Question 1

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

Accepted Answer

The value of a share is calculated by multiplying the forecasted earnings per share by the P/E ratio: $1.88 * 15 = $28.20.

Question 2

The P/E ratio is calculated by dividing

Accepted Answer

The P/E ratio (price-to-earnings ratio) is calculated by dividing the current share price by the company's earnings per share. It is a measure of the market's expectation of a company's future earnings growth and profitability. A higher P/E ratio typically indicates that investors are willing to pay more for a company's earnings potential.

Question 3

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

Accepted Answer

If the ROE on a new investment is less than the firm's required rate of return, it means that the investment is not generating enough returns to meet the firm's expectations. This can lead to negative cash flows and lower company valuation, ultimately reducing the firm's value.

Question 4

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?

Accepted Answer

The answer of Tannerly Worldwide's ordinary shares are currently selling...

Question 5

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?

Accepted Answer

The answer of Draper Company's ordinary shares paid a dividend...

Question 6

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?

Accepted Answer

The answer of You are considering the purchase of CSL...

Question 7

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

Accepted Answer

All of the factors listed will influence a firm's P/E ratio. The investors' required rate of return will influence the P/E ratio because as the rate of return increases, investors will require a higher earnings multiple to invest in the stock. Firm investment opportunities will also influence the P/E ratio because investors will be willing to pay more for a stock with strong growth prospects. General market conditions will also affect the P/E ratio as investors tend to pay higher multiples during bull markets and lower multiples during bear markets.

Question 8

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

Accepted Answer

The statement is false. Share cash flows are generally less certain than bond cash flows, which makes share valuation less precise than bond valuation. Bond holders have a fixed cash flow at predetermined intervals, whereas shareholders rely on the performance of the company, which can be influenced by various external factors.

Question 9

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

Accepted Answer

The share valuation model D1/(Rc - g) can only be used when the required rate of return (Rc) is greater than the expected growth rate (g) in earnings and dividends. This is because a lower required rate of return would result in a higher valuation, which would be unrealistic. Therefore, Rc > g is a necessary condition for using this model.

Question 10

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

Accepted Answer

In cumulative voting, each shareholder has the ability to cast their total number of votes for a single candidate or to distribute them among candidates as they see fit. The total number of votes is equal to the number of shares owned multiplied by the number of directors being elected to the board.

Question 11

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

Accepted Answer

This statement is true. The market price of a security reflects the consensus of all buyers and sellers in the market, and the expected rate of return implied by that price represents the return required by investors at the margin, i.e. those investors who are deciding whether to buy or sell the security based on its current price. If the expected rate of return is higher than the required rate of return, investors will buy the security, driving up its price and reducing the expected rate of return. Conversely, if the expected rate of return is lower than the required rate of return, investors will sell the security, driving down its price and increasing the expected rate of return. Over time, the expected rate of return will converge with the required rate of return as the market adjusts to changing conditions and new information.

Question 12

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

Accepted Answer

To calculate expected earnings per share, we need to use the formula:

Earnings per share = market value per share / P/E ratio

The market value per share is already given as $38.00. To calculate the P/E ratio, we can use the average industry multiple of 17.

P/E ratio = 17

Therefore,

Earnings per share = $38.00 / 17 = $2.24

Thus, the answer is option C.

Question 13

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

Accepted Answer

A high P/E ratio indicates that investors are willing to pay more for each dollar of earnings, which suggests that they expect rapid growth in earnings in the future.

Question 14

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

Accepted Answer

A reasonable price for Grill'd's shares can be estimated using the average P/E ratio for similar restaurant chains (16.5) and next year's forecasted earnings per share ($1.46). The calculation is 16.5 * $1.46 = $24.09.

Question 15

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

Accepted Answer

The answer of Is the following ordinary share priced correctly?...

Question 16

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%.

Accepted Answer

The answer of Determine the rate of return on a...

Question 17

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

Accepted Answer

To calculate the expected share price based on the P/E ratio, we multiply the expected earnings per share by the industry average P/E ratio:

Expected share price = Expected earnings per share x P/E ratio 
Expected share price = $5.50 x 24 
Expected share price = $132

Since the expected share price based on the industry average P/E ratio is higher than the current share price of $103, the stock is expected to rise. Therefore, the answer is B.

Question 18

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?

Accepted Answer

The answer of The ordinary shares of Avexa Limited are...

Question 19

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?

Accepted Answer

The answer of You can purchase one share of Sumter...

Question 20

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

Accepted Answer

The formula for the P/E ratio is Price per Share/Earnings per Share (EPS).

We know that the current share price is $75 and next year's estimated EPS is $4.16. Therefore, the P/E ratio would be:

P/E ratio = $75 / $4.16 = 18.03

Therefore, the best choice is B, which corresponds to 18.

Quiz 10: Share Valuation