Deck 10: Equity Valuation Tools

Question 1

Which of the following is most accurate?

A) The present value of a stock is usually less than the current stock price.
B) The present value of a stock equals the current stock price.
C) The future value of a stock is greater than the current stock price.
D) The future value of a stock is less than the current stock price.

Answer 1

The present value of a stock equals the current stock price.

Question 2

In valuing a stock, in the long run ____ are (is) most important.

A) earnings
B) dividends
C) psychology
D) risk assessment

Answer 2

earnings

Question 3

A stock sells for $30, has a required rate of return of 12%, and current earnings of $2.50. Its present value of growth opportunities (PVGO) is

A) $20.83
B) $9.17
C) $30.00
D) $250.00

Answer 3

$9.17

Question 4

An investor assigns a required rate of return of 13% to a stock selling for $45 with a P/E ratio of 22. What percentage of the firm's current value comes from growth opportunities?

A) 25%
B) 45%
C) 55%
D) 65%

Question 5

A stock sells for $45. An analyst assigns a required rate of return of 12% to the stock. If the analyst subsequently raises the required rate of return, the present value of growth opportunities will

A) decrease
B) be unaffected
C) increase
D) initially decrease but return to the original value

Question 6

EBITDA is also called

A) cash flow from operations
B) net income
C) operating income
D) operating cash flow

Question 7

Free cash flow differs from cash flow from operations in that it accounts for

A) interest expense
B) capital expenditures
C) dividends
D) loan proceeds

Question 8

An advocate of the PEG ratio usually looks for a ratio less than

A) 0
B) 1.0
C) 10.0
D) 100.0

Question 9

GARP stands for

A) growth at a reasonable price
B) generalized auto regressive program
C) guaranteed account review procedure
D) gross accounting residual process

Question 10

A firm has a return on equity of 12% and a dividend payout rate of 45%. Its sustainable growth rate is

A) 5.4%
B) 6.6%
C) 21.8%
D) 26.7%

Question 11

You calculate that a stock has an implied required rate of return of 15%, a $2.00 current dividend (D₀), and a 5% dividend growth rate. If the required rate of return increases to 16%, the stock price will

A) fall by $1.91
B) fall by $2.33
C) rise by $1.91
D) rise by $2.33

Question 12

Which of the following is the correct formulation of the Greenspan model?

A) S&P 500 P/E minus the 10-year bond yield
B) 10-year bond yield minus the S&P 500 earnings yield
C) 10-year bond yield minus the S&P 500 P/E
D) S&P 500 earnings yield minus the 10-year bond yield

Question 13

Which of the following is associated with a Greenspan model value of zero?

A) Market undervaluation
B) Fair market valuation
C) Market overvaluation
D) The Greenspan model cannot equal zero.

Question 14

Which of the following is true regarding a company's trailing versus forward-looking Price/Earnings ratio?

A) The trailing P/E will normally exceed the forward P/E
B) The trailing P/E will normally be less than the forward P/E.
C) The trailing and forward looking P/E will normally be equal.
D) There is no necessary relationship between the trailing and the forward P/E.

Question 15

A stock sells for $23.67 and currently pays a $0.44 annual dividend. If the market expects a 14% rate of return on this stock, what dividend growth rate do these figures imply?

A) 7.2%
B) 8.7%
C) 10.2%
D) 11.9%