06 Jul F303 Intermediate Investments Exam 1
Primary screening criteria for growth stocks often specifiy __________.
| A. a maximum absolute level of historical earnings per share growth | |
| B. a growth rate in earnings that is below the industry average |
| C. a minimum absolute level of historical earnings per share growth | |
| D. an improving return on equity (ROE) |
Question 24 pts
In general, a stock is attractive to investors if its VRE ratio is __________.
| A. negative | |
| B. greater than 0, but less than 1.0 |
| C. equal to or greater than 1.0 | |
| D. none of the above |
Question 34 pts
In general, a stock is attractive to investors it it VRE ratio is __________.
| A. negative | |
| B. equal to or greater than 1.0 |
| C. less than 1.0 | |
| D. none of the above |
Question 44 pts
Value stock investors favor companies that sell at attractive valuations when value is measured in terms of a P/E ratio that is __________.
| A. equal to the market average | |
| B. above the market average |
| C. below the market average | |
| D. extremely volatile |
Question 54 pts
According to Benjamin Graham, one measure of stock market value comes from __________.
| A. past dividends | |
| B. future expected earnings growth |
| C. past price movements | |
| D. none of the above |
Question 64 pts
A firm’s stock represents a good investment when __________.
| A. cash flow is positive | |
| B. implied expectations about future cash flows are overly pessimistic |
| C. sales growth is positive | |
| D. profits are positive |
Question 74 pts
You expect firm XYZ to pay a dividend next year of $0.50, in year 2 of $0.60, and in year 3 of $0.75. If you expect the stock to sell for $35 in three years and the required rate is 8%, what is your estimate of the current share value (price per share) rounded to the nearest dime?
| A. $37.50 | |
| B. $27.80 |
| C. $29.36 | |
| D. $20.30 |
Question 84 pts
Consider Elixir Drug Company, which is enjoying rapid growth from the introduction of its new medicine for back pain. What is your estimate of the current value of the stock price using a two-stage DDM if you assume the growth rate in dividends will be 15% for the next five years then fall to 5% forever, the required return on equity (Re) is 10% and the current dividend is $1.00 per share?
| A. $53.91 | |
| B. $20.78 |
| C. $23.00 | |
| D. $31.95 |
Question 94 pts
Based on the Constant-Growth DDM, what is the estimated market value for a dividend-paying stock given investor expectations that D(1) = $0.75, the required rate of return is 12%and the expected growth is 3%?
| A. $4.27 | |
| B. $8.33 |
| C. $9.00 | |
| D. $15.00 |
Question 104 pts
A firm’s _____ is the appropriate discount rate to use when valuing the total firm with the FCFF Model.
| A. cost of debt | |
| B. cost of equity |
| C. tax rate | |
| D. weighted average cost of capital |
Question 114 pts
The FCFF Model is used to estimate the total value of a firm by summing all the present values (PVs) of the free cash flows; the PVs of the annual free cash flows during the non-constant period plus the PV of the terminal value, to find the firm’s value of operating assets. This going concern value, when added to the value of the _____ assets, is the total value of the firm.
| A. operating | |
| B. non-operating |
| C. fixed | |
| D. depreciated |
Question 124 pts
The Constant-Growth form of the dividend discount model (DDM) is a simplified DCF stock approach to equity valuation. It states that the stock price should equal the present value of all expected future dividends under the assumption that a firm _____________.
| A. has a 5-year life | |
| B. has an infinite life |
| C. will vary its dividend growth rate over its life | |
| D. has managers who own shares in the firm |
Question 134 pts
One way for managers to make their companies more valuable for investors is to create a sustainable increase the in the firm’s __________.
| A. sales revenue | |
| B. free cash flow |
| C. advertising program | |
| D. weighted average cost of capital |
Question 144 pts
The Constant-Growth DDM is valid only when expected dividend growth, g, is less than the required rate of return, R. If dividends were expected to grow forever (to infinity) at a rate faster than R, the value of the stock would be __________.
| A. negative | |
| B. zero |
| C. a very large finite number | |
| D. infinite |
Question 154 pts
Assume that the Constant-Growth DDM is the appropriate valuation model for a stock index. Assume further that the long-term annual market return is expected to be 8%, the long-term expected growth rate in dvidends is expected to be 3.5% and that the Dow Jones Industrial Average (DJIA) is fairly valued at 18,000. If investors change their expectation for the long-term growth rate in dividends from 3.5% to 2.5%, what would be the expected change in the value of the DJIA?
| A. +18.97% | |
| B. -18.97% |
| C. +15.38% | |
| D. -15.38% |
Question 164 pts
When using relative valuation (RV), if company A is being compared to companies B through G, the ratios of company A should be _____________ the calculation of median and standard deviation of the ratios.
| A. excluded from | |
| B. included in |
| C. multiplied by .5 in | |
| D. multiplied by 1.5 in |
Question 174 pts
The relative valuation (RV) approach assumes that the other firms used in the analysis are ______________ the firm being valued.
| A. comparable to | |
| B. unlike |
| C. more risky than | |
| D. less risky than |
Question 184 pts
A goal of an equity analysis is to find securities __________.
| A. whose estimated value, based on your expectations about future cash flows, growth rates and required rates of return, exceeds the current market price | |
| B. with a negative present value of growth opportunities |
| C. with high market capitalization rates | |
| D. all of the above |
Question 194 pts
Several key points in the article “Constructing Winning Stock Screens” are:
| A. Stock screens should be used to limit or narrow the universe of stocks for further valuation analysis. | |
| B. Screening is merely the first step (a starting point) in the security analysis process. |
| C. A good screening system contains both primary and secondary criteria. | |
| D. All of the above |
Question 204 pts
The Gordon Growth single-stage version of DDM is best suited for dividend paying firms where the dividends are growing at a rate that is _________ than the nominal growth in the overall economy and that have established a _________ dividend payout policy that you expect will continue in the future.
| A. greater; constant | |
| B. comparable to or less: constant |
| C. greater; variable | |
| D. less; variable |
Question 214 pts
You have been asked to use the two-stage DDM to estimate the value per common share of Sundanci, Inc. You expect that Sundanci’s earnings and dividends grow at 12% for two years and at 4% thereafter. Calculate the current value per share (to the nearest dollar) given that: The required return on equity = 8%; E(0) = current Earnings per share = $1.95 per share; D(0) = current dividend per share (the dividend just paid) = $.90 per share.
| A. $33.12 | |
| B. $26.93 |
| C. $27.29 | |
| D. $13.32 |
Question 224 pts
The first stage of a multistage DDM frequently incorporates analysts’ individual earnings and dividend forecasts for some finite period. The final stage is often modeled using the Constant-Growth DDM based on __________.
| A. a growth rate that is always higher than the nominal growth rate of the economy | |
| B. a growth rate that is not stable |
| C. a growth rate that is stable and comparable to or lower than the nominal growth rate of the economy | |
| D. none of the above |
Question 234 pts
Because the DDM requires multiple input variable estimates, investors should __________.
| A. carefully examine the input estimates to the model | |
| B. perform sensitivity analysis on price estimates by changing the input estimates |
| C. feel confident that their input estimates are always correct | |
| D. both A and B |
Question 244 pts
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 |
Question 254 pts
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. What is your estimated value per share for this preferred stock?
| A. $11.56 | |
| B. $9.65 |
| C. $11.82 | |
| D. $10.42 |
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