investments ch 6 7 8
List the key variables that affect the P/E ratio and explain the relationship between each variable and the P/E ratio.
(a) growth rate in earnings; the higher the growth rate, the higher the P/E ratio
The Charbridge Inc. has 4 million shares of stock outstanding. The stock has a par value of $1.00 per share and is currently trading at $36 per share. Nicole estimates the investment value of this stock at $38.50. According to this information, the market capitalization of Charbridge is
A) $144,000,000.
JJ Industries has a P/E ratio of 18 and an EPS of $0.93. This means that JJ's stock is currently selling for
A) $16.74 per share.
Martin's Inc. is expected to pay annual dividends of $2.50 a share for the next three years. After that, dividends are expected to increase by 3% annually. What is the current value of this stock to you if you require a 9% rate of return on this investment?
A) $39.47
Walpurg, Inc. paid $1.30 as an annual dividend per share last year. The company is expected to increase their annual dividends by 6% each year. How much should you pay to purchase one share of this stock if you require a 9% rate of return on this investment?
A) $45.93
A round lot consists of
A) 1 share.
Gypsum Corp. pays out 25% of its earnings as dividends. Earnings per share are currently $1.32, book value per share is $16.80, and the market price per share is $22.44. What is the dividend yield?
A) 1.5%
A company has sales of $640,000, net profit after taxes of $23,000, a total asset turnover of 4.17 and an equity multiplier of 1.67. What is the return on equity?
A) 24%
Quick Cement has a return on assets of 8%. If it has $1.5 million in total assets and a total asset turnover of 2, it follows that the firm must have a net profit margin of
A) 4%.
Engines, Inc. declares a 4-for-10 stock split. The stock currently sells for $3 a share. A shareholder who owned 1000 shares of stock prior to the split will now own
A) 400 shares valued at about $7.50 a share.
Which one of the following statements about common stock is true?
A) Common stock can provide attractive capital appreciation opportunities.
Which of the following are characteristics of an expansionary fiscal policy? I. Increased government spending on infrastructure projects. II. Reduction in defense and education budgets. III. Reduction in employment taxes. IV. Reduction in government borrowing.
A) I and III only
Which of the following are measures of liquidity? I. net working capital II. accounts receivable turnover III. current ratio IV. times interest earned
A) I and III only
Commonly used multiples for determining a stock's value include I. price to earnings. II. price to sales. III. price to cash flow. IV. price to dividends.
A) I, II and III only
Which of the following can be considered discounted cash flow methods of stock valuation? I. The constant growth dividend valuation model II. The variable growth dividend valuation model III. The price to cash flow method IV. The cash flow to equity method
A) I, II, and IV only
Investors who conduct industry analyses typically favor companies with strong market positions over companies with less secure market positions because firms with strong market positions tend to I. be price leaders. II. benefit more from economies of scale. III. have better R&D programs. IV. have lower production costs.
A) II and IV only
Marco's just reported an EPS of $1.80 on revenues of $440 million. The company has 13 million shares outstanding. Total assets are $380 million, current liabilities equal $78 million, and long-term debt is $122 million. Net fixed assets are worth $230 million. Given this information, which one of the following statements is correct?
A) Marco's net working capital is $72 million.
In applying the variable-growth dividend valuation model to a company's stock, analysts frequently define the growth rate, g, as equal to
A) ROE multiplied by the firm's retention rate.
High P/E ratios can be expected when investors expect
A) a high rate of growth in earnings.
The par or stated value of common stock is important for
A) accounting purposes only.
Which of the following is most likely to increase in value as the result of a weakening dollar?
A) an ADR for a foreign telecommunications company
When using the constant-growth dividend valuation model, which of the following will lower the value of the stock?
A) an increase in the required rate of return
The decision of how much money to pay out in dividends is made by the
A) board of directors.
Rising corporate profits are likely to have the greatest effect on which of the following industrial sectors?
A) business equipment
The common stock investment strategy that is the most basic strategy and is popular with conservative, quality-conscious individuals looking for competitive returns over the long run is the
A) buy-and-hold strategy.
Rising interest rates tend to
A) contract the level of economic activity.
The date on which an investor must be a registered shareholder of the firm in order to receive a dividend is called the
A) date of record.
Stocks whose prices are expected to remain stable, or even prosper, when economic activity is slowing down are known as
A) defensive stocks.
The consumer electronics industry would be most significantly affected by
A) developments in technology.
P/E ratios could rise even as earnings fall if
A) earnings fall at a faster rate than stock prices.
In a rights offering, the
A) existing stockholders are given the first opportunity to purchase new shares in proportion to their current ownership position.
