Question 1

Explain the difference between required rate of return and the dividend growth rate, and describe the relationship between the two.

Accepted Answer

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Question 2

Union Enterprise has an expected profit margin of 12%, turnover ratio of 1.5, and a leverage ratio of 0.8.Union plans to distribute 45% of its expected earnings of $1 million as a dividend next year.What is the firm's P/E ratio if the risk-free rate is 4.75% and the risk premium associated with the shares is 6.75%?

Accepted Answer

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Question 3

Elves Corporation has just paid a dividend of $1.25.Dividends are expected to grow at 15% for years 1-3, 30% for years 4-6, 10% for years 7-8, and 4% thereafter.What should the share sell for today if the required return is 16%?

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Question 4

The market value and the book value of White Elephant's one million preferred shares are $40,000,000 and $35,000,000, respectively.The preferred shares pay an annual dividend of 8%.What is the risk premium associated with these shares if the risk-free rate is 3.25%?

Accepted Answer

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Question 5

Explain how earnings are implicitly considered in the Dividend Discount Model (DDM)model.

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Question 6

What factors impact the P/E ratio, and what is the direction of the impact?

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Question 7

Which one of the following is NOT a relative value ratio?

Accepted Answer

Interest expense to assets ratio is not a relative value ratio, it is a solvency ratio that measures a company's ability to meet its debt obligations. The other options are all relative value ratios that compare one financial metric to another to help investors evaluate the value of a company's stock.

Question 8

Explain how an evolution in accounting rules will help in the use of relative pricing methods.

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Question 9

Company XYZ has a P/E ratio of 10 and a share price of $50 per share.Calculate earnings per share of the company.

Accepted Answer

The earnings per share (EPS) can be calculated by dividing the share price by the P/E ratio. Thus, $50 / 10 = $5 per share.

Question 10

What is the sustainable growth rate?

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Question 11

In what ways are preferred shares different from common shares?

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Question 12

A high proportion of the value for a growth share comes from:

Accepted Answer

Growth shares are intended to provide high potential for future earnings growth, so the majority of their value comes from future growth opportunities. Past sales figures and earnings may be used as indicators of the company's performance and potential for growth, but they are not the primary drivers of a growth share's value.

Question 13

Why did the book to market ratio become obsolete during the 1980-1990 period?

Accepted Answer

Inflation distorted the equity book value during the 1980-1990 period, which made the book to market ratio become obsolete.

Question 14

Mountain Co.currently just paid a dividend of $2.20 per share.The dividends are expected to grow at 25% per year for the next four years and then grow 5% per year thereafter.The required rate of return is 10%.Calculate the expected price in year 5.

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Question 15

Marvellous Ideas Inc.common shares are currently selling for $18.33 per share.The required rate of return on the share is 10%.What is the expected dividend in year five when the earnings and dividends are expected to decline at an annual rate of 2.5% indefinitely?

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Question 16

List and briefly describe the two basic types of Dividend Discount Models?

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Question 17

Evaluate the following statement:
The price-to-cash-flow multiple alleviates some of the accounting concerns regarding measures of earnings.

Accepted Answer

The price-to-cash-flow multiple uses a company's cash flow, which is less susceptible to manipulation or accounting concerns than traditional measures of earnings such as net income or earnings per share. Therefore, it can provide a more reliable picture of a company's financial health.

Question 18

If you were using a constant-dividend growth model to price a share, what would happen if the growth rate was greater than the required rate of return?

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Question 19

Rustic Corporation has earnings per share of $2.50 and paid a dividend of $1.75 per share.The firm's ROE and P/E are 15% and 20, respectively.Calculate the following:
a)The current share price
b)The required rate of return
c)The dividend yield

Accepted Answer

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Question 20

Explain how the retention ratio affects the future dividends, and hence, the price of the share.

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Quiz 7: Equity Valuation