Deck 10: Shares Valuation

Question 1

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%

Answer 1

A

Question 2

Shares in Softec Ltd 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.Calculate the required rate of return on FBC shares.

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

Answer 2

A

Question 3

Frost Corporation's recent earnings per share were $12.90.Their dividend payout ratio is 20%.Earnings are expected to grow at an average of 6% per year and the company's policy is to maintain the same payout ratio.If investors are requiring a 12% rate of return on these shares, what will they be willing to pay for one share?

A)$21.50
B)$22.75
C)$43.00
D)$45.58

Answer 3

D

Question 4

Magiklean Ltd'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 5

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 shares of $40.If this investor's required rate of return is 10%, then the value of the shares to this investor is [blank].

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

Question 6

Evidence that agency costs exists [blank].

A)because they are shown in footnotes to the financial statements
B)because shares prices increase when an underperforming CEO is unexpectedly replaced
C)because underperforming CEO's are frequently voted out by shareholders
D)because management often pursues risky but profitable opportunities rather than safer, less profitable opportunities

Question 7

Pixie Ltd just paid a $2.00 dividend on its ordinary shares and expects to continue growing dividends at an average rate of 5% each year, from now to infinity.If the required rate of return for these shares is 9% and they are currently selling for $54.50 per share, the shares [blank].

A)are selling for exactly their intrinsic value
B)there is no information to determine if the shares are overpriced or underpriced
C)are underpriced
D)are overpriced

Question 8

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 [blank].

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

Question 9

Ordinary shareholders are essentially [blank] of the firm.

A)creditors
B)managers
C)owners
D)proxies.

Question 10

Acme Consolidated has a return on equity of 12%.If Acme distributes 60% of earnings as dividends, then we would expect the common shareholders' investment in the firm and the value of the ordinary shares to grow by

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

Question 11

You are evaluating purchasing ordinary shares of Charbridge Ltd, which currently pays no dividend and is not expected to do so for many years.Because of rapidly growing sales and profits, you believe the shares will be worth $51.50 in three years.If your required rate of return is 16%, what is the shares' worth today?

A)$59.74
B)$51.25
C)$32.99
D)$0.00

Question 12

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

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

Question 13

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 14

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 15

You are evaluating the purchase of Cool Toys, Inc.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 them today? Round to the nearest $.01.

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

Question 16

[blank] gives minority shareholders more power to elect a member to the board of directors.

A)Preemptive right
B)Majority voting
C)Proxy fights
D)Cumulative voting

Question 17

You are evaluating the purchase of Cellars Pty Ltd 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 them.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 18

Evidence exists that directors [blank].

A)aggressively represent the interests of shareholders
B)are quick to replace or reduce the compensation of underperforming CEOs
C)often represent the interests of the managers who nominated them for directorships
D)are vigilant in requiring that the firm's assets be used efficiently

Question 19

P.Noel Company's ordinary shares have just paid a $2.00 dividend.If investors believe that the expected rate of return on P.Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of P.Noel shares?

A)$15.00
B)$22.22
C)$23.33
D)$40.00

Question 20

Kim is the CEO of Fast Feet Pty Ltd.She has selected a slate of nominees for the firm's board of directors and given the slate to shareholders to elect the firm's board.This is an example of a(n)[blank].

A)agency problem
B)preemptive right
C)majority vote
D)unlimited proxy

Question 21

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

A)proxy fights.
B)cumulative voting.
C)call provisions.
D)majority voting.

Question 22

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

Question 23

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

Question 24

When a company has an initial public offering [blank].

A)the previous owner of the shares will bet the money and the buyer will get the shares
B)the proceeds of the sale will not affect the company's balance
C)the proceeds of the sale will increase the company's equity
D)the proceeds of the sale will become a liability payable to the shareholders

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)The casting feature
C)The cumulative voting provision
D)The proxy method

Question 26

Which stock exchange does not allow non-voting ordinary shares?

A)The London Stock Exchange
B)The New York Stock Exchange
C)The Australian Securities Exchange
D)The Toronto Stock Exchange

Question 27

When do common shareholders have a claim on the company's assets?

A)At any time
B)Only after the claims of debtholders and preferred shareholders have been satisfied
C)After the claims of the preferred shareholders have been satisfied, but before the debt holders
D)Common shareholders have no claim on the company's assets.

Question 28

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

Question 29

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

Question 30

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

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

Question 31

Which investor incurs the greatest risk?

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

Question 32

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

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

Question 33

Ordinary shareholders are essentially creditors of the firm.

Question 34

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

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

Question 35

Ordinary shares represent a claim on residual income.

Question 36

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 shares?

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

Question 37

You are considering the purchase of Wahoo 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)$11.46

Question 38

You are considering the purchase of Miller Manufacturing'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 shares are returning 15%, calculate the growth rate of dividends.

