Question 1

Global Warning's EPS for the current year is $2.75 and its current P/E ratio is 50. You have forecasted that EPS will grow by 10% but the P/E ratio will fall to 40. What do you expect the price of a share of GW's stock to be at the end of next year?

Accepted Answer

First, calculate the forecasted EPS for next year: $2.75 * (1 + 10%) = $3.025. Then, use the forecasted P/E ratio to find the expected stock price: $3.025 * 40 = $121.

Question 2

There is no assurance that the actual rate of return on an asset will be similar to the projected rate of return.

Accepted Answer

The actual rate of return on an asset can be influenced by various factors, and there is always a possibility for the actual return to differ from the projected return.

Question 3

The common stock 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 common stock of Jennifer's Furniture Outlet...

Question 4

P/E ratios could rise even as earnings fall if

Accepted Answer

P/E ratio is calculated by dividing the stock price by earnings per share. If earnings fall at a faster rate than stock prices, then the P/E ratio would increase even though earnings are lower. This is because the denominator (earnings per share) is decreasing faster than the numerator (stock price).

Question 5

The greater the perceived risk of an asset, the lower the expected rate of return.

Accepted Answer

The answer of The greater the perceived risk of an...

Question 6

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

Accepted Answer

Earnings per share (EPS) is calculated by dividing the net income by the number of outstanding shares. The formula given in option B, (profit margin) × (total asset turnover) × (equity multiplier) × (book value per share), is a rearrangement of the DuPont identity, which breaks down ROE into three components: profit margin, asset turnover, and financial leverage (equity multiplier). However, it does not directly calculate EPS but rather gives an insight into the factors affecting a company's financial performance. The correct explanation for EPS calculation involves net income and outstanding shares, which is not precisely represented in any of the options provided. My initial response was incorrect as none of the options directly calculate EPS in its standard form.

Question 7

Which of the following will lead to an increase in earnings per share?

Accepted Answer

The answer of Which of the following will lead to...

Question 8

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

Accepted Answer

Rapid growth in earnings is most likely to increase the price of a stock as it indicates that the company is becoming more profitable and valuable. Rapid growth in sales and dividends can also have a positive impact on the stock price, but they are not as directly linked to the company's financial health as earnings. Rapid increases in bond interest rates can actually have a negative effect on stocks as investors may shift their focus to bonds instead of stocks.

Question 9

Risk is brought into the stock valuation process through the required rate of return.

Accepted Answer

The required rate of return takes into account the risk associated with the stock and factors it into the stock valuation process.

Question 10

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 one share of common stock in Markhem Enterprises be selling for in the market?

Accepted Answer

Step 1: Calculate the dividends per share
Dividend payout ratio = 40% 
Dividends per share = EPS x Dividend payout ratio 
= 1.34 x 0.40
= 0.536

Step 2: Calculate the price per share using P/E ratio
P/E ratio = Price per share / EPS 
Price per share = P/E ratio x EPS 
= 18 x 1.34 
= 24.12

Step 3: Add the dividends per share to the price per share 
Market price per share = Price per share + Dividends per share
= 24.12 + 0.536
= $24.66

Therefore, the best choice is C - $24.12.

Question 11

The current annual sales of Flower Bud, Inc. are $178,000. Sales are expected to increase by 4% next year. The company has a net profit margin of 5% which is expected to remain constant for the next couple of years. There are 10,000 shares of common stock outstanding. The market multiple is 16.4 and the relative P/E of the firm is 1.21. What is the expected market price per share of common stock for next year?

Accepted Answer

Step 1: Calculate the expected sales for next year 
Expected sales = Current sales + (Current sales × Growth rate) 
= $178,000 + ($178,000 × 0.04) 
= $184,720

Step 2: Calculate the expected net profit for next year 
Expected net profit = Expected sales × Net profit margin 
= $184,720 × 0.05 
= $9,236

Step 3: Calculate the expected earnings per share (EPS) 
EPS = Expected net profit ÷ Number of outstanding shares 
= $9,236 ÷ 10,000 
= $0.9236

Step 4: Calculate the expected market price per share of common stock 
Expected market price per share = EPS × Market multiple × Relative P/E 
= $0.9236 × 16.4 × 1.21 
= $18.37

Therefore, the expected market price per share of common stock for next year is $18.37 (choice C).

Question 12

A stock will be an attractive investment if the required rate of return exceeds the expected rate of return.

Accepted Answer

A stock is considered an attractive investment if the expected rate of return exceeds the required rate of return, not the other way around.

Question 13

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

Accepted Answer

Even if a company does not officially follow a fixed-dividend policy, dividend payments are fairly stable from one time period to another. While dividends may fluctuate based on a company's performance and financial position, companies typically strive to maintain a consistent or gradually increasing dividend payment to please shareholders and maintain their public image.

Question 14

GLOO stock's P/E ratio is 45 at a time when the market's P/E ratio is 15. GLOO's relative P/E ratio is

Accepted Answer

The relative P/E ratio is simply the company's P/E ratio divided by the market's P/E ratio. Therefore, GLOO's relative P/E ratio is 45/15=3.

Question 15

The major forces behind earnings per share are

Accepted Answer

Earnings per share calculation involves dividing net income by the number of outstanding shares. Therefore, the major forces behind earnings per share are net income and the number of shares outstanding.

Question 16

Whisper numbers are

Accepted Answer

Whisper numbers are unofficial, informal earnings estimates that are often higher than the official forecasts released by analysts.

Question 17

The Merry Co. has current annual sales of $350,000 and a net profit margin of 6%. Sales are expected to increase by 5% annually while the profit margin is expected to remain constant. What is the projected after-tax earnings for two years from now?

Accepted Answer

First, we need to find the current net profit amount:
Net Profit = Current Annual Sales x Net Profit Margin
Net Profit = $350,000 x 0.06 = $21,000

Next, we can use the sales growth rate and net profit margin to estimate the future net profit amounts:
Year 1 Net Profit = ($350,000 x 1.05) x 0.06 = $22,050
Year 2 Net Profit = ($350,000 x 1.05^2) x 0.06 = $23,153.25

To find the after-tax earnings, we need to consider the tax rate. Let's assume a tax rate of 25%.
Year 1 After-Tax Earnings = $22,050 x (1 - 0.25) = $16,537.50
Year 2 After-Tax Earnings = $23,153.25 x (1 - 0.25) = $17,364.94

Therefore, the projected after-tax earnings for two years from now is $23,153.25, which is closest to answer choice D.

Question 18

Both beta and the expected return on the market portfolio incorporate risk into the Capital Asset Pricing Model.

Accepted Answer

Both beta and the expected return on the market portfolio are measures of risk and are used to determine the expected return of an asset or security within the Capital Asset Pricing Model.

Question 19

If the market multiple is 23.0 and the P/E ratio of a company is 27.4, then the stock's relative P/E is

Accepted Answer

The relative P/E ratio is calculated by dividing the P/E ratio of the company by the market multiple. So, the relative P/E ratio of the stock is 27.4/23.0 = 1.19.

Question 20

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

The answer of Over the last year, a firm's earnings...

Quiz 8: Stock Valuation