Investment analysts who believe that a thorough investigation of a company's financial condition, product development, management and other intrinsic factors can discover stocks that are priced above or below their intrinsic value are advocates of
A) fundamental analysis.
The value of a stock is a function of
A) future returns.
For which one of the following situations will the dividend-growth models work especially well?
A) mature firm with a policy of increasing its earnings and dividends at an average rate of 5% per year
From March 2009 to January 2012, stock prices as measured by the S&P 500 Index
A) more than doubled in value.
When a company offers the investing public a certain number of shares of its stock at a certain price, the company is making what is known as a
A) public offering.
Cash flow from operations includes all of the following adjustments to net income EXCEPT
A) purchases of new equipment.
Because common shareholders are entitled to the profits that remain after all of a corporation's other obligations have been met, common shareholders are known as
A) residual owners.
The intrinsic value of a stock provides a purchase price for the stock
A) that is reasonable given the associated level of risk.
In general, the higher the retention ratio
A) the higher the future growth rate of the company.
If a corporation declares a 10% stock dividend, then
A) the share price of the stock will most likely decline by about 9%.
Which one of the following is a leverage measure?
A) times interest earned
The measure that indicates how efficiently assets are being used to support sales is called the
A) total asset turnover.
The price-to-cash-flow method of stock valuation generally
A) uses either EBITDA or operating cash flow from the cash flow statement as a measure of cash flow.
Which of the following will tend to increase transaction costs?
A) using a full service broker
ABC Company stock currently has a market value equivalent to its intrinsic value. Marco perceives that ABC Company is increasing its level of risk and therefore Marco increases his required rate of return on ABC stock. This change in the required rate of return
A) will reduce the intrinsic value of ABC stock to Marco.
The stock listing for a company shows a P/E of 18, a dividend yield of 2.4% and a closing price of $23.76. What is the amount of dividends per share?
B) $0.57
Pilgrim Corp. stock currently sells for $25. The dividend yield is 4% and the dividend payout ratio is 25%. The dividend is ________ and the earnings per share are ________.
B) $1.00; $4.00
Global Warning's EPS for the current year is $2.75 and its current P/E ratio is 50. You have forecasted that EPS will grow by 10% but the P/E ratio will fall to 40. What do you expect the price of a share of GW's stock to be at the end of next year?
B) $121
Hallowell Inc. has free cash flow of $2.5 million and 1.25 million shares outstanding. If you believe the price to cash flow ratio for this company should be 11, what is the highest price you should pay for the stock?
B) $22.00
Zephyr Inc. sells wind based systems for generating electricity. The company pays no dividends, but you estimate the stock will be worth $50 per share 5 years from now and you require a 15% rate of return for stock investments of this type. What price should you be willing to pay for this stock?
B) $24.86
MBA Inc. will pay a dividend for the first time at the end of 2016. It projects the following dividend per share: 2016 $1.50 2017 $2.00 2018 $2.50 Beginning with 2016 dividends will grow at 4% per year. The required rate of return is 12%. The intrinsic value of MBA shares is
B) $27.85.
Lindor Inc.'s $100 par value preferred stock pays a dividend fixed at 8% of par. To earn 12% on an investment in this stock, you need to purchase the shares at a per share price of
B) $66.67.
Early in 2015, Mathew is analyzing shares of Janeff Corp. He expects the following dividends per share (end of year). 2015 $1.00 2016 $1.25 2017 $1.50 He expects 2017 earnings per share to be $4.50 and Janeff's P/E ratio to be 20. His required rate of return for this stock is 12%. He should pay no more than
B) $67.02 per share.
Equinox Bioengineering began operations in January of 2015. In its first year of operation, sales were $85 million and the net loss was $(5.1 million). Free cash flow was $(300,000). Equinox has 10 million shares outstanding. If you think the price to sales ratio for this company should be 1 or less, what is the most you should pay per share.
B) $8.50
Which one of the following is a correct equation to calculate earnings per share?
B) (profit margin)(total asset turnover)(equity multiplier)(book value per share)
Amanda purchased stock in a German firm at a price per share of 35 euros when the U.S. $/euro exchange rate was $1.20. After six months, Ann sold the stock for 37 euros when the U.S. $/euro exchange rate was $1.10. The stock does not pay a dividend. What is Ann's rate of return on this investment?
B) -3.10%
Most analysts would not feel comfortable forecasting a firm's future earnings for more than
B) 1 to 3 years.
A company has a net loss for the year of $(10,000,000) and a deficit (negative equity) of $(1,000,000). ROE will be
B) 1000% and meaningless.
Ivonne has bought shares of RIO, Inc. stock for $25.00 per share. She expects a 1.00 dividend at the end of this year. After 2 years, she expects to receive a dividend of $1.25 and to sell the stock for $28.75. What is Ivonne's required rate of return?
