market capitalization rate; PVGO

The price to earnings ratio can be thought of as the sum of the reciprocal of the ______ and the ______ relative to current earnings.

- the plowback ratio - the earnings retention ratio

The proportion of the firm's earnings that is reinvested in the business and not paid out as dividends is called ______.

true, intrinsic

The purpose of fundamental analysis is to identify stocks that are mispriced relative to some measure of __________ or ___________ value that can be derived from observable financial data.

Tobin's q

The ratio of a firm's market value to its replacement cost is

present value of growth opportunities

The value of a firm equals the sum of its no-growth value and the

intrinsic value

The_______ _________ of the share is the present value of the dividend to be received at the end of the first year, D1, and the expected sales price, P1.

true

True or false: Even a minor mispricing allows a stockmarket analyst to earn their salary.

False

True or false: Some analysts believe the market value of a firm can remain above its replacement costs for sustained periods of time.