Financial Analysis Final

A stock is expected to pay a dividend of $1.50 at the end of each of the next three years. At the end of three years the stock price is expected to be $25. The equity discount rate is 16 percent. What is the current stock price? A. $19.39. B. $24.92. C. $17.18.

A. $19.39. $1.50/1.16 + $1.50/1.162 + $1.50/1.163 + $25.00/1.163 = $19.39

A stock has the following elements: last year's dividend = $1, next year's dividend is 10% higher, the price will be $25 at year-end, the risk-free rate is 5%, the market risk premium is 5%, and the stock's beta is 1.5. The stock's price is closest to: A. $23.20. B. $20.20. C. $23.50.

A. $23.20.

A company last paid a $1.00 dividend, the current market price of the stock is $20 per share and the dividends are expected to grow at 5 percent forever. What is the required rate of return on the stock? A. 10.25%. B. 9.78%. C. 10.00%.

A. 10.25%. D0 (1 + g) / P0 + g = k 1.00 (1.05) / 20 + 0.05 = 10.25%.

Securities that can be sold back to the issuing firm at a specific price are best described as: A. callable. B. non-callable. C. putable.

C. putable.

Shareholders selling shares between the ex-dividend date and holder-of-record date: A. do not receive the dividend, which is paid to the share buyer. B. do not receive the dividend, which stays with the company. C. receive the dividend.

C. receive the dividend.

Other things equal, preference shares have the most risk for the investor when they are: a) Callable and non-cumulative b) Non-callable and non-cumulative c) Putable and cumulative

a) Callable and non-cumulative

Participating preference shares most likely: a) receive extra dividends b) can be exchanged for common stock c) give shareholders right to sell the shares

a) receive extra dividends

Which of the following industries is likely to be most sensitive to the business cycle? A. Pharmaceutical. B. Automobile. C. Confectionery.

B. Automobile.

Which of the following types of industries is typically characterized by stable performance during both expansions and contractions of the business cycle? A. Growth. B. Defensive. C. Cyclical.

B. Defensive.

Assuming the risk-free rate is 5% and the expected return on the market is 12%, what is the value of a stock with a beta of 1.5 that paid a $2 dividend last year if dividends are expected to grow at a 5% rate forever? A. $20.00. B. $12.50. C. $17.50.

A. $20.00. P0 = D1 / (k - g) Rs = Rf + β(RM - Rf) = 0.05 + 1.5(0.12 - 0.05) = 0.155 D1 = D0(1 + g) = 2 × (1.05) = 2.10 P0 = 2.10 / (0.155 - 0.05) = $20.00

An analyst has gathered the following data for Webco, Inc: Retention Rate = 40% ROE = 25% k = 14%Using the infinite period, or constant growth dividend discount model, calculate the price of Webco's stock assuming that next years earnings will be $4.25. A. $63.75 B. $55.00 C. $125.00

A. $63.75 g = (ROE)(RR) = (0.25)(0.4) = 10% P0 = D1 / (k - g) D1 = 4.25 (1 − 0.4) = 2.55 K - g = 0.14 − 0.10 = 0.04 P = 2.55 / 0.04 = 63.75

After completing a thorough industry analysis, which of the following is most likely an additional element an analyst should examine when analyzing a specific company within the industry? A. Competitive strategy. B. Threat of entry. C. Power of buyers.

A. Competitive strategy.

Wallace Kidwell is classifying an industry as to its life-cycle stage. Kidwell notes that the industry's growth is stable and largely limited to replacement demand and overall population increases. The companies that comprise the industry have achieved efficient cost structures and strong brand loyalty. This level of brand loyalty has resulted in very few price wars. Kidwell will most likely classify the industry life cycle stage as being: A. Mature. B. Decline. C. Shakeout.

A. Mature.

Which of the following statements about switching costs is most accurate? A. Switching costs include the time needed to learn to use a competitor's product. B. Switching costs tend to be lower for specialized products. C. Low switching costs contribute to market share stability.

A. Switching costs include the time needed to learn to use a competitor's product.

Which of the following statements about the industry life cycle is most accurate? A. The growth stage is typically characterized by decreasing prices. B. Industry growth rates are highest in the embryonic stage. C. The mature stage is followed by a shakeout stage and a decline stage.