B) 11.6%
The risk-free rate of return is 2.2 percent, the expected market return is 11 percent, and the beta for Solstice, Inc. is 1.12. What is Solstice's required rate of return?
B) 12.05%
Macoun Co.'s most recent EPS were $3.25 and they are expected to grow at a rate of 5% for the near future. The stock currently sells for $48.75. What is the price to forecasted earnings ratio?
B) 14.30
If stocks earn an average rate of return of 12 %, their value doubles every
B) 6 years.
To determine whether a pharmaceutical company's profitability ratios indicate strength or weakness, we should I. compare them to others in the same industry. II. compare them to companies in unrelated industries such as energy or banking. III. compare them to previous years. IV. compare them to absolute standards established by the CFA Institute.
B) I and III only
Which of the following is a readily available source of industry comparisons? I. Standard & Poor's II. MSN Money, Yahoo Finance and other financial portals III. Mergent (Moody's) IV. The Wall Street Journal
B) I, II and III only
The three steps in determining a stocks intrinsic value are I. estimating the stocks future cash flows. II. estimating the risk associated with future cash flows. III. careful analysis of patterns in the stocks recent price history. IV. estimating an appropriate discount rate to apply to future cash flows.
B) I, II and IV only
Which of the following will affect the firm's future cash flows? I. state of the economy II. state of the industry III. the firm's recent and current earnings IV. new products in the firm's pipeline
B) I, II and IV only
Which of the following are considered in the ratio analysis of a firm? I. profitability II. market share III. liquidity IV. leverage
B) I, III and IV only
Which of the following periods provided particularly high returns to stock investors?
B) March 2009-December 2014
Which of the following best fits the description "defensive stock"?
B) Walmart
Which one of the following is likely to have a negative effect on stock prices?
B) a decrease in the money supply (M2)
Generally, the market price of a stock is
B) above its book value.
Reinvested dividends
B) are taxed at the time the dividend is paid.
The balance sheet value of a firm's assets minus the balance sheet amount of its liabilities is known as
B) book value.
Which strategy applies to investors who fund long-term goals with high-quality stocks which they retain for the entire investment period?
B) buy and hold
The PEG ratio
B) compares the price/earnings ratio to the rate of growth of the company's earnings.
To take advantage of the opportunity to acquire additional shares of a company's stock without incurring any brokerage commissions, many investors participate in
B) dividend reinvestment plans.
Since each share of common stock represents ownership in a company, shares of common stock are often referred to as
B) equity securities.
Fundamental analysis involves the in-depth study of the
B) financial condition and operating results of a given firm.
If a firm has an ROA of 10% and an ROE of 10%, then the
B) firm has no financial leverage.
In the price/earnings approach to stock valuation,
B) forecasted EPS are typically used.
Which of the following contributes to high P/E ratios?
B) high rate of earnings growth
Typical characteristics of growth stocks include
B) high rates of growth in operations and earnings.
Top-down security analysis
B) includes economic, industry, and fundamental analysis.
Investors seeking current income that tends to increase over time should purchase
B) income stocks.
The government has an expansionary economic policy when it
B) increases government spending.
The value that investors place on a stock is called its
B) investment value.
Aggressive stock management
B) involves active stock trading in the short-term in the quest for capital gains.
The variable-growth dividend valuation model
B) is valuable because it accounts for the general growth patterns of most companies.
Substituting EBITDA for EBIT when computing the times interest earned ratio will make the company appear
B) less leveraged.
From October 2007 to March 2009, stock prices as measured by the S&P 500 Index
B) lost more than half their value.
Since 2003, dividends have been taxed at the same rate as capital gains. As a result,
B) many companies have increased the percentage of earnings paid out as dividends.
Stocks that are readily available to the general public and that are bought and sold on the open market are known as
B) publicly traded issues.
Aggressive stock management focuses on the pursuit of
B) short-term capital gains.
Heather believes that by carefully examining a company's fundamentals and by applying the best valuation models she can identify stocks whose market prices are lower than their intrinsic values. In order for this to be true
B) some stocks must be incorrectly priced.
Which stage of an industry's growth cycle is interesting only for potentially high dividend payouts?
B) stability or decline
Dividend yield is calculated by dividing
B) the annual dividend per share by the market price of one share of stock.
An investor should purchase a stock when
B) the expected rate of return equals or exceeds the required return.
Well managed companies rarely reach the decline stage because
B) they continuously develop new products to meet the needs of changing markets.
Stock which has been issued and subsequently reacquired by the issuing corporation is called
B) treasury stock.
What are the effects of a company repurchasing its own stock as Treasury shares?
