投资学第7版TestBank答案.doc

Chapter 18 Equity Valuation Models Multiple Choice Questions1._ is equal to the total market value of the firms common stock divided by (the replacement cost of the firms assets less liabilities). A)Book value per share B)Liquidation value per share C)Market value per share D)Tobins Q E)None of the above. Answer: D Difficulty: Easy Rationale: Book value per share is assets minus liabilities divided by number of shares. Liquidation value per share is the amount a shareholder would receive in the event of bankruptcy. Market value per share is the market price of the stock.2.High P/E ratios tend to indicate that a company will _, ceteris paribus. A)grow quickly B)grow at the same speed as the average company C)grow slowly D)not grow E)none of the above Answer: A Difficulty: Easy Rationale: Investors pay for growth; hence the high P/E ratio for growth firms; however, the investor should be sure that he or she is paying for expected, not historic, growth.3._ is equal to (common shareholders equity/common shares outstanding). A)Book value per share B)Liquidation value per share C)Market value per share D)Tobins Q E)none of the above Answer: A Difficulty: Easy Rationale: See rationale for test bank question 18.14._ are analysts who use information concerning current and prospective profitability of a firms to assess the firms fair market value. A)Credit analysts B)Fundamental analysts C)Systems analysts D)Technical analysts E)Specialists Answer: B Difficulty: Easy Rationale: Fundamentalists use all public information in an attempt to value stock (while hoping to identify undervalued securities).5.The _ is defined as the present value of all cash proceeds to the investor in the stock. A)dividend payout ratio B)intrinsic value C)market capitalization rate D)plowback ratio E)none of the above Answer: B Difficulty: Easy Rationale: The cash flows from the stock discounted at the appropriate rate, based on the perceived riskiness of the stock, the market risk premium and the risk free rate, determine the intrinsic value of the stock.6._ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders. A)Book value per share B)Liquidation value per share C)Market value per share D)Tobins Q E)None of the above Answer: B Difficulty: Easy Rationale: See explanation for test bank question 18.1.7.Since 1955, Treasury bond yields and earnings yields on stocks were_. A)identical B)negatively correlated C)positively correlated D)uncorrelated Answer: C Difficulty: Easy Rationale: The earnings yield on stocks equals the expected real rate of return on the stock market, which should be equal to the yield to maturity on Treasury bonds plus a risk premium, which may change slowly over time. The yields are plotted in Figure 18.8.8.Historically, P/E ratios have tended to be _. A)higher when inflation has been high B)lower when inflation has been high C)uncorrelated with inflation rates but correlated with other macroeconomic variables D)uncorrelated with any macroeconomic variables including inflation rates E)none of the above Answer: B Difficulty: Easy Rationale: P/E ratios have tended to be lower when inflation has been high, reflecting the markets assessment that earnings in these periods are of lower quality, i.e., artificially distorted by inflation, and warranting lower P/E ratios.9.The _ is a common term for the market consensus value of the required return on a stock. A)dividend payout ratio B)intrinsic value C)market capitalization rate D)plowback rate E)none of the above Answer: C Difficulty: Easy Rationale: The market capitalization rate, which consists of the risk-free rate, the systematic risk of the stock and the market risk premium, is the rate at which a stocks cash flows are discounted in order to determine intrinsic value.10.The _ is the fraction of earnings reinvested in the firm. A)dividend payout ratio B)retention rate C)plowback ratio D)A and C E)B and C Answer: E Difficulty: Easy Rationale: Retention rate, or plowback ratio, represents the earnings reinvested in the firm. The retention rate, or (1 - plowback) = dividend payout.11.The Gordon model A)is a generalization of the perpetuity formula to cover the case of a growing perpetuity. B)is valid only when g is less than k. C)is valid only when k is less than g. D)A and B. E)A and C. Answer: D Difficulty: Easy Rationale: The Gordon model assumes constant growth indefinitely. Mathematically, g must be less than k; otherwise, the intrinsic