A. The growth stage is typically characterized by decreasing prices.

The primary reason for a firm to issue equity securities is to: A. acquire the assets necessary to carry out its operations. B. improve its solvency ratios. C. increase publicity for the firm's products.

A. acquire the assets necessary to carry out its operations.

Preference shares will have the most risk for the investor if the shares are: A. callable and non-cumulative. B. callable and cumulative. C. non-callable and non-cumulative.

A. callable and non-cumulative.

Declining prices that result from the development of substitute products are most likely to characterize an industry in the: A. decline stage. B. shakeout stage. C. mature stage.

A. decline stage.

Stages of an industry life cycle in chronological order are: A. embryonic, growth, shakeout, mature, and decline. B. embryonic, growth, mature, shakeout, and decline. C. growth, shakeout, mature, decline, and embryonic.

A. embryonic, growth, shakeout, mature, and decline.

When classifying companies into peer groups for analysis, an analyst should: A. examine firms' annual reports to see if they identify competitors. B. disregard industry classifications from commercial providers. C. include each company in only one peer group.

A. examine firms' annual reports to see if they identify competitors.

A firm is most likely to have pricing power if it operates in an industry characterized by: A. high concentration, undercapacity, and high market share stability. B. low concentration, overcapacity, and high market share stability. C. high concentration, undercapacity, and low market share stability.

A. high concentration, undercapacity, and high market share stability.

Utilizing the infinite period dividend discount model, all else held equal, if the required rate of return (Ke) decreases, the model yields a price that is: A. increased, due to a smaller spread between required return and growth. B. reduced, due to increased spread between growth and required return. C. reduced, due to the reduction in discount rate.

A. increased, due to a smaller spread between required return and growth.

Asset-based valuation models are most appropriate for a firm that: A. is being liquidated. B. has cyclical earnings. C. has significant intangible assets.

A. is being liquidated.

Factors that increase competition in an industry most likely include: A. low barriers to entry, low concentration, and high unused capacity. B. high barriers to entry, low concentration, and low unused capacity. C. low barriers to entry, high concentration, and high unused capacity.

A. low barriers to entry, low concentration, and high unused capacity.

A firm's earnings are most likely to be cyclical if: A. the firm produces luxury items. B. most of the firm's costs depend on its level of output. C. the firm operates in a growth industry.

A. the firm produces luxury items.

Which of the following statements concerning security valuation is least accurate? A. The best way to value a company with high and unsustainable growth that exceeds the required return is to use the temporary supernormal growth (multistage) model. B. A firm with a $1.50 dividend last year, a dividend payout ratio of 40%, a return on equity of 12%, and a 15% required return is worth $18.24. C. The best way to value a company with fast growth and no current dividend but who is expected to pay dividends in three years is to use the temporary supernormal growth (multistage) model.

B. A firm with a $1.50 dividend last year, a dividend payout ratio of 40%, a return on equity of 12%, and a 15% required return is worth $18.24.

Assume a company has earnings per share of $5 and pays out 40% in dividends. The earnings growth rate for the next 3 years will be 20%. In the third year the company will start paying out 100% of earnings in dividends and earnings will increase at an annual rate of 5% thereafter. If a 12% rate of return is required, the value of the company is closest to: A. $55.70. B. $102.80. C. $92.90.

B. $102.80. D0 = (0.4)(5) = 2 D1 = (2)(1.2) = 2.40 D2 = (2.4)(1.2) = 2.88 D3 = E3 = 5(1.2)3 = 8.64 P2 = D3 / (k - g)= 8.64 / (0.12 - 0.05) = $123.43 Present value of the cash flows = value of stock = 2.4 / (1.12)1 + 2.88 / (1.12)2 + 123.43 / (1.12)2 = 102.83

A company has 8 percent preferred stock outstanding with a par value of $100. The required return on the preferred is 5 percent. What is the value of the preferred stock? A. $100.00. B. $160.00. C. $152.81.

B. $160.00. The annual dividend on the preferred is $100(.08) = $8.00. The value of the preferred is $8.00/0.05 = $160.00.