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

Question 39

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

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

Question 40

Cumulative voting allows a shareholder to cast all of his or her votes for one director rather than voting on each director separately

Question 41

The GAP'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 GAP shares should be valued at [blank].

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

Question 42

The P/E ratio is calculated by dividing [blank].

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

Question 43

You are considering the purchase of AMDEX Company shares.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 AMDEX Company shares?

Question 44

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 45

McDonald's shares currently sell for $123.Its expected earnings per share are $5.12.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 shares price would [blank].

A)stay about the same
B)rise
C)fall
D)increase and then decline

Question 46

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 shares price?

Question 47

Shares valuation is more precise than bond valuation as shares cash flows are more certain.

Question 48

Home Depot shares are currently selling for $136 per share.Next year's dividend is expected to be $3.31; next year's earnings per share are expected to be $6.55.Home Depot's P/E ratio is [blank].

A).048
B)22.03
C)20.75
D)41.08

Question 49

The retail analyst at Morgan-Sachs values shares of the GAP at $38.00 per share.They are using the average industry 'forward' P/E ratio of 17.Their forecasted earnings per share for next year is [blank].

A)$0.54.
B)$1.50.
C)$2.24
D)$4.20

Question 50

Zorba's 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 Zorba's shares is [blank].

A)$24
B)$20
C)$18
D)$16

Question 51

The ordinary shares of Cranberry Ltd is 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 shares at the market price, what is his expected rate of return?

Question 52

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

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 53

When interest rates and uncertainty decline, P/E ratios will [blank].

A)rise
B)stabilise
C)decline
D)fluctuate

Question 54

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 shares?

Question 55

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

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

Question 56

A decrease in the [blank] will cause an increase in the value of ordinary shares.

Question 57

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 58

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 shares?

Question 59

List the two primary voting procedures used by corporations

Question 60

Apple shares are now selling for $115 per share.The P/E ratio based on current earnings is 13.77 and the P/E ratio based on expected earnings is 12.29.The expected growth rate in Apples earnings must be [blank].

A)1.48%
B)12.1%
C)-10.3%
D)10.3%

Question 61

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

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

Question 62

The required rate of return on TKF preferred shares have fallen from 5.75% at the time of issue to the present rate of 5%.The share now sells for $115.What was the original price?

A)$75.61
B)$132.25
C)$114
D)$100

Question 63

Edison Power and Light 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 three years, but intends to pay a dividend on the ordinary shares in the coming year.Before Edison can pay a dividend on the ordinary shares

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

Question 64

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

Question 65

Walmart's current earnings per share of $4.60 are expected to grow only at a rate of 2% per year for the next few years.Using a P/E ratio of 15, what is a reasonable value for a share of Walmart shares?

Question 66

Unlike bonds, preference shares [blank].

A)pay large dividends
B)do not have a fixed maturity date
C)have only one type
D)are not fixed based on the general level of interest rates

Question 67

UVP preference shares pays $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 68

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

Question 69

Sydney Pickle Company preference shares pays a perpetual annual dividend of 2 1/2% of its par value.Par value of TSP preference shares is $100 per share.If investors' required rate of return on these shares is 15%, what is the value of per share?

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

Question 70

Murky 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

Question 71

Horizon Communications shares pays a fixed annual dividend of $3.00.Because of lower inflation, the market's required yield on this preference shares has gone from 12% to 10%.As a result [blank].

A)Horizon's dividend decreased by 6 cents
B)the value of Horizon's preferred increased by $3.00
C)the value of Horizon's preferred decreased by $5.00
D)the value of Horizon's preferred increased by $5.00

Question 72

Piercing Publishers recently issued preference shares with a fixed annual dividend of $3.00 per share.Investors require a 5% return on similar preference shares 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 73

Brisbane Power issued preference shares in 1998 that had a par value of $85.The preference shares pay a dividend of 5.75%.Investors require a rate of return of 6.50% today on these shares.What is the value of the preference shares today? Round to the nearest $1.

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

Question 74

Petrified Forest Skin Care Ltd pays an annual perpetual dividend of $1.70 per share.If the shares are currently selling for $21.25 per share, what is the expected rate of return on these shares?

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

Question 75

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 shares will have a par value of $30.If investors' required rate of return on this investment is currently 20%, what should the preference shares's market value be?

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

Question 76

Which of the following statements concerning preference shares is correct?

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

Question 77

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

A)Cumulative dividends feature
B)Voting rights
C)Floating dividend
D)Promised yields

Question 78

Davis Gas & Electric issued preference shares in 1985 that had a par value of $50.The shares pay a dividend of 7.875%.Assume that the shares are currently selling for $62.50.What is the preferred 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 79

RAH Ltd is not publicly traded, but the P/E ratios of its four 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 80

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