value is undefined.12.You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X _. A)cannot be calculated without knowing the market rate of return B)will be greater than the intrinsic value of stock Y C)will be the same as the intrinsic value of stock Y D)will be less than the intrinsic value of stock Y E)none of the above is a correct answer. Answer: D Difficulty: Easy Rationale: PV0 = D1/(k-g); given k and g are equal, the stock with the larger dividend will have the higher value.13.You wish to earn a return of 11% on each of two stocks, C and D. Stock C is expected to pay a dividend of $3 in the upcoming year while Stock D is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock C _. A)will be greater than the intrinsic value of stock D B)will be the same as the intrinsic value of stock D C)will be less than the intrinsic value of stock D D)cannot be calculated without knowing the market rate of return E)none of the above is a correct answer. Answer: C Difficulty: Easy Rationale: PV0 = D1/(k-g); given k and g are equal, the stock with the larger dividend will have the higher value.14.You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A _. A)will be greater than the intrinsic value of stock B B)will be the same as the intrinsic value of stock B C)will be less than the intrinsic value of stock B D)cannot be calculated without knowing the rate of return on the market portfolio. E)none of the above is a correct statement. Answer: C Difficulty: Easy Rationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the higher growth rate will have the higher value.15.You wish to earn a return of 10% on each of two stocks, C and D. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock C and 10% for stock D. The intrinsic value of stock C _. A)will be greater than the intrinsic value of stock D B)will be the same as the intrinsic value of stock D C)will be less than the intrinsic value of stock D D)cannot be calculated without knowing the rate of return on the market portfolio. E)none of the above is a correct statement. Answer: C Difficulty: Easy Rationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the higher growth rate will have the higher value.16.Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A _. A)will be greater than the intrinsic value of stock B B)will be the same as the intrinsic value of stock B C)will be less than the intrinsic value of stock B D)cannot be calculated without knowing the market rate of return. E)none of the above is true. Answer: A Difficulty: Easy Rationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the larger required return will have the lower value.17.Each of two stocks, C and D, are expected to pay a dividend of $3 in the upcoming year. The expected growth rate of dividends is 9% for both stocks. You require a rate of return of 10% on stock C and a return of 13% on stock D. The intrinsic value of stock C _. A)will be greater than the intrinsic value of stock D B)will be the same as the intrinsic value of stock D C)will be less than the intrinsic value of stock D D)cannot be calculated without knowing the market rate of return. E)none of the above is true. Answer: A Difficulty: Easy Rationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the larger required return will have the lower value.18.If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to A)V0 = (Expected Dividend Per Share in Year 1)/k B)V0 = (Expected EPS in Year 1)/k C)V0 = (Treasury Bond Yield in Year 1)/k D)V0 = (Market return in Year 1)/k E)none of the above Answer: B Difficulty: Moderate Rationale: If ROE = k, no growth is occurring; b = 0; EPS = DPS19.Low Tech Company has an expected ROE of 10%. The dividend growth rate will be _ if the firm follows a policy of paying 40% of earnings in the form of dividends. A)6.0% B)4.8% C)7.2% D)3.0% E)none of the above Answer: A Difficulty: Easy Rationale: 10% X 0.60 = 6.0%.20.Music Doctors Company has an expected ROE of 14%. The dividend growth rate will be _ if the firm follows a policy of paying 60% of earnings in the form of dividends. A)4.8% B)5.6% C)7.2% D)6.0% E)none of the above Answer: B Difficulty: Easy Rationale: 14% X 0.40 = 5.6%.21.Medtronic Company has an expected ROE of 16%. The dividend growth rate will be _ if the firm follows a policy of paying 70% of earnings in the form of dividends. A)3.0% B)6.0% C)7.2% D)4.8% E)none of the above Answer: D Difficulty: Easy Rationale: 16% X 0.30 = 4.8%.22.High Speed Company has an