An analyst gathered the following data:• An earnings retention rate of 40%.• An ROE of 12%.• The stock's beta is 1.2.• The nominal risk free rate is 6%.• The expected market return is 11%.Assuming next year's earnings will be $4 per share, the stock's current value is closest to: A. $45.45. B. $33.32. C. $26.67

B. $33.32. Dividend payout = 1 - earnings retention rate = 1 - 0.4 = 0.6 RS = Rf + β(RM - Rf) = 0.06 + 1.2(0.11 - 0.06) = 0.12 g = (retention rate)(ROE) = (0.4)(0.12) = 0.048 D1 = E1 × payout ratio = $4.00 × 0.60 = $2.40 Price = D1 / (k - g) = $2.40 / (0.12 - 0.048) = $33.32

Given the following information, compute price/sales.• Book value of assets = $550,000.• Total sales = $200,000.• Net income = $20,000.• Dividend payout ratio = 30%.• Operating cash flow = $40,000.• Price per share = $100.• Shares outstanding = 1,000.• Book value of liabilities = $500,000. A. 2.50X. B. 0.50X. C. 2.00X.

B. 0.50X. Market value of equity = ($100)(1000) = $100,000 Price / Sales = $100,000 / $200,000 = 0.5X

In its latest annual report, a company reported the following:Net income = $1,000,000Total equity = $5,000,000Total assets = $10,000,000Dividend payout ratio = 40%Based on the sustainable growth model, the most likely forecast of the company's future earnings growth rate is: A. 6%. B. 12%. C. 8%.

B. 12%. g = (RR)(ROE) RR = 1 - dividend payout ratio = 1 - 0.4 = 0.6 ROE = NI / Total Equity = 1,000,000 / 5,000,000 = 1 / 5 = 0.2 g = (0.6)(0.2) = 0.12 or 12%

Use the following information to determine the value of River Gardens' P/E:Expected dividend payout ratio is 45%.Expected dividend growth rate is 6.5%.River Gardens' required return is 12.4%.Expected earnings per share next year are $3.25. A. 6.72X B. 7.63X C. 8.72X

B. 7.63X

Which of the following statements about the role of equities in financing a company's assets is most accurate? A. Management can directly increase the market value of equity by increasing net income. B. Equity capital is typically used for the purchase of long-term assets and expansion into new areas. C. The book value and market value of equities is usually the same.

B. Equity capital is typically used for the purchase of long-term assets and expansion into new areas.

Compared to publicly traded firms, privately held firms have which of the following characteristics? A. Less ability to focus on long-term prospects. B. More limited financial disclosure. C. Higher reporting costs.

B. More limited financial disclosure.

A manager tells a research analyst, "A thorough industry analysis should use more than one approach to estimate industry variables," and "An analyst should not compare his valuations to those of other analysts." Which of these two statements is (are) CORRECT? A. Neither of these statements is accurate. B. Only one of these statements is accurate. C. Both of these statements are accurate.

B. Only one of these statements is accurate.

An aggressive price reduction to gain market share is most likely to be associated with a: A. product differentiation strategy. B. cost leadership strategy. C. service differentiation strategy.

B. cost leadership strategy.

Food, beverage, and utility companies are examples of: A. declining industries. B. defensive industries. C. cyclical industries.

B. defensive industries.

One advantage to using the price/book value (P/B) ratio over using the price/earnings (P/E) ratio is that P/B can be used when: A. stock markets are volatile. B. earnings or cash flows are negative. C. the firm is in a slow growth phase.

B. earnings or cash flows are negative.

According to the earnings multiplier model, which of the following factors is the least important in estimating a stock's price-to-earnings ratio? The: A. expected dividend payout ratio. B. historical dividend payout ratio. C. estimated required rate of return on the stock.

B. historical dividend payout ratio.

If the payout ratio increases, the justified P/E multiple will: A. always increase. B. increase, if we assume that the growth rate remains constant. C. decrease, if we assume that the growth rate remains constant

B. increase, if we assume that the growth rate remains constant.

A firm is most likely to have pricing power if: A. its market share is high. B. its product is differentiated. C. costs to exit the industry are high.

