Investments Exam 2
The EMH states that
the market is efficient with respect to some particular information if that information is not useful in earning a positive excess return.
A price-book ratio is measured as
the market value of a company's outstanding common stock divided by its book value of equity
The simplicity of the constant perpetual growth model makes it
the most popular dividend discount model -it should be applied only to companies with stable earnings and dividend growth.
A company's return on equity is greater than its required return on equity. The earnings multiplier (P/E) for that company's stock is most likely to be positively related to the
Earnings retention ratio
A Yankee bond is issued by a U.S. corporation, denominated in U.S. dollars, and is sold outside of the U.S.
False
Investors buy at the bid price and sell at the ask price.
False
In applying the constant growth dividend discount model, a stock's intrinsic value will do which of the following when the required rate of return is lowered?
Increase.
Weak form:
Past price and volume information.
The residual income model separates the value of the firm into two basic components. What are these two components?
The current book value and the present value of future earnings.
The clean surplus relation says that
The difference between earnings and dividends equals the change in book value.
Semistrong form:
All publicly available information.
analysts frequently use a two-stage dividend growth model when:
Companies experience temporary periods of unusually high or low growth, where growth eventually converges to an industry average
If a market is efficient
earning these excess returns is not possible, except by luck. The controversy surrounding the EMH centers on this assertion.
The fact that professional money managers have been unable to beat the market supports the notion that markets are generally rather
efficient
The free cash flow (FCF) model values the
entire firm by concentrating on firm FCF.
Dividend models require an
estimate of future growth.
Price ratios are widely used by
financial analysts.
Scenario 4: The two-stage dividend growth model assumes that a firm will initially grow at a rate g1 for T years, and thereafter, it will grow at a rate g2 < k during a perpetual second stage of growth.
gfgh
Financial analysts often refer to high-P/E stocks as
growth stocks and low-P/E stocks as value stocks.
companies with high expected earnings growth will have
high P/E ratios, which is why high-P/E stocks are referred to as growth stocks.
A high P/S ratio suggests
high sales growth, while a low P/S ratio suggests low sales growth.
the sustainable growth rate
is measured as a firm's return on equity times its retention ratio
Scenario 3: Dividends grow at a constant rate of g forever.
jlkj
Scenario 6: The two-stage dividend growth model assumes that a firm will initially grow nonconstantly for T years, and thereafter, it will stay constant during a perpetual second stage of growth.
k;l
Scenario 2: Dividends grow at a constant rate of g for T periods.
kl;
A basic price ratio for a company is its
price-book (P/B) ratio
Which one of these rates is considered the bellwether rate for short term bank commercial loans?
prime
A price-sales ratio is calculated as
the price of a company's stock divided by its annual sales revenue per share.
A P/E ratio is calculated as
the ratio of a firm's stock price divided by its earnings per share (EPS).
The two-stage growth model can be used with
two separate growth rates for two distinct time periods, or with growth rates that linearly converge toward the constant growth rate -this is called the H-model
Low-P/E stocks are referred to as
value stocks because they are viewed as cheap relative to current earnings.
The constant growth dividend discount model would typically be most appropriate for valuing the stock of which of the following?
Moderate growth, mature company.
NYSE Circuit Breakers Circuit breakers implemented by the NYSE were designed to
Slow a market decline
You purchase a stock that you expect to increase in value over the next year. One year later, after the discovery that the CEO embezzled funds and the company is close to bankruptcy, the stock has fallen in price. Which of the following statements is true?
This is not a violation of market efficiency.
The discount rate is the rate charged by the Federal Reserve to commercial banks for overnight reserve loans.
True
The efficient markets hypothesis (EMH) asserts that
as a practical matter, organized financial markets like the New York Stock Exchange are efficient.
Which one of the following relates to the possibility that a bond issuer might not repay the bond's principal as stated in the bond indenture agreement?
default premium
Scenario 7: The two-stage dividend growth model assumes that a firm will initially grow at a rate g1 for T years, and thereafter, it will stay constant during a perpetual second stage of growth.
n,n
Dividend discount models value common stock as the
sum of all expected future dividend payments, where the dividends are adjusted for risk and the time value of money.
A high P/B ratio suggests
that a company is potentially expensive, while a low P/B value suggests that a company may be cheap.
Scenario 1: Dividends stay constant over time:
P0=D/K
Testing market efficiency is difficult because:
(1) the risk adjustment problem, (2) the relevant information problem, (3) the dumb luck problem, and (4) the data snooping problem.
The constant growth dividend discount model will not produce a finite value if the dividend growth rate is which of the following?
Above the required rate of return.
Strong form:
All information of any kind, public or private.
Which of the following assumptions does the constant growth dividend discount model require? I. Dividends grow at a constant rate. II. The dividend growth rate continues indefinitely. III. The required rate of return is less than the dividend growth rate.
I and II only
Which of the following is a possible explanation of the January effect? I. Institutional window dressing II. Bonus demand III. Tax-loss selling
I and III only
The Treasury yield curve: I. is generally expected to be flat. II. plots yields against maturities. III. is the same as the term structure of interest rates. IV. reveals the cost of risk-free borrowing.
II and IV only
Which of the following statements concerning market efficiency is true?
If the market is semistrong-form efficient, it is also weak-form efficient.
Assume the market is semi strong-form efficient. The best investment strategy is to
Invest in an index fund
Which of the following is not true concerning the efficient markets hypothesis?
Markets with wide fluctuations in prices cannot be efficient.
The SEC has regulations that prohibit trading on inside information. If the market is -form efficient, such regulation is not needed.
Strong
Which of the following is an advantage of the enterprise value ratio as compared to price ratios?
The EV ratio captures the value of both firm debt and equity.
Residual income is
The actual earnings less expected earnings.
A price-cash flow ratio is measured as
a company's stock price divided by its cash flow per share.
The residual income model is a method that
can be used to value a share of stock in a company that does not pay dividends.
A price-sales ratio focuses on a
company's ability to generate sales growth.
Most analysts agree that cash flow can provide more information than net income about a
company's financial performance.
The most popular price ratio is a
company's price-earnings ratio.
A particularly simple form of the dividend discount model is the case in which
dividends grow at a constant perpetual growth rate
Researchers who study efficient markets often ask whether
it is possible to "beat the market." -We say that you beat the market if you can consistently earn returns in excess of those earned by other investments having the same risk.
Scenario 5: The two-stage dividend growth model assumes that a firm will initially grow nonconstantly for T years, and thereafter, it will grow at a rate g < k during a perpetual second stage of growth.
jkh
The dividend discount model is
often simplified by assuming that dividends will grow at a constant growth rate
An alternative view of a company's performance is provided by its
price-sales (P/S) ratio.
The two-stage growth model can be used where there is a period
with non-constant dividend growth and a period of constant dividend growth.