B) usually positive in the short term but uncertain over the long term
Columbus Co.'s sales revenue for the most recent quarter was $2.5 million and cost of goods sold was $1.5 million. If sales grow by 15% in the next quarter and all ratios remain the same, gross profit will be
C) $1.15 million.
The common stock of Rob's Discount Furniture is currently selling at $65.20 a share. The company adheres to a 60% dividend payout ratio and has a P/E ratio of 19. There are 42,000 shares of stock outstanding. What is the amount of the annual net income for the firm?
C) $144,126
The current annual sales of Flower Bud, Inc. are $178,000. Sales are expected to increase by 4% next year. The company has a net profit margin of 5% which is expected to remain constant for the next couple of years. There are 10,000 shares of common stock outstanding. The market multiple is 16.4 and the relative P/E of the firm is 1.21. What is the expected market price per share of common stock for next year?
C) $18.37
Markhem Enterprises is expected to earn $1.34 per share this year. The company has a dividend payout ratio of 40% and a P/E ratio of 18. What should one share of common stock in Markhem Enterprises be selling for in the market?
C) $24.12
Westlake Industries has total assets of $42.5 million, total debt of $29.3 million, and $2.4 million of 6% preferred stock outstanding. If the company has 250,000 shares of common stock outstanding, its book value per share would be
C) $43.20.
If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company also has $10,000,000 in debt. The company's market capitalization is
C) $50,000,000.
For the period 2000 through 2009, the average annual price change for stocks in the S&P 500 index was
C) -1%.
If the market multiple is 20.24 and the P/E ratio of a company is 24.5, then the stock's relative P/E is
C) 1.21.
What is the required rate of return on a common stock that is expected to pay a $0.75 annual dividend next year if dividends are expected to grow at 2 percent annually and the current stock price is $8.59?
C) 10.73%
Tiffany owned 1000 shares of GIA stock which was selling for $1.50 per share when the company declared a 1 for 10 reverse split. After the split, Tiffany owned
C) 100 shares worth approximately $15 per share.
Early in 2015, Maria bought shares of MBA Inc. at $27.85 per share. She received the following dividends per share (end of year). 2015 $1.50 2016 $2.00 2017 $2.50 Immediately after receiving the 2017 dividend, she sold the stock for $32.50 per share. Her internal rate of return on this investment was
C) 11.99%.
Newton, Inc. just paid an annual dividend of $0.95. Their dividends are expected to increase by 4% annually. Newton Company stock is selling for $11.54 a share. What is the required rate of return on this stock implied by the dividend-growth model?
C) 12.6%
Nadine Enterprises has total assets of $240,000, a debt-equity ratio of 0.60, and a return on assets of 9%. What is the return on equity?
C) 14.4%
Over the last 5 years, Spencer Inc.'s earnings have grown at an annual average rate of 9%. Current EPS are $1.80 and the company's stock recently sold for $36 per share. Spencer's PEG ratio is
C) 2.22
GLOO stock;s P/E ratio is 45 at a time when the markets P/E ratio is 15. GLOOs relative P/E ratio is
C) 3.
The common shares of the Hiboux Ltd have a book value of $21.60 and a market value of $28.60. The company pays $0.28 in dividends each quarter. What is the dividend yield?
C) 3.9%
Pilgrim Corp. stock currently sells for $25 per share? The annual dividend payment is $1.00 per share and earnings per share are $3.00. The dividend yield is ________ and the dividend payout ratio is ________.
C) 4%; 33%
The Hopkinton Company just paid $2.25 as its annual dividend. The dividends have been increasing at a rate of 5% annually and this trend is expected to continue. The stock is currently selling for $63.60 a share. What is the rate of return on this stock?
C) 8.7%
Which of the following would be typical of a Statement of Cash Flows for a healthy firm in a sustainable business?
C) Cash flow from operations is positive, cash flows from investment activities and financing activities are negative.
EBITDA is an acronym for
C) Earnings Before Interest, Taxes, Depreciation, and Amortization.
The risk free rate is 2%. The expected rate of return on the market is 12%. Beta and the expected rate of return for four stocks are as follows.: ABC .8 , 10%; DEF 1, 12%; GHI 1.2 , 13%, and JKL 2, 22%. Which of these stocks should not be purchased?
C) GHI
Which of the following best fits the description "blue chip stock"?
C) General Electric
Which of the following are true about stock market returns as measured by the S&P 500 index? I. In 2008 alone stocks in the index lost approximately 36% of their value. II. $10,000 invested in the index in March 2009 would have been worth more than $20,000 by the end of 2014. III. From the beginning of 2000 to the end of 2010, the index more than doubled in value. IV. Both stock and real estate prices recovered recovered strongly in the period between early 2009 and late 2014.
