chapter 13 Flashcards
(39 cards)
1) The accounting measure of a firm’s equity value generated by applying accounting principles to asset and liability acquisitions is called ________. <br></br> A) book value <br></br> B) market value <br></br> C) liquidation value <br></br> D) Tobin’s q
A
2) The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle? <br></br> A) start-up phase <br></br> B) consolidation <br></br> C) maturity <br></br> D) relative decline
A
3) If a firm increases its plowback ratio, this will probably result in ________ P/E ratio. <br></br> A) a higher <br></br> B) a lower <br></br> C) an unchanged <br></br> D) The answer cannot be determined from the information given.
D
4) The value of Internet companies is based primarily on ________. <br></br> A) current profits <br></br> B) Tobin’s q <br></br> C) growth opportunities <br></br> D) replacement cost
C
5) New-economy companies generally have higher ________ than old-economy companies. <br></br> A) book value per share <br></br> B) P/E multiples <br></br> C) profits <br></br> D) asset values
B
6) P/E ratios tend to be ________ when inflation is ________. <br></br> A) higher; higher <br></br> B) lower; lower <br></br> C) higher; lower <br></br> D) they are unrelated
C
7) Which one of the following statements about market and book value is correct? <br></br> A) All firms sell at a market-to-book ratio above 1. <br></br> B) All firms sell at a market-to-book ratio greater than or equal to 1. <br></br> C) All firms sell at a market-to-book ratio below 1. <br></br> D) Most firms have a market-to-book ratio above 1, but not all.
D
8) Earnings yields tend to ________ when Treasury yields fall. <br></br> A) fall <br></br> B) rise <br></br> C) remain unchanged <br></br> D) fluctuate wildly
A
9) Which one of the following is a common term for the market consensus value of the required return on a stock? <br></br> A) dividend payout ratio <br></br> B) intrinsic value <br></br> C) market capitalization rate <br></br> D) plowback ratio
C
10) Which one of the following is equal to the ratio of common shareholders’ equity to common shares outstanding? <br></br> A) book value per share <br></br> B) liquidation value per share <br></br> C) market value per share <br></br> D) Tobin’s q
A
12) If a stock is correctly priced, then you know that ________. <br></br> A) the dividend payout ratio is optimal <br></br> B) the stock’s required return is equal to the growth rate in earnings and dividends <br></br> C) the sum of the stock’s expected capital gain and dividend yield is equal to the stock’s required rate of return <br></br> D) the present value of growth opportunities is equal to the value of assets in place
C
13) A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________. <br></br> A) has a Tobin’s q value < 1 <br></br> B) will generate a positive alpha <br></br> C) has an expected return less than its required return <br></br> D) has a beta > 1
B
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? <br></br> 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. <br></br> 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. <br></br> 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. <br></br> D) All three should be willing to pay the same amount for the stock regardless of their holding period.
D
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? <br></br> I. All else equal, the firm’s growth rate will accelerate after the payout change. <br></br> II. All else equal, the firm’s stock price will go up after the payout change. <br></br> III. All else equal, the firm’s P/E ratio will increase after the payout change. <br></br> A) I only <br></br> B) I and II only <br></br> C) II and III only <br></br> D) I, II, and III
A
16) A firm cuts its dividend payout ratio. As a result, you know that the firm’s ________. <br></br> A) return on assets will increase <br></br> B) earnings retention ratio will increase <br></br> C) earnings growth rate will fall <br></br> D) stock price will fall
B
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. <br></br> A) Book value per share <br></br> B) Liquidation value per share <br></br> C) Market value per share <br></br> D) Tobin’s q
B
18) An underpriced stock provides an expected return that is ________ the required return based on the capital asset pricing model (CAPM). <br></br> A) less than <br></br> B) equal to <br></br> C) greater than <br></br> D) greater than or equal to
C
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 ________. <br></br> A) 0% <br></br> B) 100% <br></br> C) between 0% and 50% <br></br> D) between 50% and 100%
B
20) The constant-growth dividend discount model (DDM) can be used only when the ________. <br></br> A) growth rate is less than or equal to the required return <br></br> B) growth rate is greater than or equal to the required return <br></br> C) growth rate is less than the required return <br></br> D) growth rate is greater than the required return
C
21) Suppose that in 2018 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market will change by ________. <br></br> A) -10% <br></br> B) -20% <br></br> C) -25% <br></br> D) -33%
D
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 ________. <br></br> A) will be higher than the intrinsic value of stock B <br></br> B) will be the same as the intrinsic value of stock B <br></br> C) will be less than the intrinsic value of stock B <br></br> D) The answer cannot be determined from the information given.
A
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 ________. <br></br> A) will be higher than the intrinsic value of stock B <br></br> B) will be the same as the intrinsic value of stock B <br></br> C) will be less than the intrinsic value of stock B <br></br> D) The answer cannot be determined from the information given.
A
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 ________. <br></br> A) will be higher than the intrinsic value of stock B <br></br> B) will be the same as the intrinsic value of stock B <br></br> C) will be less than the intrinsic value of stock B <br></br> D) The answer cannot be determined from the information given.
A
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