FM PS 3 continued

A stop order to sell at $46 will be executed:

As a market order once a trade occurs at a price of $46 or less

A day order to sell at a limit of $32 will be:

Cancelled at the end of the day if not executed

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.

Capital gains

Which one of these statements is correct?

Dealers buy at the bid price

The total return on a stock is equal to the:

Dividend yield plus dividend growth rate

Russell's has annual revenue of $387,000 with costs of $216,400. Depreciation is $48,900 and the tax rate is 30 percent. The firm has debt outstanding with a market value of $182,000 along with 9,500 shares of stock that is selling at $67 a share. The firm has $48,000 of cash of which $29,500 is needed to run the business. What is the firm's EV/EBITDA ratio?

EV/EBITDA = [$182,000 + (9,500 × $67) - ($48,000 - 29,500)] / ($387,000 - 216,400) = 4.34

A limit order to buy:

Guarantees the purchase price but not the order execution

One advantage of the EV/EBITDA ratio over the PE ratio is the:

Lessened impact of leverage on the ratio

Assume you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:

Market values of all stocks to decrease

City Movers announced that its next annual dividend will be $.40 a share. The following dividends will be $.60, and $.75 a share annually for the following two years, respectively. After that, dividends are projected to increase by 3.5 percent per year. How much is one share of this stock worth at a rate of return of 12 percent?

P0 = $.40 / 1.12 + $.60 / 1.122 + $.75 / 1.123 + {[$.75 × (1 + .035)] / (.12 - .035)} / 1.123 P0 = $7.87

T&P common stock sells for $23.43 a share at a market rate of return of 11.65 percent. The company just paid its annual dividend of $1.20. What is the dividend growth rate?

P0 = $23.43 = $1.20 × (1 + g) / (.1165 - g); g = .0621, or 6.21%

A company paid an annual dividend of $.40 a share last month and plans to increase the dividend by 7 percent a year for the next 6 years and then increase it by 4 percent annually thereafter. What is the value of this stock at the end of Year 6 if the discount rate is 11 percent?

P6 = [$.40 × (1 + .07)6 × (1 + .04)] / (.11 - .04) = $8.92

If a stock pays a constant annual dividend then the stock can be valued using the:

Perpetuity present value formula

The dividend yield on Alpha's common stock is 5.2 percent. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.30 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock?

R = .052 + ($2.30 - 2.10) / $2.10 = .1472, or 14.72%

For a firm with a constant payout ratio, the dividend growth rate can be estimated as:

Return on retained earnings x Retention ratio

The closing price of a stock is quoted at 32.08, with a P/E of 21 and a net change of .36. Based on this information, which one of the following statements is correct?

The current stock price is equivalent to 21 years of the firm's current earnings per share

Enterprise value equals the:

combined market value of debt and equity minus excess cash.

Supplemental liquidity providers (SLPs):

do not operate on the floor of a stock exchange.

Dexter's has a fixed dividend payout ratio of 40 percent, current net income of $5,200, total assets of $56,400, and total equity of $21,600. Given this information, what estimate would you use as the dividend growth rate if the last dividend paid was $.464 per share?

g = (1 - .40) × ($5,200 / $21,600) = .1444, or 14.44%

A stock had a total return of 9.62 percent last year. The dividend amount was $.70 a share which equated to a dividend yield of 2.39 percent. What is the dividend growth rate?

g = .0962 - .0239 = .0723 = 7.23%

Lester's has a return on equity of 11.6 percent, a profit margin of 6.2 percent, and a payout ratio of 35 percent. What is the firm's growth rate?

g = .116 ×(1 - .35) = .0754, or 7.54%

Which one of these stock valuation methods is used for a non-dividend paying firm that is experiencing accounting losses?

price-sales ratio