Deck 7: Valuing Stocks

Question 1

The dividend discount model states that today's stock price equals the present value of all expected future dividends.

Answer 1

True

Question 2

The liquidation value of a firm is equal to the book value of the firm.

Answer 2

False

Question 3

If the market is efficient, stock prices should be expected to react only to new information that is released.

Answer 3

True

Question 4

If investors believe a company will have the opportunity to make very profitable investments in the future, they will pay more for the company's stock today.

Question 5

Strong-form market efficiency implies that one could earn above-average returns by examining the history of a firm's stock price.

Question 6

Fundamental analysts attempt to get rich by identifying patterns in stock prices.

Question 7

Market efficiency implies that security prices impound new information quickly.

Question 8

The dividend discount model indicates that the value of a stock is the present value of the dividends it will pay over the investor's horizon, plus the present value of the expected stock price at the end of that horizon.

Question 9

If security prices follow a random walk, then on any particular day the odds are that an increase or decrease in price is equally likely.

Question 10

The growth of mature companies is primarily funded by:

A) issuing new shares of stock.
B) issuing new debt securities.
C) reinvesting company earnings.
D)increasing accounts payable.

Question 11

Market value, unlike book value and liquidation value, treats the firm as a going concern.

Question 12

Securities with the same expected risk should offer the same expected rate of return.

Question 13

Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.

Question 14

The dividend discount model should not be used to value stocks in which the dividend does not grow.

Question 15

Technical analysts have no effect on the efficiency of the stock market.

Question 16

Technical analysts would be more likely than other investors to index their portfolios.

Question 17

The intent of technical analysis is to discover patterns in past stock prices.

Question 18

The dividend yield of a stock is much like the current yield of a bond. Both ignore prospective capital gains or losses.

Question 19

If the stock prices follow a random walk, successive stock prices are not related.

Question 20

An excess of market value over the book value of equity can be attributed to going concern value.

Question 21

The sustainable growth rate represents the ____ rate at which a firm can grow:

A) maximum; while maintaining a constant debt-equity ratio.
B) maximum; based solely on internal financing.
C) minimum; while maintaining a constant debt-equity ratio.
D)minimum; based solely on internal financing.

Question 22

The sustainable rate of growth:

A) increases as the dividend payout ratio increases.
B) must be moderate over the long-term even if it is high in the short-term.
C) assumes the debt-equity ratio will increase at the same rate as the growth rate.
D)must exceed the required rate of return to be used in the dividend discount model.

Question 23

What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40?

A) 2.5%
B) 4.0%
C) 10.0%
D)5.0%

Question 24

What is the difference between a fundamental analyst and a technical analyst?

A) Only a fundamental analyst believes markets are inefficient.
B) A technical analyst focuses on financial statement analysis.
C) Only a technical analyst helps keep the market efficient.
D)A fundamental analyst analyzes information such as earnings and asset values.

Question 25

A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%. What might investors expect to pay for the stock one year from now?

A) $82.20
B) $86.20
C) $87.20
D)$91.20

Question 26

Firms with valuable intangible assets are more likely to show a(n):

A) excess of book value over market value of equity.
B) high going-concern value.
C) low liquidation value.
D)low P/E ratio.

Question 27

Wilt's has earnings per share of $2.98 and dividends per share of $.35. What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%?

A) 2.14%
B) 1.71%
C) 12.89%
D)16.06%

Question 28

As a result of its IPO, Facebook received:

A) less than half of its true value.
B) almost double its true value.
C) about 75% of its actual value.
D)about the maximum value that it could.

Question 29

A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8, and $648,200 in free cash flows. What value would you place on a share of this firm's stock if you require a 14% rate of return?

A) $48.09
B) $52.96
C) $54.02
D)$61.58

Question 30

What is the current price of a share of stock for a firm with $5 million in balance-sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4?

A) $2.50
B) $10.00
C) $20.00
D)$40.00

Question 31

A firm's liquidation value is the amount:

A) necessary to repurchase all outstanding shares of common stock.
B) realized from selling all assets and paying off all creditors.
C) a purchaser would pay to acquire all of the firm's assets.
D)shown on the balance sheet as total owners' equity.

Question 32

Which one of the following is least likely to account for an excess of market value over book value of equity?

A) Inaccurate depreciation methods
B) High rate of return on assets
C) The presence of growth opportunities
D)Valuable off-balance sheet assets

Question 33

Which of the following values treats the firm as a going concern?

A) Market value
B) Book value
C) Liquidation value
D)Both market and book values

Question 34

According to the semistrong form of market efficiency, when new information becomes available in the market, the related stock prices will:

A) remain unchanged because they already reflect this information.
B) accurately and rapidly adjust to include this new information.
C) adjust to accurately reflect this new information over the course of the next few days.
D)most likely increase because all new information has a positive effect on stock prices.

