FIN 533 CH 18

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

A

A firm has a return on equity of 14% and a dividend-payout ratio of 60%. The firm's anticipated growth rate is: A)5.6%. B)10%. C)14%. D)20%.

A

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.

A

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? A)$20.60 B)$20.00 C)$12.12 D)$22.00

A

Consider the free cash flow approach to stock valuation. F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year. The firm's corporate tax rate is 40%. It is expected that $250,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $125,000. After the coming year, cash flows are expected to grow at 7% per year. The appropriate market capitalization rate for unleveraged cash flow is 13% per year. The firm has no outstanding debt. The projected free cash flow of F&G Manufacturing Company for the coming year is: A)$250,000. B)$180,000. C)$300,000. D)$380,000.

A

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.

A

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 the options are correct.

A

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

A

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 the options are correct. E)None of the options are correct.

A

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)None of the options are correct.

A

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

Turtle Corp has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends. A)6.0% B)4.8% C)7.2% D)3.0%

A

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

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 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 10% return. A) $30.23 B) $24.11 C) $26.52 D) $27.50 E) None of the options are correct.

A

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

A

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.

B

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

B

A preferred stock will pay a dividend of $2.75 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 intrinsic value of this preferred stock. A)$0.275 B)$27.50 C)$31.82 D)$56.25

B

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

B

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 projected free cash flow of Utica Manufacturing Company for the coming year is: A)$150,000. B)$180,000. C)$300,000. D)$380,000.

B

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.

B

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

B

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

B

Mature Products Corporation produces goods that are very mature in their product life cycles. Mature Products Corporation is expected to pay a dividend in year 1 of $2.00, a dividend of $1.50 in year 2, and a dividend of $1.00 in year 3. After year 3, dividends are expected to decline at a rate of 1% per year. An appropriate required rate of return for the stock is 10%. The stock should be worth: A)$9.00. B)$10.57. C)$20.00. D)$22.22.

B

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 market-capitalization rate for Risk Metrics? A)13.6% B)13.9% C)15.6% D)16.9% E)None of the options are correct.

B

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required 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 A)$68.13. B)$18.17. C)$26.35. D)$14.76. E)None of the options are correct.

B

Slow Silver Scuba Corp is expected to pay a dividend of $8 in the upcoming 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 Slow Silver Scuba Corp has a beta of −0.25. The return you should require on the stock is A)2%. B)4%. C)6%. D)8%.

B

Smart Draw Company is expected to have per share FCFE in year 1 of $1.20, per share FCFE in year 2 of $1.50, and per share FCFE in year 3 of $2.00. After year 3, per share FCFE is expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The first three dividends are worth _______ today. A)$2.54 B)$3.56 C)$4.32 D)$2.37 E)None of the above

B

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

B

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

B

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 the options are correct.

B

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 −0.25. The intrinsic value of the stock is: A)$80.00. B)$133.33. C)$200.00. D)$400.00.

B

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

_______ 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

B

________ 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

Highpoint had a FCFE of $246M last year and has 123M shares outstanding. Highpoint's required return on equity is 10%, and WACC is 9%. If FCFE is expected to grow at 8.0% forever, the intrinsic value of Highpoint's shares is A)$21.60. B)$108. C)$244.42. D)$216.00.

B (246/123)=2 x 1.08= 2.16--> 2.16/(0.10-0.08)=108

A preferred stock will pay a dividend of $3.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A)$0.39 B)$0.56 C)$31.82 D)$56.25

C

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. The market's required rate of return on Confusion's stock is: A)14.0%. B)17.5%. C)16.5%. D)15.25%. E)None of the options are correct.

C

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

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 the options are correct.

C

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 increasing the growth rate. E)None of the options are correct.

C

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

C

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. A)$33.00 B)$40.67 C)$71.80 D)$66.00

C

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 the options are correct.

C

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 the options are correct.

C

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? A)0.8 B)1.0 C)1.1 D)1.4 E)None of the options are correct.

C

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

C

Suppose that the average P/E multiple in the oil industry is 20. Non-Standard Oil Corp is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Non-Standard Oil Corp stock should be: A)$28.12. B)$35.55. C)$60.00. D)$72.00. E)None of the options are correct.

C

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 the options are correct.

C

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 the options are correct.

C

The growth in dividends of Music Doctors, Inc. is expected to be 8% per year for the next two years, followed by a growth rate of 4% per year for three years. After this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on Music Doctors, Inc. is 11%. Last year's dividends per share were $2.75. What should the stock sell for today? A)$8.99 B)$25.21 C)$39.71 D)$110.00 E)None of the options are correct.

