fin 510 chpt 18

The percentage of earnings returned to shareholders as dividends is called the _______ ____________ _____________ .

dividend payout ratio

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

earnings multiplier

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.

fundamental

Matching Which of the following are added to generate the free cash flow to the firm and which are subtracted? Note: net working capital (NWC) is current assets less current liabilities. 1: EBIT 2: tc * EBIT 3: Depreciation 4: Capital expenditures 5: Increase in NWC a) Subtracted b) Subtracted c) Subtracted d) Added e) Added

1. added 2. subtracted 3. added 4. subtracted 5. subtracted

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

Blank 1: present Blank 2: value Blank 3: growth Blank 4: opportunities

Select all that apply If a stock pays a dividend of D1 in one year and the dividend grows at a constant rate g forever, the intrinsic value of the stock is given by which formula(s)? D1(1+g)/1+k D1/1+k + D1(1+g)/(1+k)2 + D1(1+g)2/(1+k)3 + ... D1/1+k−g D1/k-g

D1/1+k + D1(1+g)/(1+k)2 + D1(1+g)2/(1+k)3 + ... D1/k-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. P0/D1 + g D1/P0 + g P0/D1 - g D1/P0 - g

D1/P0 + g

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

False

Select all that apply 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.

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

The formula for the P/E ratio is P/E = (1-b)/(k-g) P/E = (g-k)/(1-b) P/E = (k-g)/(1-b) P/E = (1-b)/(g-k)

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

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? Price-to-sales Price-to-cash-flow Price-to-book Price-to-earnings

Price-to-cash-flow

Which ratio became a popular valuation benchmark for many start-up firms which had no earnings? Price-to-book Price-to-cash-flow Price-to-earnings Price-to-sales

Price-to-sales

Select all that apply Which statements are true of a stock's price under the constant-growth dividend discount model? The stock price increases with the expected growth rate of dividends. Price is proportional to the dividend. The stock price increases with the market capitalization rate. The expected return is equal to the market capitalization rate.

The stock price increases with the expected growth rate of dividends. Price is proportional to the dividend. The expected return is equal to the market capitalization rate. note: stock price decreases when there is an increase in (market capitalization rate) k.

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

Tobin's q

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

True

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? D1 + D2/1+r + P2/(1+r)2 [(1+k)D1/1+r] +[(1+k)2(D2+P2)/(1+r)2] [D1/1+k] + [D2+P2(1+k)2] [D1/1+r] + [D2+P2(1+r)2]

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

The price to earnings ratio can be thought of as the sum of the reciprocal of the ______ and the ______ relative to current earnings. dividend payout rate; PVGO market capitalization rate; PVGO market capitalization rate; intrinsic value dividend payout rate; intrinsic value

market capitalization rate; PVGO

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.

plowback ratio

True or false: An example of earnings management is the reporting of "pro forma earnings."

true

Why does the dividend discount model not include capital gains in its formula? Firms do not have capital gains, only dividends. Capital gains are based on future dividends. Shareholders are assumed never to be able to sell their shares.

Capital gains are based on future dividends.

Select all that apply In what ways can the equity value of a firm be calculated for a firm with debt? 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 equity using the cost of equity 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.

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 equity using the cost of equity capital.

According to which theory is the value of a firm equal to D11+kD11+k + D2(1+k)2D2(1+k)2 + D3(1+k)3D3(1+k)3 + ...? Define Dt as the dividend in year t and k as the market capitalization rate. Dividend discount model Constant growth of book value model Earnings retention ratio model Present value of free cash flow model

Dividend discount model

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

Earnings management

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

Earnings may be managed for profitability. Earnings in high inflation periods tend to be higher because of inflation. Higher P/E multiples are associated with higher levels of growth. notes: 2: They tend to be higher because historic costs underrepresent true economic values. 4: It is the opposite--the denominator of the ratio responds more sensitively to the business cycle than the numerator.

Which is the formula for the free cash flow to equityholders? FCFF − Interest expense × (1 − tc) - Increases in net debt FCFF + Interest expense × (1 − tc) - Increases in net debt FCFF + Interest expense × (1 − tc) + Increases in net debt FCFF − Interest expense × (1 − tc) + Increases in net debt

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

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

Free cash flow model P/E ratio Dividend discount model note: The moving average is used by technical analysts.

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

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

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

Gordon model, after Myron J. Gordon

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

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

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

Liquidation

Which is Tobin's q? Book Value/Market Value Market Value/Replacement Cost Replacement Cost/Liquidation Value Liquidation Value/Book Value

Market Value/Replacement Cost

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

Market capitalization rate

Which is the P/E ratio of a share of stock? Par Value/EBITDA Price/EPS Par Value/EPS Price/EBITDA

Price/EPS

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

Pro forma

If a company has a plowback ratio of b and a fixed return on equity, what is its growth rate of dividends? Multiple choice question. ROE/1+b ROE/b ROE × b ROE × (1+ b)

ROE × b

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

Replacement

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

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

Select all that apply If the intrinsic value is ______ the market price, the stock is considered ______. above; undervalued below; overvalued below; undervalued above; overvalued

above; undervalued below; overvalued

The accounting measure describing the net worth of common equity according to a firm's balance sheet is __________ value.

book

The accounting measure describing the net worth of common equity according to a firm's balance sheet is ___________ value.

book

Firms with considerable cash flow but limited investment prospects are called "cash ______" because the cash these firms generate is best taken out of, or "milked from," the firm. goats cows chickens sheep

cows

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.

fundamental

Select all that apply The share price of firm that cuts its dividend in order to invest in a new project that has a return ______ the firm's market capitalization rate would be expected to ______. greater than; decrease greater than; remain the same greater than; increase equal to; remain the same equal to; decrease equal to; increase

greater than; increase equal to; remain the same

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 intrinsic liquidation book

intrinsic

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.

intrinsic value

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

liquidation

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 ______. low; low high; low high; high low; high

low; high

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

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

market; liquidation notes: A firm will not be attractive as a takeover target if its market price is high.

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.

residual

Select all that apply The proportion of the firm's earnings that is reinvested in the business and not paid out as dividends is called ______. Tobin's q the plowback ratio the dividend payout ratio the earnings retention ratio

the plowback ratio the earnings retention ratio

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.

true intrinsic