Question 35

For a firm that repurchases its stock, the dividend discount model might best be applied to the firm's:

A) dividends plus its repurchases.
B) repurchases rather than its dividends.
C) free cash flows.
D)pre-repurchase earnings per share.

Question 36

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%, what is the stock's current price?

A) $24.30
B) $18.00
C) $22.22
D)$40.50

Question 37

Which of the following is inconsistent with a firm that sells for very near book value?

A) Low current earnings
B) Few, if any, intangible assets
C) High future earning power
D)Low, unstable dividend payment

Question 38

If the general sentiment of investors is pessimistic, stock prices are more apt to:

A) increase significantly.
B) increase slightly.
C) remain constant.
D)decline.

Question 39

With respect to the notion that stock prices follow a random walk, several researchers have concluded that:

A) stock prices reflect a majority of available information about the firm.
B) successive price changes are predictable.
C) past stock price changes provide little useful information about current stock prices.
D)stock prices always rise excessively in January.

Question 40

In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.

A) guaranteed; not guaranteed
B) guaranteed; guaranteed
C) not guaranteed; not guaranteed
D)not guaranteed; guaranteed

Question 41

Other things equal, a firm's sustainable growth rate could increase as a result of:

A) increasing the plowback ratio.
B) increasing the payout ratio.
C) decreasing the return on equity.
D)increasing total assets.

Question 42

Under which of the following forms of market efficiency would stock prices always reflect fair value?

A) Weak-form efficiency
B) Semistrong-form efficiency
C) Strong-form efficiency
D)Semiweak-form efficiency

Question 43

ABC common stock is expected to have extraordinary growth of 20% per year for 2 years, after which the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the approximate current share price?

A) $31.16
B) $33.23
C) $37.39
D)$47.77

Question 44

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

A) $22.86
B) $28.00
C) $42.00
D)$43.75

Question 45

It is possible to ignore cash dividends that occur far into the future when using a dividend discount model because those dividends:

A) will most likely be paid to a different investor.
B) will most likely not be paid.
C) have an insignificant present value.
D)have a minimal, if any, potential rate of growth.

Question 46

What is the plowback ratio for a firm that has earnings per share of $2.68 and pays out $1.75 per share in dividends?

A) 28.20%
B) 34.70%
C) 66.67%
D)71.80%

Question 47

What should you pay for a stock if next year's annual dividend is forecast to be $5.25, the constant-growth rate is 2.85%, and you require a 15.5% rate of return?

A) $31.25
B) $38.87
C) $41.50
D)$42.68

Question 48

The expected return on a common stock is equal to:

A) [(1 + dividend yield) × (1 + capital appreciation rate)] - 1.
B) the capital appreciation rate + dividend yield.
C) (1 + capital appreciation rate)/(1 + dividend yield).
D)the capital appreciation rate - dividend yield.

Question 49

A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant-growth rate of:

A) 4%.
B) 9%.
C) 21%.
D)25%.

Question 50

What rate of return is expected from a stock that sells for $30 per share, pays $1.54 annually in dividends, and is expected to sell for $32.80 per share in one year?

A) 15.03%
B) 14.28%
C) 14.09%
D)14.47%

Question 51

What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate for 3 years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00?

A) $67.60
B) $62.08
C) $68.64
D)$73.44

Question 52

The value of common stock will likely decrease if:

A) the investment horizon decreases.
B) the growth rate of dividends increases.
C) the discount rate increases.
D)dividends are discounted back to the present.

Question 53

A positive value for PVGO suggests that the firm has:

A) a positive return on equity.
B) a positive plowback ratio.
C) investment opportunities with superior returns.
D)a high rate of constant growth.

Question 54

What constant-growth rate in dividends is expected for a stock valued at $32.40 if next year's dividend is forecast at $2.20 and the appropriate discount rate is 13.6%?

A) 7.02%
B) 6.59%
C) 6.81%
D)7.38%

Question 55

Dani's just paid an annual dividend of $6 per share. What is the dividend expected to be in five years if the growth rate is 4.2%?

A) $7.07
B) $7.37
C) $7.14
D)$7.44

Question 56

A stock currently sells for $50 per share, has an expected return of 15%, and an expected capital appreciation rate of 10%. What is the amount of the expected dividend?

A) $2.50
B) $2.75
C) $3.00
D)$3.50

Question 57

What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?

A) $27.55
B) $30.28
C) $26.60
D)$31.37

Question 58

When valuing stock with the dividend discount model, the present value of future dividends will:

A) change depending on the time horizon selected.
B) remain constant regardless of the time horizon selected.
C) remain constant regardless of the rate of growth.
D)always equal the present value of the terminal price.

