Question 1

Economic value added (EVA)indicates the amount by which a company's operating profit exceeds its cost of capital.

Accepted Answer

EVA is calculated by subtracting the cost of capital from the operating profit, indicating the amount of value the company has created for its shareholders.

Question 2

Riza Corporation's preferred stock has a par value of $100 and a dividend rate of 6%.If the required return on the stock is 8%,its intrinsic value is closest to:

Accepted Answer

The answer of Riza Corporation's preferred stock has a par...

Question 3

Hannett Inc.has a stock price of $40 and just reported earnings of $3 per share.The firm maintains a constant dividend payout of 65% and has an expected return on equity (ROE)of 16%.Based on the constant growth model,Hannett's expected rate of return is closest to:

Accepted Answer

The answer of Hannett Inc.has a stock price of $40...

Question 4

Stan expects Terta Corp.to pay its first dividend of $3 in five years.He expects the dividend to grow at 6% thereafter,and his required return on the stock is 9.5%.The largest amount that Stan should pay for the stock is closest to:

Accepted Answer

The answer of Stan expects Terta Corp.to pay its first...

Question 5

No one knows with precision which valuation model to apply for any particular stock.

Accepted Answer

There are various valuation models available such as the discounted cash flow model, price-earnings ratio model, price-to-book ratio model, etc. However, the application of a specific model for a particular stock depends on several factors, and no one model can provide a precise valuation for all stocks in all situations. Therefore, it is important to use multiple models and exercise judgment when evaluating the value of a stock.

Question 6

The P/E ratio is one of the most widely used measures to assess the financial attractiveness of potential stock investments.

Accepted Answer

The P/E ratio (price-to-earnings ratio) is indeed a widely used measure to evaluate the financial attractiveness of stocks. It compares the current market price of a company's shares to its earnings per share (EPS), indicating how much investors are willing to pay for each dollar of earnings. A higher P/E ratio implies that investors have higher expectations for future growth, while a lower P/E ratio suggests that the market has lower expectations.

Question 7

Which of the following is a component of the formula used to derive a firm's enterprise value?

Accepted Answer

The answer of Which of the following is a component...

Question 8

Investors will arrive at the same intrinsic valuation for common stocks because valuation is based on an objective approach.

Accepted Answer

Intrinsic valuation of common stocks can be subjective, as investors may have different assumptions, opinions, and expectations about the future cash flows and growth prospects of the company. As a result, they may use different valuation methods and arrive at different estimates of intrinsic value.

Question 9

Tanex Inc.has a return on assets (ROA)of 12%,a return on equity (ROE)of 15%,and a dividend payout ratio of 60%.Based on the sustainable growth formula,Tanex's estimated growth is:

Accepted Answer

The answer of Tanex Inc.has a return on assets (ROA)of...

Question 10

If a stock's dividend growth rate or discount rate changes even a small amount,the change in the price calculated by the constant growth model can be very large.

Accepted Answer

The constant growth model takes into account the dividend growth rate and discount rate, and any change in these rates, even a small amount, can have a significant impact on the calculated price of the stock.

Question 11

Sara estimated the revenue per share for Firm A as $5.50 and estimated the appropriate P/B ratio,P/E ratio,and P/S ratio as 1.9,14.5,and 2.6,respectively.What is the estimated intrinsic value for Firm A?

Accepted Answer

The answer of Sara estimated the revenue per share for...

Question 12

To estimate the intrinsic value of a security,investors should rely on:

Accepted Answer

It is recommended for investors to use more than one approach to estimate the intrinsic value of a security. This helps to provide a more comprehensive and accurate valuation. Relying on only one approach may lead to errors or biases. Using multiple approaches can also provide a range of values that can help investors make informed decisions about buying or selling a security.

Question 13

Seaside Boats currently earns $4.00 per share and has a retention ratio of 75%.It is expected to have a constant growth rate of 5 percent per year.The required rate of return is 15 percent.What is the intrinsic value of this stock?

Accepted Answer

The answer of Seaside Boats currently earns $4.00 per share...

Question 14

The required return needed to discount a stock's future cash flows can be determined using the CAPM.

Accepted Answer

This is true. The Capital Asset Pricing Model (CAPM) is one of the methods used to determine the required return on a stock. It considers the risk-free rate, market risk premium, and beta of the stock to calculate the expected return that investors require for the level of risk they are taking on. This expected return is then used to discount the stock's future cash flows to determine its current value.

Question 15

The only reliable way to value a common stock is to discount the future flow of dividends at a discount rate appropriate to the riskiness of the company.

Accepted Answer

The answer of The only reliable way to value a...

Question 16

Historically,the average P/E for the S&P 500 is approximately 16.

Accepted Answer

This is true according to historical data. However, the average P/E ratio can vary over time and may not always be exactly 16.

Question 17

An increase in interest rates generally reduces P/E ratios and stock prices.

Accepted Answer

When interest rates increase, investors have the opportunity to earn higher returns in fixed-income securities such as bonds, making stocks less attractive. This decreases demand for stocks, driving down their prices and subsequently reducing P/E ratios.

Question 18

Rita has calculated the discounted value of the free cash flows to the firm (FCFFs)for a company that has no preferred stock.What additional adjustment(s)does she have to make to her calculated discounted value to derive an estimate of the firm's stock price?

Accepted Answer

The answer of Rita has calculated the discounted value of...

Question 19

Many analysts prefer to use a relative valuation technique,such as comparing P/E ratios,because these techniques are more grounded in theory than the DCF approaches.

Accepted Answer

This statement is incorrect. DCF approaches are based on sound theory, and while relative valuation techniques such as comparing P/E ratios can be helpful, they are not necessarily more grounded in theory than DCF approaches. Ultimately, the choice of valuation technique will depend on the particular circumstances of the company being analyzed.

Question 20

Technology stocks generally have P/E ratios that are higher than the market average.

Accepted Answer

Technology companies are often expected to have higher growth rates and higher earnings potential, which leads to higher P/E ratios compared to companies in other sectors.

Quiz 10: Common Stock Valuation