C

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

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

C

You wish to earn a return of 10% on each of two stocks, C and D. 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 C and 10% for stock D. The intrinsic value of stock C A)will be greater than the intrinsic value of stock D. B)will be the same as the intrinsic value of stock D. C)will be less than the intrinsic value of stock D. D)will be the same or greater than the intrinsic value of stock D. E)None of the options are correct.

C

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 the same or greater than the intrinsic value of stock Y. E)None of the options are correct.

C

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 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 15% return. A)$23.91 B)$24.11 C)$26.52 D)$27.50 E)None of the options are correct.

C return=(sale price+div-purchase price)/purchase price--> .15=(28+2.50-P)/P

An analyst has determined that the intrinsic value of VM CORP stock is $20 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of VM CORP in the coming year is: A)$3.63. B)$4.44. C)$0.80. D)$22.50.

C $20 x (1/25)= 0.80

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? A)$1.68 B)$2.60 C)$32.14 D)$60.71 E)None of the options are correct.

C 45,000,000/1,400,000=32.14

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 A)7.69. B)8.33. C)9.09. D)11.11. E)None of the options are correct.

C ROE x plowback= .13(.50)= 0.065 P/E=(1 - Plowback ratio) / (market capitalization rate - growth rate) P/e= (1-.5) / (.12-0.065)= 9.09

A company paid a dividend last year of $1.75. The expected ROE for next year is 14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, the dividend in the coming year should be A)$1.80. B)$2.12. C)$1.77. D)$1.94.

D

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 the options are correct.

D

Boaters World is expected to have per share FCFE in year 1 of $1.65, per share FCFE in year 2 of $1.97, and per share FCFE in year 3 of $2.54. After year 3, per share FCFE is 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. A)$77.53 B)$40.67 C)$82.16 D)$71.80 E)None of the options are correct.

D

Consider the free cash flow approach to stock valuation. F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year. The firm's corporate tax rate is 40%. It is expected that $250,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $125,000. After the coming year, cash flows are expected to grow at 7% per year. The appropriate market capitalization rate for unleveraged cash flow is 13% per year. The firm has no outstanding debt. The total value of the equity of F&G Manufacturing Company should be: A)$1,615,156.50. B)$2,479,168.95. C)$3,333,333.33. D)$4,166,666.67.

D

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.

D

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

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

D

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 the options are correct.

D

Riga Corp has an expected ROE of 16%. The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends. A)3.0% B)6.0% C)7.2% D)4.8%

D

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 A)$28.12. B)$35.55. C)$63.00. D)$72.00. E)None of the options are correct.

D

The Gordon model A)is a generalization of the perpetuity formula to cover the case of a growing perpetuity. B)is valid only whengis less thank. C)is valid only whenkis less thang. D)is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only whengis less thank. E)is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only whenkis less thang.

D

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

________ 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)Liquidation value per share C)Market value per share D)Tobin's Q E)None of the options are correct.

D

A preferred stock will pay a dividend of $7.50 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 intrinsic value of this preferred stock. A) $0.75 B) $7.50 C) $64.12 D) $56.25 E) None of the options are correct.

E

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 thatDDMestimates are correct. E)carefully examine inputs to the model and perform sensitivity analysis on price estimates.

E

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%. The beta of Confusion Corp's stock is 1.25. If Confusion's intrinsic value is $21.00 today, what must be its growth rate? A)0.0% B)10% C)4% D)6% E)7%

E

Salted Chips Company is expected to have EPS in the coming year of $2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, the growth rate of dividends should be: A)5.00%. B)6.25%. C)6.60%. D)7.50%. E)8.75%.

E

Stingy Corporation is expected have EBIT of $1.2M this year. Stingy Corporation is in the 30% tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and will have a $24,000 increase in net working capital this year. What is Stingy's FCFF? A)1,139,000 B)1,200,000 C)1,025,000 D)921,000 E)873,000

E

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 or plowback ratio

E

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $3.50 in dividends and $42 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 10% return. A)$23.91 B)$24.11 C)$26.52 D)$27.50 E)None of the options are correct.

E

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. Shares currently sell for $90. What is Red Stapler's market value per share? A)$1.68 B)$2.60 C)$32.14 D)$60.71. E) none of these

E (115-40)= 75 M 75M/1.4M= 53.57