Financial Analysis - USCA MBA - Ch9 SB

What is the price of a stock at the end of 1 year (P1) if the dividend for Year 2 (Div2) is $5, the price for Year 2 (P2) is $20, and the discount rate is 10 percent?

$22.73 P1= ($5 + $20)/1.10 = $22.73.

For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

False

True or false: An asset's value is determined by the most recent cash flows.

False

Which one of these represents the present value of a growing perpetuity?

P0 = Div/(R−g)

What conditions must be met for a firm to increase value?

Projects must have positive net present values. Earnings must be retained to fund projects.

Companies with differential growth have dividends that grow ______ in the near term than in the long term.

faster

An asset's value is determined by the present value of its ______ cash flows.

future

The price-earnings (PE) ratio is a function of which three factors?

growth opportunities accounting practices risk level

The ______ can be interpreted as the capital gains yield.

growth rate

The value of a firm is the function of its _____ rate and its _____ rate.

growth; discount

If the growth rate exceeds the discount rate, then the present value of dividends ______.

keeps getting bigger

The impact of _____ will be lower on the EV/EBITDA ratio than on the PE ratio.

leverage or gearing

A firm with growth opportunities should sell for ______ a firm without growth opportunities.

more than

The current price per share divided by last year's earnings per share gives you ______.

price-earnings ratio

Typically, growth stocks pay a ______ amount of earnings to shareholders, while cash cows pay a ______ amount of earnings to shareholders.

small; large

Comparable firms are assumed to have similar ______.

multiples

Retained earnings this year, return on retained earnings, and earnings this year determine earnings _____ year.

next

Growth opportunities may be lost if a firm pays out ______ in dividends

too much

Net investment is equal to the ______ minus ______.

total investment; depreciation

Since estimation error may be high, what do some financial economists recommend when using the constant-growth dividend discount model?

use the industry average rate of return for R

EBIT, EBITDA, and free cash flow are typically used in the denominators of _____ ratios.

value

What is the value of stock if next year's dividend is $6, the discount rate is 11 percent, and the constant rate of growth is 3 percent?

$75 P0 = $6/(0.11 − 0.03) = $75.

What is the price of a stock if its dividend a year from now is expected to be $3.20, the discount rate is 9 percent, and the constant rate of growth is 5 percent?

$80 P0 = $3.20/(0.09 − 0.05) = $80.

If the dividend received next year is $2, the discount rate is 10 percent, and the stock is currently priced at $25, the constant growth rate must be ______ percent.

2 R = 0.10 = ($2/$25) + g. g = 0.10 − 0.08 = 0.02, or 2%.

Which of the following refers to a company that pays a small amount of its earnings to its stockholders?

a growth stock

When enterprise value is calculated, cash is subtracted from the market value of debt and equity because ______.

an EV ratio should reflect the ability of productive assets to create cash flow many firms hold more cash than necessary

What information do we need to determine the value of stock using the zero-growth model?

annual dividend amount discount rate

Which of the following are cash flows to investors in stocks?

capital gains dividends

The dividend yield is determined by dividing next year's expected cash dividend by the ______.

current stock price

If the discount rate increases, the PE ratio will ______.

decrease

All else constant, the dividend yield will increase if the stock price ______.

decreases

A no-dividend firm can pay off an investor by paying _____ in the future.

dividends

The price of a share of common stock is equal to the present value of all ______ future dividends.

expected

When computing the PE ratio, using _____ earnings is merely using forecasts.

forward

When the growth rate is _____ than or equal to the discount rate, one should be particularly skeptical.

greater, more, higher, or larger

Which of these factors are used in predicting stock values using the dividend discount model?

growth discount rate

Firms may retain all their earnings if they have identified ______.

growth opportunities positive NPV projects

In the dividend discount model, the expected return for investors comes from which two sources?

growth rate dividend yield

The value of a firm is the function of its ______ rate and its ______ rate.

growth; discount

A firm may choose to forgo dividends today if growth opportunities are ______.

high

Firms with many investment opportunities typically have ______ PE ratios.

