BUS 206 Exam- CH 11

The expected acquisition of a firm typically results in ____ in the target's stock price.

an increase

The price-earnings valuation method applies the ____ price-earnings ratio to the ____ earnings per share in order to value the firm's stock.

average industry; firm's

Vansel Inc. retains most of its earnings. The company currently has earnings per share of $11. Vansel expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Vansel's industry is 12. Vansel is expected to pay dividends per share of $3.50 during each of the next three years. If investors require a 10 percent rate of return on Vansel stock, a fair price for Vansel stock today is $____.

113.95

Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.

41.67

A beta of 1.8 implies that the stock has a risk premium of 1.8 percent. True or False?

False

The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's volatility.

Sharpe

The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model.

Treasury bond rate

The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.

Treynor

The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derive the PE ratio. True or False?

True

When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns.

beta; standard deviation

The January effect refers to the ____ pressure on ____ stocks in January of every year.

upward; small

Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar.

favorably; adversely

The limitations of the dividend discount model are more pronounced when valuing stocks

that retain most of their earnings.

A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.

true