expected ROE of 15%. The dividend growth rate will be _ if the firm follows a policy of paying 50% of earnings in the form of dividends. A)3.0% B)4.8% C)7.5% D)6.0% E)none of the above Answer: C Difficulty: Easy Rationale: 15% X 0.50 = 7.5%.23.Light Construction Machinery Company has an expected ROE of 11%. The dividend growth rate will be _ if the firm follows a policy of paying 25% of earnings in the form of dividends. A)3.0% B)4.8% C)8.25% D)9.0% E)none of the above Answer: C Difficulty: Easy Rationale: 11% X 0.75 = 8.25%.24.Xlink Company has an expected ROE of 15%. The dividend growth rate will be _ if the firm follows a policy of plowing back 75% of earnings. A)3.75% B)11.25% C)8.25% D)15.0% E)none of the above Answer: B Difficulty: Easy Rationale: 15% X 0.75 = 11.25%.25.Think Tank Company has an expected ROE of 26%. The dividend growth rate will be _ if the firm follows a policy of plowing back 90% of earnings. A)2.6% B)10% C)23.4% D)90% E)none of the above Answer: C Difficulty: Easy Rationale: 26% X 0.90 = 23.4%.26.Bubba Gumm Company has an expected ROE of 9%. The dividend growth rate will be _ if the firm follows a policy of plowing back 10% of earnings. A)90% B)10% C)9% D)0.9% E)none of the above Answer: D Difficulty: Easy Rationale: 9% X 0.10 = 0.9%.27.A preferred stock will pay a dividend of $2.75 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A)$0.275 B)$27.50 C)$31.82 D)$56.25 E)none of the above Answer: B Difficulty: Moderate Rationale: 2.75 / .10 = 27.5028.A preferred stock will pay a dividend of $3.00in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A)$33.33 B)$0.27 C)$31.82 D)$56.25 E)none of the above Answer: A Difficulty: Moderate Rationale: 3.00 / .09 = 33.3329.A preferred stock will pay a dividend of $1.25 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 12% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A)$11.56 B)$9.65 C)$11.82 D)$10.42 E)none of the above Answer: D Difficulty: Moderate Rationale: 1.25 / .12 = 10.4230.A preferred stock will pay a dividend of $3.50 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A)$0.39 B)$0.56 C)$31.82 D)$56.25 E)none of the above Answer: C Difficulty: Moderate Rationale: 3.50 / .11 = 31.8231.A preferred stock will pay a dividend of $7.50 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A)$0.75 B)$7.50 C)$64.12 D)$56.25 E)none of the above Answer: E Difficulty: Moderate Rationale: 7.50 / .10 = 75.0032.A preferred stock will pay a dividend of $6.00 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A)$0.60 B)$6.00 C)$600 D)$5.40 E)none of the above Answer: E Difficulty: Moderate Rationale: 6.00 / .10 = 60.0033.You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _ if you wanted to earn a 10% return. A)$30.23 B)$24.11 C)$26.52 D)$27.50 E)none of the above Answer: A Difficulty: Moderate Rationale: .10 = (32 - P + 1.25) / P; .10P = 32 - P + 1.25; 1.10P = 33.25; P = 30.23.34.You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _ if you wanted to earn a 12% return. A)$23.91 B)$14.96 C)$26.52 D)$27.50 E)none of the above Answer: B Difficulty: Moderate Rationale: .12 = (16 - P + 0.75) / P; .12P = 16 - P + 0.75; 1.12P = 16.75; P = 14.96.35.You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _ if you wanted to earn a 15% return. A)$23.91 B)$24.11 C)$26.52 D)$27.50 E)none of the above Answer: C Difficulty: Moderate Rationale: .15 = (28 - P + 2.50) / P; .15P = 28 - P + 2.50; 1.15P = 30.50; P = 26.52.36.You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _ if you wanted to earn a 10% return. A)$23.91 B)$24.11 C)$26.52 D)$27.50 E)none of the above Answer: E Difficulty: Moderate Rationale: .10 = (42 - P + 3.50) / P; .10P = 42 - P + 3.50; 1.1P = 45.50; P = 41.36.Use the following to answer questions 37-40:Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities and $45 million in common shareholders equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. 37.What is Paper Expresss book value per share? A)$1.68 B)$2.60 C)$32.14 D)$60.71 E)none of the above Answer: C Difficulty: Moderate Rationale: $45M/1.4M = $32.14.38.What is Paper Expresss market value per share? A)$1.68 B)$2.60 C)$32.14 D)$60.71 E)none of the above Answer: E Difficulty: Easy 39.What is Paper Expresss replacement cost per share? A)$1.68 B)$2.60 C)$53.57 D)$60.71 E)none of the above Answer: C Difficulty: Moderate Rationale: $115M - 40M/1.4M = $53.57.40.What is Paper Expresss Tobins q? A)1.68 B)2.60 C)53.57 D)60.71 E)none of the above Answer: