Deck 10: Share Valuation

Question 1

Acme Consolidated has a return on equity of 12%.If Acme distributes 60% of earnings as dividends,its expected growth rate will be

A)new 4.80%.
B)7.20%.
C)12%.
D)6%.

Answer 1

A

Question 2

The XYZ Company,whose ordinary shares are currently selling for $40 per share,is expected to pay a $2.00 dividend in the coming year.If investors believe that the expected rate of return on XYZ is 14%,what growth rate in dividends must be expected?

A)5%
B)14%
C)9%
D)6%

Answer 2

C

Question 3

________ gives minority shareholders more power to elect board of directors.

A)A dual share class
B)Majority voting
C)A proxy
D)Cumulative voting

Answer 3

D

Question 4

You are evaluating the purchase of Cellars,Inc.ordinary shares that just paid a dividend of $1.80.You expect the dividend to grow at a rate of 12% for the next three years.You plan to hold the shares for three years and then sell it.You estimate that a required rate of return of 17.5% will be adequate compensation for this investment.Calculate the present value of the expected dividends.

A)$4.91
B)$5.40
C)$9.80
D)$6.80

Question 5

If a company has a return on equity of 25% and wants a growth rate of 10%,how much of ROE should be retained?

A)40%
B)50%
C)60%
D)70%

Question 6

A firm just paid $2.00 on its ordinary shares and expects to continue paying dividends,which are expected to grow 5% each year,from now to infinity.If the required rate of return for this share is 9%,then the value of the share is

A)$50.00.
B)$40.00.
C)$54.50.
D)$52.50.

Question 7

Butler,Inc.'s return on equity is 17% and management retains 75% of earnings for investment purposes.Based on this information,what will be the firm's growth rate?

A)4.25%
B)22.67%
C)44.12%
D)12.75%

Question 8

CEOs naming friends to the board of directors and paying them more than the norm is an example of

A)the agency problem.
B)cumulative voting
C)majority voting features.
D)using a proxy

Question 9

You are evaluating the purchase of Somners Resources' ordinary shares that just paid a dividend of $1.80.You expect the dividend to grow at a rate of 12%,indefinitely.You estimate that a required rate of return of 17.5% will be adequate compensation for this investment.Assuming that your analysis is correct,what is the most that you would be willing to pay for the ordinary shares if you were to purchase it today? Round to the nearest $.01.

A)$36.65
B)$91.23
C)$51.55
D)$74.82

Question 10

A decrease in the ________ will cause an increase in ordinary shares value.

A)growth rate
B)required rate of return
C)last paid dividend
D)both B and C

Question 11

Wild Acre Metals has ordinary shares that paid a dividend of $1.00 a share last year.You expect the share to grow at 5% per year.If the appropriate rate of return on this share is 12%,how much are you willing to pay for the share today?

A)$13.00
B)$15.00
C)$17.00
D)$19.00

Question 12

Fris B.Corporation share is currently selling for $42.86.It is expected to pay a dividend of $3.00 at the end of the year.Dividends are expected to grow at a constant rate of 3% indefinitely.Compute the required rate of return on FBC shares.

A)10%
B)33%
C)7%
D)4.3%

Question 13

Marble Corporation's ROE is 17%.Their dividend payout ratio is 20%.The last dividend,just paid,was $2.58.If dividends are expected to grow by the company's sustainable growth rate indefinitely,what is the current value of Marble ordinary shares if its required return is 18%?

A)$14.33
B)$18.27
C)$47.67
D)$66.61

Question 14

A share currently sells for $63 per share,and the required return on the share is 10%.Assuming a growth rate of 5%,calculate the share's last dividend paid.

A)$1
B)$3
C)$5
D)$7

Question 15

The expected rate of return on a share of ordinary shares whose dividends are growing at a constant rate (g)is which of the following?

A)(D1 + g)/Vc
B)D1/Vc + g
C)D1/g
D)D1/Vc

Question 16

You are evaluating the purchase of Charbridge,Inc.ordinary shares that currently pay no dividend and is not expected to do so for many years.Because of rapidly growing sales and profits,you believe the share will be worth $51.50 in 3 years.If your required rate of return is 16%,what is the share worth today?

A)$59.74
B)$51.25
C)$32.99
D)$0.00 because shares that do not pay dividends have no value.

Question 17

Ordinary shareholders are essentially

A)creditors of the firm.
B)managers of the firm.
C)owners of the firm.
D)all of the above.

Question 18

Green Company's ordinary shares are currently selling at $24.00 per share.The company recently paid dividends of $1.92 per share and projects growth at a rate of 4%.At this rate,what is the share's expected rate of return?

A)4.08%
B)8.00%
C)12.00%
D)8.80%

Question 19

Gilliland Motor Limited just paid a dividend of $1.65 on its ordinary shares.This company's dividends are expected to grow at a constant rate of 3% indefinitely.If the required rate of return on this share is 11%,compute the current value of per share of GML's shares.