B. its product is differentiated.

Compared to preferred stock, common stock is most likely to: A. pay more frequent dividends. B. provide a higher average return. C. exhibit a lower standard deviation of returns.

B. provide a higher average return.

A security that represents an equity share in a foreign firm and for which the voting rights are retained by the depository bank, is a(n): A. global registered share. B. unsponsored depository receipt. C. American depository share.

B. unsponsored depository receipt.

Use the following information to determine the value of River Gardens' common stock:Expected dividend payout ratio is 45%.Expected dividend growth rate is 6.5%.River Gardens' required return is 12.4%.Expected earnings per share next year are $3.25. A. $30.12. B. $27.25. C. $24.80.

C. $24.80.

Bybee is expected to have a temporary supernormal growth period and then level off to a "normal," sustainable growth rate forever. The supernormal growth is expected to be 25 percent for 2 years, 20 percent for one year and then level off to a normal growth rate of 8 percent forever. The market requires a 14 percent return on the company and the company last paid a $2.00 dividend. What would the market be willing to pay for the stock today? A. $47.09. B. $67.50. C. $52.68

C. $52.68

A company with a return on equity (ROE) of 27%, required return on equity (ke) of 20%, and a dividend payout ratio of 40% has an implied sustainable growth rate closest to: A. 10.80%. B. 12.00%. C. 16.20%.

C. 16.20%.

A stock has a required return of 14% percent, a constant growth rate of 5% and a retention rate of 60%. The firm's P/E ratio should be: A. 5.55X B. 6.66X C. 4.44X

C. 4.44X P/E = (1 - RR) / (k - g) = 0.4 / (0.14 - 0.05) = 4.44

Which of the following is a disadvantage of using the price-to-book value (PB) ratio? A. Book value may not mean much for manufacturing firms with significant fixed costs. B. Firms with negative earnings cannot be evaluated with the PB ratios. C. Book values are affected by accounting standards, which may vary across firms and countries.

C. Book values are affected by accounting standards, which may vary across firms and countries.

Cheryl Brower and Todd Sutter each own 100 shares of Hills Company stock. In a recent proxy vote, Brower had 100 votes but Sutter had 10 votes. The most likely reason for this difference in voting rights is that: A. Brower is a director of Hills Company. B. Hills Company uses a statutory voting method. C. Brower and Sutter own different classes of stock.

C. Brower and Sutter own different classes of stock.

Other things equal, which of the following types of stock has the most risk from the investor's perspective? A. Putable common share. B. Callable preferred share. C. Callable common share.

C. Callable common share.

Use the following information to find the value of Computech's common stock.Last year's dividend was $1.62.The dividend is expected to grow at 12% for three years.The growth rate of dividends after three years is expected to stabilize at 4%.The required return for Computech's common stock is 15%.Which of the following statements about Computech's stock is least accurate? A. At the end of two years, Computech's stock will sell for $20.64. B. The dividend at the end of year three is expected to be $2.27. C. Computech's stock is currently worth $17.46.

C. Computech's stock is currently worth $17.46.

Starr Company is an asset management firm. Thomas Company is a manufacturer of apparel. Assuming these firms are representative of their industry groups, how are they best classified with regard to their sensitivity to the business cycle? Starr Thomas A. Non-cyclical Non-cyclical B. Cyclical Non-cyclical C. Cyclical Cyclical

C. Cyclical Cyclical

Which type of cash dividend is most likely to be declared by a cyclical firm during good times? A. Stock dividend. B. Regular dividend. C. Special dividend.

C. Special dividend.

Which of the following statements about book value of equity is most accurate? A. Increases in retained earnings decrease book value. B. Book value of equity reflects the market's perception of the firm's prospects. C. The primary goal of firm management is to increase the book value of the firm's equity.

C. The primary goal of firm management is to increase the book value of the firm's equity.

Which of the following is a disadvantage of using price-to-sales (P/S) multiples in stock valuations? A. It is difficult to capture the effects of changes in pricing policies using P/S ratios. B. P/S multiples are more volatile than price-to-earnings (P/E) multiples. C. The use of P/S multiples can miss problems associated with cost control.