C) I ,II and IV only
Advantages of using American Depositary Receipts to participate in foreign markets include I. lower transaction costs than for direct foreign stock purchases. II. reduced exposure to foreign exchange risk. III. dividends are paid in U.S. dollars. IV. quotations are readily available from U.S. sources such as Yahoo Finance or MSN Money.
C) I, II and III only
Factors considered in making a decision on a firm's dividend include the I. cash position of the firm. II. firm's growth prospects. III. the expectations of the shareholders. IV. minimum dividends required by law.
C) I, II and III only
Stock quotes on most Internet service providers such as Yahoo Finance include I. the highest and lowest price over the last 52 weeks. II. the closing price for the previous trading day. III. the opening price for the day. IV. the bid price and ask price.
C) I, II and III only
Which of the following are characteristics of blue-chip stocks? I. solid balance sheets II. generous dividend yields III. immunity from bear markets IV. some growth potential
C) I, II and IV only
Which of the following are key inputs to determining the intrinsic value of an asset? I. the required rate of return II. future cash flows III. current stock price IV. timing of future cash flows
C) I, II and IV only
Which of the following may be signs of future problems for a company? I. Inventories growing faster than sales. II. Rapidly increasing debt to equity ratio. III. Cash flow from operations is higher than net income. IV. Current liabilities increasing faster than current assets.
C) I, II and IV only
Which of the following statements concerning the constant-growth dividend valuation model is (are) correct? I. One simple method of estimating the dividend growth rate is to analyze the historical pattern of dividends. II. The expected total return equals the return from capital gains plus the return from dividends paid. III. The model is applicable to growth firms with initially high growth rates. IV. The intrinsic value calculated using this method can change from one investor to another if their risk-return payoffs differ.
C) I, II and IV only
Which of the following tend to signal that stock prices are likely to rise in the future? I. Employment increases after several months of recession. II. Interest rates are low compared to the recent past. III. Major market indexes have just reached record highs. IV. Housing starts increase after several months of decline.
C) I, II and IV only
Which of the following would be found on a company's income statement? I. cost of goods sold II. interest expense III. cash flow from operations IV. earnings before taxes
C) I, II and IV only
Which of the following statements concerning the Price to Cash-Flow approach to stock valuation are true? I. The Price to Cash-Flow method works just as well for non-dividend paying stocks as it does for dividend-paying stocks. II. The Price to Cash-Flow calculate s the intrinsic value of a stock as the present value of future cash flows. III. The Price to Cash-Flow ratio divides the market price of one share of stock by cash flow per share. IV. The Price to Cash-Flow method does not directly calculate the intrinsic value of a share.
C) I, III and IV only
Which of the following are advantages of the buy and hold strategy? I. rapid accumulation of wealth II. low transaction costs III. capital gains taxed at the long-term rate IV. portfolio requires less time and energy to manage than for most other strategies
C) II, III and IV only
ADRs I. are shares of U.S. companies traded on foreign exchanges. II. are shares of foreign companies traded on U.S. exchanges. III. pay dividends in U.S. dollars if they pay dividends. IV. are subject to exchange rate risk.
C) II. III and IV only
Worcester Corporation has a P/E ratio of 15. Natick Corporation is in the same industry as Worcester, but has a P/E ratio of 20. Possible interpretations of this discrepancy include
C) Investors expect Natick to grow faster than Worcester.
John requires a 12% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock. Which of the following will happen?
C) John will not be able to buy the stock unless the price changes.
Which one of the following statements is correct?
C) Stock prices are often start to rise before the end of a recession.
Which one of the following statements concerning accounting reports is correct?
C) The statement of cash flows identifies both the sources and the uses of cash.
The dividend valuation model (DVM) cannot accommodate which of the following assumptions?
C) a constant growth rate of dividends greater than the required rate of return
One of the basic premises of security analysis, and in particular fundamental analysis, is that
C) all securities have an intrinsic value that their market value will approach over time.
One motive for issuing classified stock with different voting rights is to
C) allow the company's founders to retain control of the company.
Which of the following will lead to an increase in earnings per share?
C) an increase in return on equity if book value per share stays the same.
One characteristic of mid-cap stocks is that they
C) are fairly good-sized companies that offer attractive return opportunities.
The inventory turnover rate for a firm is 14.5 as compared to the relevant industry rate of 13.2. In this case, the firm is
C) averaging fewer days of sales in inventory than the industry.
From 1976 through 2014, the dividend yield on stocks has been ________ the coupon yield on corporate bonds.
C) consistently lower than
13) An individual stock generally provides a
C) current income that is less predictable than that available from other types of investments.
