Question 1

Which one of the following is most likely to increase the price of a share?

Accepted Answer

Rapid growth in earnings is likely to increase the price of a share as it indicates the company's profitability and potential for future growth, making the stock more attractive to investors.

Question 2

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

Accepted Answer

B

Question 3

Which of the following contributes to high P/E ratios?

Accepted Answer

High rate of earnings growth contributes to high P/E ratios because investors are willing to pay more for a company's stock if they expect its earnings to grow significantly in the future.

Question 4

The single most important variable in the dividends- and- earnings approach is the

Accepted Answer

The answer of The single most important variable in the...

Question 5

The intrinsic value of a share provides a purchase price for the share

Accepted Answer

The intrinsic value of a share is an estimate of its true worth based on fundamentals, and a reasonable purchase price should reflect the associated level of risk, not guarantee returns or be below market value.

Question 6

A company has an annual dividend growth rate of 5% and a retention rate of 40%. The company's dividend payout ratio is

Accepted Answer

The dividend payout ratio is the complement of the retention rate. If the retention rate is 40%, the payout ratio is 60% (100% - 40%).

Question 7

Stephanie is an investor who believes that the real key to a company's future share price lies in its future earnings. When investing in a company, she carefully studies its future earnings potential, and sells a company's share at the first sign of any trouble. This information indicates that Stephanie would correctly be classified as

Accepted Answer

Stephanie is focused on future earnings potential, which is a characteristic of a growth investor who looks for companies expected to grow at an above-average rate compared to others.

Question 8

Which of the following will most directly influence a company's market value?

Accepted Answer

A company's market value is most directly influenced by its future cash flows, as these determine the potential for profitability and growth, which investors consider when valuing the company.

Question 9

Even if a company does not officially follow a fixed- dividend policy, dividend payments are

Accepted Answer

Companies often aim to maintain stable dividend payments to signal financial health and reliability to investors, even if they don't have a fixed policy.

Question 10

The dividends- and- earnings (D&E) approach to share valuation and the variable- growth DVM approach are similar in that both approaches

Accepted Answer

Both the dividends-and-earnings (D&E) approach and the variable-growth Dividend Valuation Model (DVM) approach are based on the present value of expected future cash flows, which include dividends and potentially the selling price of the share.

Question 11

The ordinary shares of Jennifer's Furniture Outlet is currently selling at $32.60 a share. The company adheres to a 60% dividend payout ratio and has a P/E ratio of 19. There are 21,000 shares of stock outstanding. What is the amount of the annual net income for the firm?

Accepted Answer

The answer of The ordinary shares of Jennifer's Furniture Outlet...

Question 12

A firm with a price- to- sales ratio of 1 would usually be considered

Accepted Answer

The answer of A firm with a price- to- sales...

Question 13

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 the shares of ordinary shares in Markhem Enterprises be selling for in the market?

Accepted Answer

The price of the shares can be calculated using the P/E ratio: Price = Earnings per share * P/E ratio = $1.34 * 18 = $24.12.

Question 14

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 share valuation model to calculate a present (intrinsic) value of $55.00 per share. Assuming that your calculations are correct you should

Accepted Answer

The present value is less than the market price per share, so it is not a good investment.

Question 15

Winifred, Inc. paid $1.64 as an annual dividend per share last year. The company is expected to increase their annual dividends by 3% 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?

Accepted Answer

The answer of Winifred, Inc. paid $1.64 as an annual...

Question 16

Which one of the following is a correct equation to calculate earnings per share?

Accepted Answer

Earnings per share (EPS) can be calculated using the DuPont identity, which involves multiplying the profit margin, total asset turnover, and equity multiplier, then applying it to the book value per share.

Question 17

A company that wants to maintain both a constant-growth rate in dividends and a constant payout ratio will have to

Accepted Answer

To maintain a constant-growth rate in dividends and a constant payout ratio, the company's earnings must grow at the same rate as dividends. This ensures that the proportion of earnings paid out as dividends remains consistent.

Question 18

When using the constant- growth dividend valuation model, which of the following will lower the value of the share?

Accepted Answer

An increase in the required rate of return will lower the value of the share because the present value of future dividends will be discounted at a higher rate, reducing the overall valuation.

Question 19

The price- to- cash- flow method of share valuation generally

Accepted Answer

The answer of The price- to- cash- flow method of...

Question 20

P/E ratios could rise even as earnings fall if

Accepted Answer

If earnings fall at a faster rate than share prices, the P/E ratio will rise because the denominator (earnings) is decreasing more rapidly than the numerator (price), leading to a higher ratio.

Quiz 8: Share Valuation