A)$20.63
B)$21.24
C)$15.00
D)$55.00

Question 20

An investor is contemplating the purchase of ordinary shares at the beginning of this year and to hold the shares for one year.The investor expects the year-end dividend to be $2.00 and expects a year-end price for the share of $40.If this investor's required rate of return is 10%,then the value of the share to this investor is

A)$36.36.
B)$38.18.
C)$33.06.
D)$34.88.

Question 21

Ordinary shareholders have a claim on the company's assets

A)at any time,equal to the value of their shares.
B)only after the claims of debtholders and preference shareholders have been satisfied.
C)after the claims of the preference shareholders have been satisfied,but before the debt holders.
D)never.Ordinary shareholders have no claim on the company's assets.

Question 22

A share of ordinary shares just paid a dividend of $3.25 per share.The expected long-run growth rate for this share is 18%.If investors require a rate of return of 24%,what should the price of the share be?

A)$57.51
B)$62.25
C)$71.86
D)$63.92

Question 23

Which investor incurs the greatest risk?

A)Mortgage bondholder
B)Preference shareholder
C)Ordinary shareholder
D)Debenture bondholder

Question 24

An issue of ordinary shares currently sells for $50.00 per share,has an expected dividend to be paid at the end of the year of $2.50 per share,and has an expected growth rate to infinity of 5% per year.If investors' required rate of return for this particular security is 12% per year,then this security is

A)overvalued and offering an expected return higher than the required return.
B)undervalued and offering an expected return higher than the required return.
C)overvalued and offering an expected return lower than the required return.
D)undervalued and offering an expected return lower than the required return.

Question 25

What allows ordinary shareholders the right to cast a number of votes equal to the number of directors being elected?

A)The majority voting provision
B)Dual share classes
C)The cumulative voting provision
D)The proxy method

Question 26

The shareholder's expected rate of return consists of a dividend yield and interest.

Question 27

Ordinary shareholders are essentially creditors of the firm.

Question 28

Ordinary shares represent a claim on residual income.

Question 29

The shareholder can cast all votes for a single candidate or split them among various candidates through

A)the proxy.
B)cumulative voting.
C)dual share classes.
D)majority voting.

Question 30

ABC,Inc.just paid a dividend of $2.ABC expects dividends to grow at 10%.The return on shares like ABC,Inc.is typically around 12%.What is the most you would pay for a share of ABC share?

A)$100
B)$110
C)$120
D)$130

Question 31

Ordinary shareholders expect greater returns than bondholders because

A)they have no legal right to receive dividends.
B)they bear greater risk.
C)in the event of liquidation,they are only entitled to receive any cash that is left after all creditors are paid.
D)all of the above.

Question 32

An issue of ordinary shares currently sells for $40.00 per share,has an expected dividend to be paid at the end of the year of $2.00 per share,and has an expected growth rate to infinity of 5% per year.The expected rate of return on this security is

A)5%.
B)10.25%.
C)13.11%.
D)10%.

Question 33

You are considering the purchase of Austal Limited.The firm just paid a dividend of $4.20 per share.The shares are selling for $115 per share.Security analysts agree with top management in projecting steady growth of 12% in dividends and earnings over the foreseeable future.Your required rate of return for shares of this type is 17.5%.If you were to purchase and hold the shares for three years,what would the expected dividends be worth today?

A)$12.60
B)$9.21
C)$17.12
D)$15.55
E)$11.46

Question 34

KDP's most recent dividend was $2.00 per share and is selling today in the market for $70.The dividend is expected to grow at a rate of 7% per year for the foreseeable future.If the market return is 10% on investments with comparable risk,should you purchase the share?

A)No,because the share is overpriced $1.33.
B)No,because the share is overpriced $3.33.
C)Yes,because the share is underpriced $1.33.
D)Yes,because the share is underpriced $3.33.

Question 35

WSU Inc.is a young company that does not yet pay a dividend.You believe that the company will begin to pay dividends 5 years from now,and that the company will then be worth $50 per share.If your required rate of return on this risky share is 20%,what is the share worth today?

A)$40
B)$10
C)$20.09
D)$0.00

Question 36

You are considering the purchase of Miller Manufacturing,Inc.'s ordinary shares.The shares are selling for $21.00 per share.The next dividend is expected to be $2.10,and you expect the dividend to keep growing at a constant rate.If the share is returning 15%,calculate the growth rate of dividends.

A)3%
B)5%
C)8%
D)10%

Question 37

The growth rate of future earnings is determined by return on equity and the profit-retention rate.

Question 38

When bankruptcy occurs,the claims of the ordinary shareholders may go unsatisfied.

