投资学第7版Test Bank答案18.doc

投资学第7版Test Bank答案18Chapter 18 Equity Valuation Models Multiple Choice Questions 1. replacement cost of the firms assets less liabilities).A) Book value per shareB) Liquidation value per shareC) Market value per shareD) Tobins QE) None of the above. Answer: D Difficulty: EasyRationale: 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 quicklyB) grow at the same speed as the average companyC) grow slowlyD) not growE) none of the above Answer: A Difficulty: EasyRationale: 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. A) Book value per shareB) Liquidation value per shareC) Market value per shareD) Tobins QE) none of the above Answer: A Difficulty: EasyRationale: See rationale for test bank question 18.1418Chapter 18 Equity Valuation Models 4. _ 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 18.1.419Chapter 18 Equity Valuation Models 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 thestock 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 highB) lower when inflation has been highC) uncorrelated with inflation rates but correlated with other macroeconomic variablesD) uncorrelated with any macroeconomic variables including inflation rates E) none of the aboveAnswer: B Difficulty: EasyRationale: 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. a stock.A) dividend payout ratioB) intrinsic valueC) market capitalization rateD) plowback rateE) none of the aboveAnswer: C Difficulty: EasyRationale: 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.420Chapter 18 Equity Valuation Models 10. A) dividend payout ratioB) retention rateC) plowback ratioD) A and CE) B and C Answer: E Difficulty: EasyRationale: Retention rate, or plowback ratio, represents the earnings reinvested in thefirm. The retention rate, or (1 - plowback) = dividend payout. 11. The Gordon modelA) is a generalization of the perpetuity formula to cover the case of a growingperpetuity.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: EasyRationale: The Gordon model assumes constant growth indefinitely. Mathematically, gmust 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 expectedto 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 returnB) will be greater than the intrinsic value of stock YC) will be the same as the intrinsic value of stock YD) will be less than the intrinsic value of stock YE) none of the above is a correct answer. Answer: D Difficulty: EasyRationale: PV0 = D1/(k-g); given k and g are equal, the stock with the larger dividendwill have the higher value.421Chapter 18 Equity Valuation Models 13. You wish to earn a return of 11% on each of two stocks, C and D. Stock C is expected topay 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 DB) will be the same as the intrinsic value of stock DC) will be less than the intrinsic value of stock DD) cannot be calculated without knowing the market rate of returnE) none of the above is a correct answer. Answer: C Difficulty: EasyRationale: PV0 = D1/(k-g); given k and g are equal, the stock with the larger dividendwill 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 isexpected 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 BB) will be the same as the intrinsic value of stock BC) will be less than the intrinsic value of stock BD) 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: EasyRationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the highergrowth 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 isexpected 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 DB) will be the same as the intrinsic value of stock DC) will be less than the intrinsic value of stock DD) 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: EasyRationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the highergrowth rate will have the higher value.422Chapter 18 Equity Valuation Models 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 BB) will be the same as the intrinsic value of stock BC) will be less than the intrinsic value of stock BD) cannot be calculated without knowing the market rate of return.E) none of the above is true. Answer: A Difficulty: EasyRationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the largerrequired 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 DB) will be the same as the intrinsic value of stock DC) will be less than the intrinsic value of stock DD) cannot be calculated without knowing the market rate of return.E) none of the above is true. Answer: A Difficulty: EasyRationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the largerrequired return will have the lower value. 18. If the expected ROE on reinvested earnings is equal to k, the multistage DDM reducestoA) V0 = (Expected Dividend Per Share in Year 1)/kB) V0 = (Expected EPS in Year 1)/kC) V0 = (Treasury Bond Yield in Year 1)/kD) V0 = (Market return in Year 1)/kE) none of the above Answer: B Difficulty: ModerateRationale: If ROE = k, no growth is occurring; b = 0; EPS = DPS423Chapter 18 Equity Valuation Models 19. 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 ofdividends.A) 6.0%B) 4.8%C) 7.2%D) 3.0%E) none of the above Answer: A Difficulty: EasyRationale: 10% X 0.60 = 6.0%. 20. Music Doctors Company has an expected ROE of 14%. The dividend growth rate willbe _ 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: EasyRationale: 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 ofdividends.A) 3.0%B) 6.0%C) 7.2%D) 4.8%E) none of the above Answer: D Difficulty: EasyRationale: 16% X 0.30 = 4.8%.424Chapter 18 Equity Valuation Models 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 ofdividends.A) 3.0%B) 4.8%C) 7.5%D) 6.0%E) none of the above Answer: C Difficulty: EasyRationale: 15% X 0.50 = 7.5%. 23. Light Construction Machinery Company has an expected ROE of 11%. The dividendgrowth 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: EasyRationale: 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: EasyRationale: 15% X 0.75 = 11.25%.425Chapter 18 Equity Valuation Models 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: EasyRationale: 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: EasyRationale: 9% X 0.10 = 0.9%. 27. A preferred stock will pay a dividend of $2.75 in the upcoming year, and every yearthereafter, 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) $0.275B) $27.50C) $31.82D) $56.25E) none of the above Answer: B Difficulty: ModerateRationale: 2.75 / .10 = 27.50426Chapter 18 Equity Valuation Models 28. A preferred stock will pay a dividend of $3.00in the upcoming year, and every yearthereafter, 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) $33.33B) $0.27C) $31.82D) $56.25E) none of the above Answer: A Difficulty: ModerateRationale: 3.00 / .09 = 33.33 29. A preferred stock will pay a dividend of $1.25 in the upcoming year, and every yearthereafter, 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) $11.56B) $9.65C) $11.82D) $10.42E) none of the above Answer: D Difficulty: ModerateRationale: 1.25 / .12 = 10.42 30. A preferred stock will pay a dividend of $3.50 in the upcoming year, and every yearthereafter, 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) $0.39B) $0.56C) $31.82D) $56.25E) none of the above Answer: C Difficulty: ModerateRationale: 3.50 / .11 = 31.82427Chapter 18 Equity Valuation Models 31. A preferred stock will pay a dividend of $7.50 in the upcoming year, and every yearthereafter, 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) $0.75B) $7.50C) $64.12D) $56.25E) none of the above Answer: E Difficulty: ModerateRationale: 7.50 / .10 = 75.00 32. A preferred stock will pay a dividend of $6.00 in the upcoming year, and every yearthereafter, 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) $0.60B) $6.00C) $600D) $5.40E) none of the above Answer: E Difficulty: ModerateRationale: 6.00 / .10 = 60.00 33. 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) $30.23B) $24.11C) $26.52D) $27.50E) none of the above Ans