The normal sequence in performing top down analysis is
C) economy, industry, company.
The single most important issue in the stock valuation process is a company's A) past earnings record.
C) expected future returns.
The most uncertain value used in the Capital Asset Pricing Model is
C) expected return on the market.
Which of the following businesses will be negatively impacted by a strong dollar?
C) exports
Which of the following businesses will be positively impacted by a weak dollar?
C) exports
Even if a company does not officially follow a fixed-dividend policy, dividend payments are
C) fairly stable from one time period to another.
Companies with strong earnings but limited growth opportunities
C) generally pay high dividends.
Which measure of the business cycle represents the market value of all goods and services produced in a country over a twelve-month period?
C) gross domestic product
A company that wants to maintain both a constant growth rate in dividends and a constant payout ratio will have to
C) grow earnings at the same rate as dividends.
The U.S. stock market
C) is decreasing as a percentage of the world's equity market.
If a company's ROA is high, then an investor can assume that the company
C) is profitable.
Which one of the following is a characteristic of blue chip stocks?
C) long and stable dividend and earnings records
A lending institution would prefer that a firm have a ________ debt-equity ratio and a ________ times interest earned ratio.
C) lower; higher
Which stage of an industry's growth cycle is most influenced by economic events?
C) mature growth
For which one of the following situations will the price-to-sales valuation model work but the dividend and cash flow models will not?
C) newly-formed biotechnology company with negative earnings
The Highlight Company has a book value of $56.50 per share, and is currently trading at a price of $59.00 per share. You are interested in investing in Highlight, and have just used a present-value based stock valuation model to calculate a present (intrinsic) value of $55.00 per share for Highlight's stock. Assuming that your calculations are correct you should
C) not buy the stock, because the present value is less than the market price per share.
Another term for the stated value or face value of a stock is its
C) par value.
Which one of the following is is most likely to increase the price of a stock?
C) rapid growth in earnings
A comparison of a firm's current financial ratios to those of prior years allows one to
C) see trends that are developing.
The Federal Reserve through monetary policy can help expand the economy by
C) supporting a moderate growth of the money supply.
To determine whether a company is using leverage effectively, an analyst should consider
C) the debt to equity and times interest earned ratios.
Which of the following approaches to stock valuation is NOT based on a multiple of some figure from the financial statements?
C) the dividends-growth model
Which of the following variables used in determining a stock's intrinsic value can be known with the greatest level of confidence?
C) the risk free rate of return
The intrinsic value of a stock is greater than its current market price if
C) the stock's IRR exceeds the required rate of return.
The constant-growth dividend valuation model is best suited for use with
C) the stocks of mature, dividend-paying companies.
The rapid expansion phase of an industry is characterized by
C) willingness of investors to buy almost any stock associated with the industry.
A total asset turnover of 3 means that every
D) $1 in assets produces $3 in sales.
DMC3 Inc. will pay no dividend for 2016 or 2017. At the end of 2018, it will pay a dividend of $1.50. Thereafter dividends will grow at 4% per year. The required rate of return is 10%. The intrinsic value of DMC3 shares is (assume you are at the beginning of 2016)
D) $20.66.
The Merry Co. has current annual sales of $350,000 and a net profit margin of 6%. Sales are expected to increase by 5% annually while the profit margin is expected to remain constant. What is the projected after-tax earnings for two years from now?
D) $23,153
Michelak's Maritime Industries has relatively stable earnings and pays an annual dividend of $3.00 per share. This dividend has remained constant over the past few years and is expected to remain constant for some time to come. If you want to earn 11% on an investment in the common stock of Michelak's, how much should you pay to purchase each share of stock?
D) $27.27
A company has an annual dividend growth rate of 5% and a retention rate of 40%. The company's dividend payout ratio is
D) 60%.
When dividend payout ratios are higher than ________, investors should investigate whether or not they are sustainable.
D) 75%.
A company has sales of $640,000, net profit after taxes of $23,000, and a total asset turnover of 2.5. What is the return on assets?
D) 9.0%
Rob owns 300 shares of Blackwood common stock valued at $9 a share. Blackwood has declared a 3-for-1 stock split effective tomorrow. After the split, Rob will own
D) 900 shares valued at about $3 a share.
As a general rule, which one of the following statements concerning the various values of common stock is correct?
D) Book values are usually below market values.
Which of the following measures excludes non-cash charges against income?
D) EBITDA
Which one of the following statements about common stock is correct?
D) Each share of common stock of a given class entitles the holder to an equal ownership position and an equal vote in the corporation.