Question 39

Marjen,Inc.just paid a dividend of $5.Marjen shares currently sell for $73.57.The return on shares like Marjen,Inc.is around 10%.What is the implied growth rate of dividends?

A)1%
B)3%
C)5%
D)7%

Question 40

You are considering the purchase of ordinary shares that just paid a dividend of $6.50 per share.Security analysts agree with top management in projecting steady growth of 12% in dividends and earnings over the foreseeable future.Your required rate of return for shares of this type is 18%.How much should you expect to pay for this share?

A)$86
B)$94
C)$108
D)$121
E)$242

Question 41

Noni B Limited's most recent earnings per share were $1.75.Analysts forecast next year's earnings per share at $1.88.If the appropriate P/E ratio is 15,a share of Noni B should be valued at

A)$28.20.
B)$26.25.
C)$27.23.
D)$8.57.

Question 42

The P/E ratio is calculated by dividing

A)the current share price by shareholders' equity.
B)total assets by net income.
C)the current share price by earnings per share.
D)the current share price by operating cash flow per share.

Question 43

If the ROE on a new investment is less than the firm's required rate of return

A)the investment increases the firm's value.
B)the investment leaves the firm's value unchanged.
C)the effect on the firm's value is unpredictable.
D)the investment reduces the firm's value.

Question 44

Tannerly Worldwide's ordinary shares are currently selling for $48 a share.If the expected dividend at the end of the year is $2.40 and last year's dividend was $2.00,what is the rate of return implicit in the current share price?

Question 45

Draper Company's ordinary shares paid a dividend last year of $3.70.You believe that the long-term growth in the dividends of the firm will be 8% per year.If your required return for Draper is 14%,how much are you willing to pay for the share?

Question 46

You are considering the purchase of CSL Limited's Company share.You anticipate that the company will pay dividends of $2.00 per share next year and $2.25 per share the following year.You believe that you can sell the shares for $17.50 per share two years from now.If your required rate of return is 12%,what is the maximum price that you would pay for a share of CSL?

Question 47

Which of the following factors will influence a firm's P/E ratio?

A)The investors' required rate of return
B)Firm investment opportunities
C)General market conditions
D)All of the above

Question 48

Share valuation is more precise than bond valuation as share cash flows are more certain.

Question 49

The share valuation model D1/(Rc - g)requires Rc > G.

Question 50

Cumulative voting gives each share a shareholder owns a number of votes equal to the number of directors being elected to the board.

Question 51

The expected rate of return implied by a given market price equals the required rate of return for investors at the margin.

Question 52

The retail analyst at Pacific Brands values shares of Noni B at $38.00 per share.They are using the average industry P/E multiple of 17.Their forecasted earnings per share for next year is

A)$0.54.
B)$1.50.
C)$2.24.
D)There is not enough information calculate earnings per share.

Question 53

If a share has a much higher than normal P/E ratio,investors probably expect

A)slow growth in earnings.
B)rapid growth in earnings.
C)large increases in the price of the share.
D)a declining share price.

Question 54

Grill'd is a small chain of restaurants whose shares are not publicly traded.The average P/E ratio for similar restaurant chains is 16.5;the P/E ratio for the S&P 500 Index is 15.2.This year's earnings were $1.21 per share and next year's earnings are forecasted at $1.46 per share.A reasonable price for a share of Grill'd's shares is

A)$24.09.
B)$19.96.
C)$20.23.
D)$16.50.

Question 55

Is the following ordinary share priced correctly? If no,what is the correct price?
Price = $26.25
Required rate of return = 13%
Dividend year 0 = $2.00
Dividend year 1 = $2.10

Question 56

Determine the rate of return on a $25 ordinary share that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.

Question 57

McDonald's shares currently sell for $103 per share.Its expected earnings per share are $5.50.The average P/E ratio for the industry is 24.If investors expected the same growth rate and risk for McDonald's as for an average firm in the same industry,its share price would

A)stay about the same.
B)rise.
C)fall.
D)there is not enough information.

Question 58

The ordinary shares of Avexa Limited are selling for $26.75 on the open market.A dividend of $3.68 is expected to be distributed,and the growth rate of this company is estimated to be 5.5%.If Richard Dean,an average investor,is considering purchasing this share at the market price,what is his expected rate of return?

Question 59

You can purchase one share of Sumter Company ordinary shares for $80 today.You expect the price of the ordinary shares to increase to $85 per share in one year.The company pays an annual dividend of $3.00 per share.What is your expected rate of return for Sumter share?

Question 60

Adairs' shares are currently selling for $75 per share.Next year's dividend is expected to be $1.56;next year's earnings per share are expected to be $4.16.Adairs' P/E ratio is

A).055.
B)18.
C)2.14.
D)48.

Question 61

Wesfarmers current earnings per share of $5.02 are expected to grow at a rate of 17% per year for the next few years.Using a P/E ratio of 13.46,what is a reasonable value for a share of Wesfarmers' shares.