C. The use of P/S multiples can miss problems associated with cost control.

In a period when U.S. equity prices are increasing and the U.S. dollar is depreciating, which of the following investors in U.S. equities is most likely to earn the highest return in the investor's local currency? A. Non-U.S. investor who reinvests dividends. B. Non-U.S. investor who does not reinvest dividends. C. U.S. investor who reinvests dividends.

C. U.S. investor who reinvests dividends.

Dividends on non-participating preference shares are typically: A. a contractual obligation of the company. B. lower than the dividends on common shares. C. a fixed percentage of par value.

C. a fixed percentage of par value.

Private equity securities most likely: A. trade in over-the-counter dealer markets. B. are issued to individual investors. C. are illiquid and do not have quoted prices.

C. are illiquid and do not have quoted prices.

The difference between a firm's balance sheet assets and liabilities is equal to the firm's: A. intrinsic value of equity. B. market value of equity. C. book value of equity.

C. book value of equity.

An equity security that requires the firm to pay any scheduled dividends that have been missed, before paying any dividends to common equity holders is a: A. participating preference share. B. convertible preference share. C. cumulative preference share

C. cumulative preference share

Equity securities are least likely issued to finance: A. equipment. B. research and development. C. inventories.

C. inventories.

Witronix is a rapidly growing U.S. company that has increased earnings at an average rate of 25% per year for the last four years. The present value model that is most appropriate for estimating the value of this company is a: A. Gordon growth model. B. constant growth model. C. multistage dividend discount model.

C. multistage dividend discount model.

Commercial industry classification systems such as the Global Industry Classification Standard (GICS) typically classify firms according to their: A. sensitivity to business cycles. B. correlations of historical returns. C. principal business activities.

C. principal business activities.

Commercial index providers typically classify companies by: A. sensitivity to business cycles. B statistical grouping. C. principal business activity.

C. principal business activity.

Common equity share types ranked from least risky to most risky are: A. callable, putable, option-free. B. option-free, putable, callable. C. putable, option-free, callable.

C. putable, option-free, callable.

The competitive forces identified by Michael Porter include: A. threat of substitutes and rivalry among suppliers. B. power of existing competitors and threat of entry. C. rivalry among existing competitors and power of buyers.

C. rivalry among existing competitors and power of buyers.

Auto manufacturers and home builders would most likely be grouped together in an industry classification system based on: A. dividend yields. B. type of business activity. C. sensitivity to business cycles.

C. sensitivity to business cycles.

If an analyst estimates the intrinsic value for a security is different from its market value, the analyst should most likely take an investment position based on this difference if: A. many analysts independently evaluate the security. B. the security lacks a liquid market and trades infrequently. C. the model used is not highly sensitive to its input values.

C. the model used is not highly sensitive to its input values.

For relative valuation, a peer group is best described as companies: A. in a similar sector or industry classification. B. at a similar stage of the industry life cycle. C. with similar business activities and competitive factors.

C. with similar business activities and competitive factors.

Day and Associates is experiencing a period of abnormal growth. The last dividend paid by Day was $0.75. Next year, they anticipate growth in dividends and earnings of 25% followed by negative 5% growth in the second year. The company will level off to a normal growth rate of 8% in year three and is expected to maintain an 8% growth rate for the foreseeable future. Investors require a 12% rate of return on Day. The value of Day stock today is closest to: A. $18.65. B. $24.05. C.$20.70

C.$20.70 D1 = $0.75 × 1.25 = $0.9375 D2 = $0.9375 × 0.95 = $0.89 $0.89 / (0.12 - 0.08) = $22.25 Value of the stock today = ($22.25 + $0.9375) / 1.12 = $20.70.

An analyst gathered the following information about a company:The stock is currently trading at $31.00 per share.Estimated growth rate for the next three years is 25%.Beginning in the year 4, the growth rate is expected to decline and stabilize at 8%.The required return for this type of company is estimated at 15%.The dividend in year 1 is estimated at $2.00.The stock is undervalued by approximately: A. $15.70 B. $0.00 C.$6.40

C.$6.40