Which of the following directly impact return on equity? I. net profit margin II. leverage III. return on assets IV. cash flow from investment activities
D) I, II and III only
Which of the following are benefits related to stock ownership? I. ease of trading II. attractive inflation-adjusted rates of return III. guarantee of long-term positive returns IV. affordability
D) I, II and IV only
Financial ratios I. allow comparisons across firms without concern over firm size. II. can compare a firm's operating and financial status to industry norms. III. provide insights into a companies future. IV. look at the liquidity, activity, leverage, profitability and market measures of a firm.
D) I, II, III and IV
Which of the following factors are considered when analyzing an industry? I. the nature and conditions of governmental regulations II. the involvement and relations, if any, with labor unions III. the development of new technologies relevant to the industry IV. the extent of competition within the industry
D) I, II, III and IV
Which of the following variables affect the P/E ratio? I. capital structure of a firm II. amount of dividends to be paid III. inflation rate IV. earnings rate of growth
D) I, II, III and IV
In the Capital Asset Pricing Model, which of the following factors are used to determine the required rate of return? I. the risk-free interest rate II. future cash flows III. expected return on the market portfolio IV. beta
D) I, III and IV only
The intrinsic value of a security is based on the I. amount of risk. II. current market value of the security. III. discount rate applicable to the security. IV. estimated future cash flows from the security.
D) I, III and IV only
Which of the following accounting practices are potentially misleading or even fraudulent? I. writing off goodwill as an extraordinary loss II. using accrual rather than cash basis reporting III. off-balance sheet liabilities IV. recognizing revenues prematurely
D) I, III and IV only
Which of the following strategies appeal to investors who place primary emphasis on the storage of value aspects of an investment? I. buy and hold II. short-term trading III. quality long-term growth IV. consistent dividend record
D) I, III and IV only
Which of the following would be found on a company's balance sheet? I. Accounts receivable II. Interest expense III. Property plant and equipment IV. Total stockholders' equity
D) I, III and IV only
Which of the following are typical characteristics of small cap stocks? I. strong balance sheets II. market cap less than $2 billion III. potential for high returns along with high risk IV. potentially dramatic changes in their earnings
D) II, III and IV only
James is willing to settle for a 10% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock. Which of the following will happen?
D) James will be happy to buy the stock for less than he was willing to pay.
The required rate of return necessary for the dividend valuation model can be estimated using
D) any or all of the above.
Since 2003, most dividends are taxed
D) at the same rate as capital gains.
Which of the following is unlikely to be found in an internet stock quotation?
D) broker's commission per 100 shares
Assume the Plum Corporation has two different issues of common stock. One issue carries voting rights, and the other issue does not. In this situation, Plum is said to have issued
D) classified stock.
One stock valuation model holds that the value of a share of stock is a function of its future dividends, and that the dividends will increase at an annual rate which will remain unchanged over time. This stock valuation model is known as the
D) constant growth dividend valuation model.
Income stocks are well suited for retirees because
D) dividends tend to increase over time.
Many companies increased their dividends
D) during the market recovery of 2009-2011.
Characteristics of established growth companies include all of the following EXCEPT
D) high dividend payout ratios.
The basic motivation of security analysis is to help investors
D) identify mispriced stocks.
When a corporation declares a stock split, it usually does so because
D) it wants to make its stock more affordable to average investors.
Which of the following will most directly influence a company's market value?
D) its future cash flows
The major forces behind earnings per share are
D) net income and the number of shares outstanding.
Over the last year, a firm's earnings per share increased from $1.20 to $1.40, its dividends per share increased from $0.50 to $0.60, and its share price increased from $21 to $24. The firm maintained a relative P/E of 1.10 over the entire time period. Given this information, it follows that the
D) overall market P/E is declining.
An internal rate of return (IRR) is the discount rate that
D) produces a present value of future benefits equal to the market price of a stock.
Which stage of an industry's growth cycle offers the greatest opportunity for an investor who is seeking capital gains?
D) rapid expansion
Investors are most interested in which one of the following ratios?
D) return on equity
Which category of stocks represents the highest level of risk?
D) small-cap
Which one of the following investment strategies would NOT appeal to an investor who is most concerned with storage of value?
D) speculation and short-term trading
Stocks related to computers and the Internet are classified as
D) tech stocks.
The extraordinary run up in stock prices during the late 1990s primarily affected
D) technology stocks.
A firm with a price to sales ratio of 1 would usually be considered
D) undervalued.
Amgens debt to equity ratio is .54 while Walmarts is .68. By comparing these ratios we can conclude
D) very little because the firm's are in different industries.
A stock will be an attractive investment if the required rate of return exceeds the expected rate of return.
FALSE
A temporary decline in earnings per share usually results in a temporary reduction of dividends.
