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Flashcards in ch13 kawncehpts Deck (29):
1

1., The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.


A. , book value

B. , market value

C. , liquidation value

D. , Tobin's q

A. , book value

2

7., Which one of the following statements about market and book value is correct?


A. , All firms sell at a market-to-book ratio above 1.

B. , All firms sell at a market-to-book ratio greater than or equal to 1.

C. , All firms sell at a market-to-book ratio below 1.

D. , Most firms have a market-to-book ratio above 1, but not all.

D. , Most firms have a market-to-book ratio above 1, but not all.

3

10., Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding?


A. , Book value per share

B. , Liquidation value per share

C. , Market value per share

D. , Tobin's q


A. , Book value per share

4

17., __________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.


A. , Book value per share

B. , Liquidation value per share

C. , Market value per share

D. , Tobin's q

B. , Liquidation value per share

5

14., Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct?


A. , Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells.

B. , Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's.

C. , Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends.

D. , All three should be willing to pay the same amount for the stock regardless of their holding period.

D. , All three should be willing to pay the same amount for the stock regardless of their holding period.

6

20., The constant-growth dividend discount model (DDM) can be used only when the ___________.


A. , growth rate is less than or equal to the required return

B. , growth rate is greater than or equal to the required return

C. , growth rate is less than the required return

D. , growth rate is greater than the required return

C. , growth rate is less than the required return

7

22., You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.


A. , will be higher 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. , The answer cannot be determined from the information given.

A. , will be higher than the intrinsic value of stock B

8

23., Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.


A. , will be higher 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. , The answer cannot be determined from the information given.

A. , will be higher than the intrinsic value of stock B

9

24., You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A _________.


A. , will be higher 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. , The answer cannot be determined from the information given.

A. , will be higher than the intrinsic value of stock B

10

59., Everything else equal, which variable is negatively related to the intrinsic value of a company?


A. , D1

B. , D0

C. , g

D. , k

D. , k

11

86., In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price?


A. , Import/export trade

B. , Software

C. , Telecommunications

D. , Utility

D. , Utility

12

3., If a firm increases its plowback ratio, this will probably result in _______ P/E ratio.


A. , a higher

B. , a lower

C. , an unchanged

D. , The answer cannot be determined from the information given.

D. , The answer cannot be determined from the information given.

13

4., The value of Internet companies is based primarily on _____.


A. , current profits

B. , Tobin's q

C. , growth opportunities

D. , replacement cost

C. , growth opportunities

14

5., New-economy companies generally have higher _______ than old-economy companies.


A. , book value per share

B. , P/E multiples

C. , profits

D. , asset values

B. , P/E multiples

15

6., P/E ratios tend to be _______ when inflation is ______.


A. , higher; higher

B. , lower; lower

C. , higher; lower

D. , They are unrelated.

C. , higher; lower

16

41., Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio?


A. , Firm A

B. , Firm B

C. , Both would have the same P/E if they were in the same industry.

D. , There is not necessarily any linkage between risk and P/E ratios.

C. , Both would have the same P/E if they were in the same industry.

17

42., Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with lower expected growth rates.


A. , higher than

B. , equal to

C. , lower than

D. , There is not necessarily any linkage between risk and P/E ratios.

A. , higher than

18

43., Value stocks are more likely to have a PEG ratio _____.


A. , less than 1

B. , equal to 1

C. , greater than 1

D. , less than zero

A. , less than 1

19

56., A firm's earnings per share increased from $10 to $12, its dividends increased from $4 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that _________.


A. , the stock experienced a drop in its P/E ratio

B. , the company had a decrease in its dividend payout ratio

C. , both earnings and share price increased by 20%

D. , the required rate of return increased

B. , the company had a decrease in its dividend payout ratio

20

80., Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that:

I. Stock A will give us a higher return than Stock B.
II. An investment in stock A is probably riskier than an investment in stock B.
III. Stock A has higher forecast earnings growth than stock B.


A. , I only

B. , I and II only

C. , II and III only

D. , I, II, and III

C. , II and III only

21

2., The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle?


A. , Start-up phase

B. , Consolidation

C. , Maturity

D. , Relative decline

A. , Start-up phase

22

15., A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct?

I. All else equal, the firm's growth rate will accelerate after the payout change.
II. All else equal, the firm's stock price will go up after the payout change.
III. All else equal, the firm's P/E ratio will increase after the payout change.


A. , I only

B. , I and II only

C. , II and III only

D. , I, II, and III

A. , I only

23

16., A firm cuts its dividend payout ratio. As a result, you know that the firm's _______.


A. , return on assets will increase

B. , earnings retention ratio will increase

C. , earnings growth rate will fall

D. , stock price will fall

B. , earnings retention ratio will increase

24

19., Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now ______.


A. , 0%

B. , 100%

C. , between 0% and 50%

D. , between 50% and 100%

B. , 100%

25

44., Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to ________ as a percentage of share price.


A. , increase

B. , decrease

C. , stay the same

D. , No typical pattern can be expected.

B. , decrease

26

50., Generally speaking, the higher a firm's ROA, the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings.


A. , higher; lower

B. , higher; higher

C. , lower; lower

D. , lower; higher

D. , lower; higher

27

57., Assuming all other factors remain unchanged, __________ would increase a firm's price-earnings ratio.


A. , an increase in the dividend payout ratio

B. , a reduction in investor risk aversion

C. , an expected increase in the level of inflation

D. , an increase in the yield on Treasury bills

B. , a reduction in investor risk aversion

28

58., A company with an expected earnings growth rate which is greater than that of the typical company in the same industry most likely has _________________.


A. , a dividend yield which is greater than that of the typical company

B. , a dividend yield which is less than that of the typical company

C. , less risk than the typical company

D. , less sensitivity to market trends than the typical company

B. , a dividend yield which is less than that of the typical company

29

89., Which of the following valuation measures is often used to compare firms that have no earnings?


A. , Price-to-book ratio

B. , P/E ratio

C. , Price-to-cash-flow ratio

D. , Price-to-sales ratio

D. , Price-to-sales ratio