Question 59

If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividend be if dividends grow annually at a constant rate of 6%?

A) $1.33
B) $1.49
C) $1.58
D)$1.67

Question 60

Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?

A) A firm with PVGO = $0.
B) A firm with investment opportunities yielding 10%.
C) A firm with investment opportunities yielding 15%.
D)A firm with PVGO < $0.

Question 61

Which of the following is true for a firm having a stock price of $42, an expected dividend of $3, and a sustainable growth rate of 8%?

A) It has a required return of 15.14%.
B) It has a dividend yield of 7.35%.
C) The stock price is expected to be $45 next year.
D)It has a capital appreciation rate of 7.14%.

Question 62

Suzi owns 100 shares of AB stock. She expects to receive a $238 in dividends next year. She also expects the stock to sell for $46 a share one year from now. What is the intrinsic value of this stock if the dividend payout ratio is 40% and the discount rate is 13.5%?

A) $38.19
B) $42.63
C) $40.53
D)$45.77

Question 63

The terminal value of a share of stock:

A) is similar to the maturity value of a bond.
B) refers to the share value at the end of an investor's holding period.
C) is the value received by investors upon liquidation of the firm.
D)is the price for shares traded through a dealers' market.

Question 64

Which of the following is least likely to contribute to going concern value?

A) High liquidation value
B) Extra earning power
C) Future investment opportunities
D)Intangible assets

Question 65

Technical analysts are most likely to be successful in a market that is considered to be:

A) semistrong-form efficient.
B) strong-form efficient.
C) less than weak-form efficient.
D)a random walk.

Question 66

If the price of a stock falls on 4 consecutive days of trading, then stock prices:

A) cannot be following a random walk.
B) can still be following a random walk.
C) are almost certain to increase the following day.
D)are almost certain to decrease the following day.

Question 67

Which one of the following is more likely to be responsible for a firm having a low PVGO?

A) ROE exceeds required return.
B) Plowback is very high.
C) Payout is very high.
D)Book value of equity is low.

Question 68

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

A) Its stock price will remain constant.
B) Its stock price will increase by the sustainable growth rate.
C) Its stock price will decline unless the dividend payout ratio is zero.
D)Its stock price will decline unless the plowback rate exceeds the required return.

Question 69

What is the expected constant-growth rate of dividends for a stock with a current price of $87, an expected dividend payment of $5.40 per share, and a required return of 16%?

A) 8.48%
B) 6.25%
C) 9.79%
D)5.23%

Question 70

What is the required return for a stock that has a constant-growth rate of 3.3%, a price of $25, an expected dividend of $2.10, and a P/E ratio of 14.4?

A) 12.40%
B) 10.92%
C) 11.70%
D)11.26%

Question 71

What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of $45, and a constant-growth rate of 12%?

A) $1.80
B) $3.60
C) $4.50
D)$7.20

Question 72

If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock:

A) pays $1 per share per quarter.
B) paid $.25 per share per quarter for the past year.
C) paid $1 during the past quarter, with no future dividends forecast.
D)is expected to pay an annual dividend of $1 per share next year.

Question 73

A stock is expected to pay dividends of $1.20 per share in Year 1 and $1.35 per share in Year 2. After that, the dividend is expected to increase by 2.5% annually. What is the current value of the stock at a discount rate of 14.5%?

A) $11.29
B) $10.87
C) $12.07
D)$13.39

Question 74

Investors are willing to purchase stocks having high P/E ratios because:

A) they expect these shares to sell for a lower price.
B) they expect these shares to offer higher dividend payments.
C) these shares are accompanied by guaranteed earnings.
D)they expect these shares to have greater growth opportunities.

Question 75

What is the most likely value of the PVGO for a stock with a current price of $50, expected earnings of $6 per share, and a required return of 20%?

A) $10
B) $20
C) $25
D)$30

Question 76

What is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation?

A) Market value of equity
B) Book value of equity
C) Zero
D)Shareholders may be required to pay to be liquidated.

Question 77

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

A) At least one of the stocks becomes temporarily mispriced.
B) This is a common occurrence indicating that one stock has more PVGO.
C) This cannot happen if the shares are traded in an auction market.
D)The expected risk levels will change until the expected returns are equal.

Question 78

What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend growth rate of 7%?

A) $37.45
B) $37.80
C) $40.25
D)$43.05

Question 79

Jefferson's recently paid an annual dividend of $1.31 per share. The dividend is expected to decrease by 4% each year. How much should you pay for this stock today if your required return is 16%?

A) $6.29
B) $5.74
C) $10.48
D)$11.57

Question 80

What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth, and has a required return of 12.5%?

A) $0
B) $4.86
C) $34.56
D)$30.24