FALSE
Companies with high P/E ratios tend to also have high dividend payout ratios.
FALSE
Generally speaking, the higher the price-to-sales ratio, the better.
FALSE
If the annual dividend on a stock never changes, its price will never change.
FALSE
None of the commonly used valuation approaches can assign a value to a company with no earnings.
FALSE
One of the easiest aspects of the dividend valuation model (DVM) is specifying the appropriate growth rate for a firm's dividends over time.
FALSE
Stocks trading at high price to book value multiples may be especially attractive to bargain hunters.
FALSE
The dividend valuation model estimates the value of a share of stock as the future value of all dividends.
FALSE
The first step in predicting a stock's future price is to forecast profits.
FALSE
The free cash flow to equity approach does not require present value calculations.
FALSE
The greater the perceived risk of an asset, the lower the expected rate of return.
FALSE
The investor's internal rate of return is always equal to the firm's rate of return on equity.
FALSE
The most important factors influencing a stock's current price are its past earnings and dividends.
FALSE
The rate of dividend growth can be estimated by multiplying the return on equity rate by the dividend payout ratio.
FALSE
The required rate of return estimated by the Capital Asset Pricing Model is not suitable for use in dividend valuation models.
FALSE
The value of a stock using the price to cash flow approach is to multiply the P/E ratio times operating cash flow divided by the number of shares outstanding.
FALSE
To use the Price-to-Sales valuation approach you also need to know the after tax profit margin.
FALSE
Tureves S.A. is a French biotechnology company that has developed promising therapies for hair loss, obesity, and wrinkled skin. Sales have doubled in each of the last three years, but so far, the company has yet to turn a profit. Which common procedures would be most, and least appropriate to value Tureves' ADRs.
Such a speculative company would be extremely difficult to value, but the price-to- sales ratio would be the best method, and the price-to-cash-flow ratio might be of some help. Since there are no dividends or earnings, dividend valuation and price-to-earnings methods would not be helpful.
A company's estimated future earnings and its P/E ratio can be used to estimate the stock's future price.
TRUE
A decline in earnings that investors expect to be temporary may actually increase a firm's P/E ratio.
TRUE
A drawback to the price-to-cash-flow method of valuation is that there is no generally accepted cash flow measure.
TRUE
A stock's internal rate of return (IRR) is the discount rate that cause the present value of future dividends and the price at which a stock is expected to be sold to equal the current price of the stock.
TRUE
A stock's value depends on future cash flows.
TRUE
Both beta and the expected return on the market portfolio incorporate risk into the Capital Asset Pricing Model.
TRUE
High price/sales multiples often go with high profit margins.
TRUE
If net income rises, but the number of shares outstanding remains the same, EPS will rise.
TRUE
Neither the P/E approach nor the cash flow to equity approach rely on dividends as the key input into the valuation of a stock.
TRUE
One method of estimating the dividend growth rate is to calculate the discount rate that equates today's dividend with the dividend paid several years ago.
TRUE
The approach to stock valuation which holds that the value of a share of stock is a function of its future dividends is known as the dividend valuation model (DVM).
TRUE
The common-size income statement expresses every item on the income statement as a percentage of sales.
TRUE
The constant growth dividend valuation model works best for mature companies with a long record of paying dividends.
TRUE
The dividend valuation model (DVM) is very sensitive to the growth rate (g) being used, because it affects both the model's numerator and its denominator.
TRUE
The efficient market hypothesis holds that a stock's intrinsic value and market value are essentially the same.
TRUE
The estimated price of a stock in the future is important because it includes the projected capital gain on the stock.
TRUE
The free cash flow to equity approach does not require that a stock pay dividends.
TRUE
The growth rate of dividends cannot be permanently greater than the required rate of return.
TRUE
The intrinsic value of a zero-growth stock can be found simply by dividing the dividend by the required rate of return.
TRUE
The intrinsic value of an asset equals the present value of all future cash flows at a given discount rate.
TRUE
The key to the future financial success of a company lies in the sales growth and the net profit margin.
TRUE
The rate of growth can exceed the required return during the variable-growth period without invalidating the variable growth dividend valuation model.
TRUE
The required rate of return denotes the minimum rate of return an investor should expect.
TRUE
The sales forecast depends on factors both internal and external to the firm.
TRUE
There is no assurance that the actual rate of return on an asset will be similar to the projected rate of return.
TRUE
Explain how the time value of money concept is used in stock valuation.
The intrinsic value of a stock is based on the current discounted value of all future dividends plus the discounted value of the sale price of the stock at a future point in time.
How can you determine the current value of a non-dividend paying stock?
There are several methods you can use such as the price to cash flow, price/earnings approach, price to sales, or the price to book ratio method.