Question 62

The higher a firm's P/E ratio,the more optimistic investors feel about the firm's growth prospects.

Question 63

The P/E ratio is the market price of a share divided by book equity per share.

Question 64

The higher the investor's required rate of return,the higher the P/E ratio will be.

Question 65

Global Health Limited pays an annual perpetual dividend of $1.70 per share.If the share is currently selling for $21.25 per share,what is the expected rate of return on this share?

A)36.13%
B)12.5%
C)8.0%
D)13.6%

Question 66

Green Corp.'s preference share are selling for $20.83.If the company pays $2.50 annual dividends,what is the expected rate of return on its share?

A)8.33%
B)12.00%
C)2.50%
D)20.00%

Question 67

World Wide Interlink Corp.has decided to undertake a large project.Consequently,there is a need for additional funds.The financial manager plans to issue preference shares with an annual dividend of $5 per share.The share will have a par value of $30.If investors' required rate of return on this investment is currently 20%,what should the preference share's market value be?

A)$10
B)$15
C)$20
D)$25

Question 68

Which of the following statements concerning preference shares is correct?

A)Preference shares generally are more costly to the firm than ordinary shares.
B)Most issues of preference shares have a cumulative feature.
C)Preference share dividend payments are tax-deductible.
D)Preference shares are a riskier form of capital to the firm than bonds.

Question 69

The Heels Shoe Company's preference shares pay a perpetual annual dividend of 2 1/2% of its face value.Par value of THS preference share is $100 per share.If investors' required rate of return on this share is 15%,what is the value of per share?

A)$37.50
B)$15.00
C)$16.67
D)$6.00

Question 70

Apple shares are now selling for $460 per share.The P/E ratio based on current earnings is 10.98 and the P/E ratio based on expected earnings is 10.16.The expected growth rate in Apple's earnings must be

A)2.39%.
B)8.07%.
C)-7.5%.
D)5.5%.

Question 71

Which of the following statements is true?

A)Preference shareholders are entitled to dividends before ordinary shareholders can receive dividends.
B)Preference shares,like ordinary shares,usually have no maturity;i.e. ,the corporation does not pay back the investment.
C)The market value of preference shares,like bonds,will usually fluctuate in value primarily as the result of market rates of interest.
D)All of the above.

Question 72

RAH Inc.is not publicly traded,but the P/E ratios of its 4 closest competitors are 15,15.3,15.7,and 16.5.RAH's current earnings per share are $1.50.They are expected to grow at 6% for the next few years.What is a reasonable price for a share of RAH shares?

Question 73

Origin Energy has an outstanding issue of cumulative preference shares with an annual fixed dividend of $2.00 per share.It has not paid the preferred dividend for the last 3 years,but intends to pay a dividend on the ordinary shares in the coming year.Before Origin can pay a dividend on the ordinary shares,

A)preference shareholders may cast all their votes for a single director.
B)preference shareholders must receive dividends totaling $8.00 per share.
C)preference shareholders must receive $2.00 per share.
D)preference shareholders will not necessarily receive any dividend.

Question 74

Which of the following provisions is unique to preference shareholders and usually NOT available to ordinary shareholders?

A)Cumulative dividends feature
B)Voting rights
C)Fixed dividend
D)Both A and C

Question 75

AGL Limited issued preference shares in 2014 that had a par value of $85.The preference share pays a dividend of 5.75%.Investors require a rate of return of 6.50% today on this share.What is the value of the preference share today? Round to the nearest $1.

A)$100
B)$85
C)$75
D)$16

Question 76

P/E ratios found in published sources or on the Internet are always computed by dividing the next period's expected earnings into the current price of the share.

Question 77

UVP preference shares pay $5.00 in annual dividends.If your required rate of return is 13%,how much will you be willing to pay for one share?

A)$38.46
B)$26.26
C)$65.46
D)$46.38

Question 78

Piercing Publishers recently issued preference shares with a fixed annual dividend of $3.00 per share.Investors require a 5% return on similar preference share issues.The share is currently selling for $65.Is the share a good buy?

A)Yes,as it is undervalued $5.
B)Yes,as it is undervalued $10.
C)No,as it is overvalued $5.
D)No,as it is overvalued $10.

Question 79

Alinta Gas & Electricity issued preference shares that had a par value of $50.The shares pay a dividend of 7.875%.Assume that shares are currently selling for $62.50.What is the preference shareholder's expected rate of return? Round to the nearest 0.01%.

A)6.30%
B)7.88%
C)10.25%
D)5.02%

Question 80

Pharmaceuticals has issued preference shares with a par value of $100 and a 5% dividend.The investors' required yield is 10%.What is the value of a share of Murky preferred?

A)$100
B)$75
C)$50
D)$25