FINA 365 Ch. 9

Enterprise value equals the: A. combined market value of debt and equity minus excess cash. B. market value of equity minus the market value of debt plus excess cash. C. market value of debt plus the book value of equity minus excess cash. D. combined market value of debt and equity. E. combined book value of debt and equity minus excess cash.

A. combined market value of debt and equity minus excess cash.

Next year's annual dividend divided by the current stock price is called the: A. yield to maturity. B. total yield. C. dividend yield. D. capital gains yield. E. earnings yield.

C. dividend yield.

22. If the issuer of a stock receives the proceeds from a sale of that issuer's stock, then the sale: A. had to have occurred on the floor of an exchange. B. was a secondary market transaction. C. was transacted on the NYSE. D. was conducted in the primary market. E. had to have been a limit order.

D. was conducted in the primary market.

If a stock pays a constant annual dividend then the stock can be valued using the: A. fixed coupon bond present value formula. B. present value of an annuity due formula. C. payout ratio formula. D. present value of an ordinary annuity formula. E. perpetuity present value formula.

E. perpetuity present value formula.

What amount of a firm's cash should be included in the enterprise value? A. only the amount needed to run the business B. none of the cash should be included C. somewhere between 25 and 50 percent at the user's discretion D. only the amount necessary to maintain a constant EV/EBITDA ratio E. the average cash balance over the past three years

A. only the amount needed to run the business

Which one of these applies to the dividend growth model of stock valuation? A. The dividend must be for the same time period as the stock price. B. The growth rate must be less than the discount rate. C. The rate of growth must be positive. D. The model cannot be applied if the growth rate is zero. E. The dividend amount must be constant over time.

B. The growth rate must be less than the discount rate.

A day order to sell at a limit of $32 will be: A. executed at the next available price once a trade occurs at the limit price. B. cancelled at the end of the day if not executed. C. executed only if the purchase price is less than the limit amount. D. executed at the end-of-day price if $32 has not been obtained. E. transferred to a market order on the following day if not executed at the limit price.

B. cancelled at the end of the day if not executed.

The underlying assumption of the dividend growth model is that a stock is worth: A. the same amount to every investor regardless of their desired rate of return. B. the present value of the future income that the stock is expected to generate. C. an amount computed as the next annual dividend divided by the market rate of return. D. the same amount as any other stock that pays the same current dividend and has the same required rate of return. E. an amount computed as the next annual dividend divided by the required rate of return.

B. the present value of the future income that the stock is expected to generate.

Latcher's is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3 percent annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from today before determining today's value. A. 4 B. 5 C. 6 D. 7 E. 8

C. 6

A stop order to sell at $46 will be executed: A. at a price of $46 at the end of the day on which the order was placed. B. at $46 following the first trade with a price below $46. C. as a market order once a trade occurs at a price of $46 or less. D. immediately at a price of $46. E. as a market order once a trade occurs at a price of $46 or higher.

C. as a market order once a trade occurs at a price of $46 or less.

The total return on a stock is equal to the: A. dividend yield minus the capital gains yield. B. dividend growth rate minus the dividend yield. C. dividend yield plus the dividend growth rate. D. growth rate of the dividends. E. dividend divided by the sum of the dividend yield and capital gains yield.

C. dividend yield plus the dividend growth rate.

Which one of these factors generally has the greatest impact on a firm's PE ratio? A. required rate of return B. current dividends C. future opportunities D. the overall risk level of the current firm E. depreciation method used by the firm

C. future opportunities

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: A. market values of all stocks to increase. B. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate. C. market values of all stocks to decrease. D. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price. E. dividend growth rates to increase to offset this change.

C. market values of all stocks to decrease.

Which one of these stock valuation methods is used for a non-dividend paying firm that is experiencing accounting losses? A. price-earnings ratio B. constant-dividend model C. price-sales ratio D. differential-growth model E. constant-growth model

C. price-sales ratio

The differential growth model: A. makes allowance for one change in the discount rate. B. uses DivT + 1 as the dividend amount throughout the formula. C. requires g2 to be less than the discount rate. D. assumes the second growth rate will be zero. E. assumes the first growth rate will be zero.

C. requires g2 to be less than the discount rate.

Which one of these statements is correct? A. Investors earn a return called a spread. B. Dealers pay a fee, called the spread, to brokers. C. Investors sell at the ask price. D. Dealers buy at the bid price. E. Brokers maintain an inventory of securities.

D. Dealers buy at the bid price.

Phillips Co. currently pays no dividend. The company is anticipating dividends of $.02, $.05, $.10, $.20, and $.30 over the next 5 years, respectively. After that, the company anticipates increasing the dividend by 3.5 percent annually. One step in computing the value of this stock today is to compute the value of: A. P1. B. P3. C. P4. D. P5. E. P6.

D. P5.

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? A. The closing price on the previous day was $.36 higher than today's closing price. B. A dealer will buy the stock at $32.08 and sell it at $32.44 a share. C. The current earnings per share equal $32.08 / 21 + $.36. D. The current stock price is equivalent to 21 years of the firm's current earnings per share. E. The earnings per share have increased by $.36 this year.

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

The constant dividend growth model: A. is more complex than the differential growth model. B. requires the growth period be limited to a set number of years. C. is never used because firms rarely attempt to maintain steady dividend growth. D. can be used to compute a stock price at any point in time. E. most applies to stocks with differential growth rates.

D. can be used to compute a stock price at any point in time.

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield. A. current B. total C. dividend D. capital gains E. earnings

D. capital gains

Supplemental liquidity providers (SLPs): A. act as floor brokers. B. only represent stock purchasers. C. seek the best price for their customers. D. donot operate on the floor of a stock exchange. E. have been replaced by designated market makers.

D. donot operate on the floor of a stock exchange.

A forward PE is generally based on the projected: A. average earnings for the next five years. B. average earnings for the next three years. C. earnings for the upcoming quarter. D. earnings for the next year. E. stock price in one year.

D. earnings for the next year.

A limit order to buy: A. guarantees the quantity purchased but not the price. B. guarantees both the purchase price and the order fulfillment. C. is executed only if the purchase price is less than the limit amount. D. guarantees the purchase price but not the order execution. E. will be executed either at the limit price or at the end-of-day price.

D. guarantees the purchase price but not the order execution

NASDAQ: A. has a single trading floor located in Chicago, Illinois. B. has multiple trading floors. C. is a designated market maker system. D. has a multiple market maker system. E. is closed to all electronic communications networks (ECNs).

D. has a multiple market maker system.

In the formula, P3 = Div / R - g, the dividend is for period: A. two. B. five. C. four. D. three. E. one.

D. three.

For a firm with a constant payout ratio, the dividend growth rate can be estimated as: A. Payout ratio × Return on equity. B. Return on assets × Retention ratio. C. Return on equity × (1 + Retention ratio). D. Payout ratio × Return on assets. E. Return on retained earnings × Retention ratio.

E. Return on retained earnings × Retention ratio.

One advantage of the EV/EBITDA ratio over the PE ratio is the: A. inclusion of depreciation charges. B. increased reliance on leverage. C. averaging of annual sales. D. inclusion of all the firm's cash reserves. E. lessened impact of leverage on the ratio.

E. lessened impact of leverage on the ratio.

A stock's PE ratio is primarily affected by which three factors? A. accounting practices, opportunities, and the market rate of return B. dividend yield, capital gains yield, and opportunities C. market rate of return, risk, opportunities D. accounting practices, market rate of return, risk E. risk, opportunities, accounting practices

E. risk, opportunities, accounting practices