higher

Higher growth opportunities create ______ value today.

higher

A no-dividend firm can still pay off for an investor by ______.

paying high dividends in the future being acquired in the future

Valuing companies using the comparables approach is similar to valuation in _____.

real estate

Earnings next year are a function of which factors?

retained earnings this year earnings this year return on retained earnings

When estimating the growth rate, g, with the constant-growth stock valuation model, it is assumed that the ______ ratio stays the same.

retention

The determinants of a firm's growth rate include which factors?

return on retained earnings the retention ratio

In theory, which of the following models are best used to determine the value of a non-dividend-paying share of stock?

the firm cash flow model

In theory, which of the following models are mutually consistent and can be used to determine the value of a share of stock?

the free cash flow model the dividend discount model the comparables method

A calculated stock price that discounts earnings instead of dividends will usually be ______.

too high

Which cases should make one particularly skeptical when estimating the required rate of return?

when the growth rate is greater than or equal to the discount rate zero dividend case

If the growth rate (g) is zero, the capital gains yield is ______.

zero

If the dividend received next year is $2.25, the discount rate is 8 percent, and the stock is currently priced at $55, the constant growth rate must be ______ percent.

3.91

A firm with an 8 percent dividend growth rate and a return on equity of 20 percent must have a retention ratio of ______ percent.

40 Retention ratio = 0.08/0.2 = 0.4, or 40%.

Why do stocks that pay no dividends sell at positive prices?

Investors count on future dividends. Investors speculate on capital returns if the firm is sold.

In an inflationary environment, reported earnings are lower if a firm uses ______ rather than ______ accounting.

LIFO; FIFO

What differences might cause firms in the same industry to have different multiples?

risk levels investment opportunities accounting treatments

The goal of many successful organizations is a(n) ______ rate of growth in dividends.

steady

The PE ratio is negatively related to the ______.

stock's risk firm's discount rate

What is the price of a stock at the end of 1 year (P1) if the dividend for Year 2 (Div2) is $2, the price for Year 2 (P2) is $15, and the discount rate is 9 percent?

$15.60 P1= ($2 + $15)/1.09 = $15.60

What is the total return for a stock that currently sells for $100, pays a dividend in 1 year of $2, and has a constant growth rate of 8 percent?

10% R = ($2/$100) + 0.08 = 0.10, or 10%.

The impact of leverage on ______ is less because enterprise value includes debt and equity.

EV/EBITDA ratio

EBITDA measures earnings before ______.

Interest, depreciation, amortization

Which of the following characterizes newer companies?

They are fast-growing companies.

Which of the following characterizes newer companies?

They don't pay dividends. They have negative earnings.

True or false: A benefit of trailing earnings is that they reflect what actually happened.

True

True or false: If the growth rate is larger than the discount rate, the dividend growth model with constant growth does not work.

True

Forecasting requires ______.

assumptions

Net investment is equal to the total investment minus ______.

depreciation

Which type of growth describes a company that grows quickly at first but then grows slower in later years?

differential growth

What are the three basic patterns of dividend growth?

differential growth constant growth zero growth

Which one of the following represents valuation of stock using a zero-growth model?

Dividend/Discount rate

Which one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate.

What denominators are often used in value ratios?

EBITDA free cash flow EBIT

If a zero-dividend stock is purchased for $80 and sold 1 year later for $84, the 1-year return is ______ percent.

5 ($84/$80) − 1 = 5%.

For many companies, steady growth in _____ is an explicit goal.

dividends

The cash flows of common stock are ______.

dividends

Investors select a stock based on the cash they expect to receive from that stock. That cash comes in the form of ______.

dividends the future sales price

The constant growth model assumes that ______.

dividends change at a constant rate

The price-earnings ratio is found by dividing the current price per share by last year's ______.

earnings per share

In an inflationary environment, reported earnings are ______ if a firm uses LIFO rather than FIFO accounting.

lower

Firms in the same industry ______ have the same multiples

may not

Enterprise value is equal to the market value of a firm's equity plus the market value of a firm's debt ______.

minus cash