Question 1

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].

Accepted Answer

The forecasted earnings per share (EPS) for next year is $1.88. Using the P/E ratio of 15, the value of a share is calculated as 15 * $1.88 = $28.20.

Question 2

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

Accepted Answer

The P/E ratio, or price-to-earnings ratio, is calculated by dividing the current share price by the company's earnings per share. This ratio is often used as a valuation metric to determine whether a stock is overvalued or undervalued in relation to its earnings.

Question 3

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?

Accepted Answer

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

Question 4

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 5

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].

Accepted Answer

The correct answer is A because the current P/E ratio for McDonald's is 123/5.12 = 24, which is equal to the average P/E ratio for the industry. This indicates that investors are currently valuing McDonald's shares in line with the average firm in the same industry, and therefore its share price would be expected to stay about the same.

Question 6

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?

Accepted Answer

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

Question 7

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

Accepted Answer

Bond valuation is more precise than shares valuation as bond cash flows are more certain and have a specified payment schedule, while share cash flows are dependent on a company's performance and may fluctuate.

Question 8

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].

Accepted Answer

The P/E ratio can be calculated by dividing the current stock price by the expected earnings per share.

P/E ratio = Stock price / Earnings per share

Plugging in the given values:

P/E ratio = $136 / $6.55 = 20.75

Therefore, the best choice is C) 20.75 as it correctly calculates the P/E ratio.

Question 9

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].

Accepted Answer

To find the forecasted earnings per share for next year, we need to use the formula:

Forecasted EPS = Stock Price / P/E Ratio

We know the stock price (valued at $38.00 per share), and we are given the industry forward P/E ratio of 17. Plugging these values into the formula gives:

Forecasted EPS = $38.00 / 17 = $2.24

Therefore, the answer is (C) $2.24.

Question 10

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].

Accepted Answer

A reasonable price for Zorba's shares can be estimated using the average P/E ratio for similar restaurant chains, which is 16.5. Using next year's forecasted earnings of $1.46 per share, the estimated price is 16.5 * $1.46 = $24.09, which is closest to $24.

Question 11

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?

Accepted Answer

The answer of The ordinary shares of Cranberry Ltd is...

Question 12

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

Accepted Answer

The required rate of return is the minimum return that investors expect from a company. If the ROE on a new investment is less than the required rate of return, it means that the investment is not generating enough profit to meet investor expectations. This will result in a decrease in the firm's value, as investors will not be willing to pay as much for the company's shares.

Question 13

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

Accepted Answer

When interest rates and uncertainty decline, investors are willing to pay more for each dollar of earnings of a company, leading to a higher P/E ratio. Hence, P/E ratios will rise.

Question 14

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?

Accepted Answer

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

Question 15

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

Accepted Answer

A high P/E ratio indicates that investors are willing to pay a premium for the stock based on their belief that the company's earnings will grow at a rapid pace in the future. Therefore, choice B is the best option.

Question 16

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

Accepted Answer

The answer of A decrease in the [blank] will cause...

Question 17

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 18

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?

Accepted Answer

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

Question 19

List the two primary voting procedures used by corporations

Accepted Answer

The answer of List the two primary voting procedures used...

Question 20

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].

Accepted Answer

The expected growth rate in Apple's earnings can be calculated using the P/E ratio based on current earnings and the P/E ratio based on expected earnings. The formula to calculate the expected growth rate is: [(P/E based on current earnings) / (P/E based on expected earnings) - 1] * 100. Plugging in the values: [(13.77 / 12.29) - 1] * 100 = 12.1%.

Quiz 10: Shares Valuation