Question 1

It is recommended that investors interested in the EVA approach should seek companies that have a return of capital in excess of ------- because this will likely exceed the cost of capital and the company is,therefore,adding value.

Accepted Answer

The answer of It is recommended that investors interested in...

Question 2

Value stocks,such as those considered the Dogs of the Dow,will generally have:

Accepted Answer

Value stocks, such as the Dogs of the Dow, typically have a low P/E ratio, which means the stock price is low relative to its earnings per share. This can be an indication of an undervalued stock, making it attractive to investors looking for bargains. The other choices do not necessarily apply to value stocks - some may pay dividends, have a high payout ratio, or require a low return.

Question 3

A company has a price to sales ratio of 1.0,annual sales of $1 billion and 100 million shares of common stock outstanding.Its stock price is:
a.$10
b.$20
c.$17.52
d.$22.00

Accepted Answer

The answer of A company has a price to sales...

Question 4

Under the P/E model,stock price is a product of:

Accepted Answer

The P/E model (Price/Earnings ratio model) states that the stock price is a product of the P/E ratio (price-earnings ratio) and EPS (earnings per share). The P/E ratio is the price of the stock divided by its EPS. Therefore, the correct answer is B, which states that the stock price is a product of P/E ratio and EPS. The other options are incorrect as they do not follow the P/E model.

Question 5

Several analysts and empiricists recommend investing in stocks with what kind of price to book value ratios?

Accepted Answer

Several studies have found that stocks with low price to book value ratios tend to outperform the market in the long run. This is because a low price to book value ratio may indicate that a stock is undervalued and has more potential for growth. On the other hand, stocks with high price to book value ratios may be overvalued and may not have as much growth potential. Therefore, investing in stocks with low price to book value ratios is generally recommended.

Question 6

Generally speaking,if interest rates fall and other factors remain constant,the P/E ratio of most companies company will:

Accepted Answer

When interest rates fall, it becomes cheaper for companies to borrow money and invest in growth opportunities. This leads to an increase in earnings, which in turn increases the P/E ratio. Therefore, option B is correct.

Question 7

Book value is:

Accepted Answer

Book value is the value of a company's assets, liabilities, and equity as shown on its balance sheet. It is the accounting value of the firm, as reflected in the financial statements. It is not necessarily the same as market value or liquidation value, as it does not take into account factors like market conditions, economic outlook, or intangible assets. While dividend models can be useful in determining a company's value, they do not necessarily provide a more accurate valuation than book value.

Question 8

A major difference between the dividend discount model (DDM)and the free cash flow to equity model (FCFE)is that the FCFE:

Accepted Answer

The answer of A major difference between the dividend discount...

Question 9

Which of the following statements regarding P/E ratios is true?

Accepted Answer

The answer of Which of the following statements regarding P/E...

Question 10

There are many ways to measure Earnings Per Share.

Accepted Answer

Earnings Per Share (EPS) can be calculated using different formulas, such as basic EPS, diluted EPS, trailing EPS, and forward EPS. Therefore, there are many ways to measure EPS.

Question 11

Economic value added is the difference between:

Accepted Answer

Economic value added (EVA) is a measure of financial performance that calculates the difference between operating profits and the cost of capital. It is a way to determine if a company is generating enough return to cover its costs of capital. EVA is used to evaluate the effectiveness of a company's management in creating value for shareholders. Operating profits are a measure of a company's earnings before interest and taxes (EBIT), while the cost of capital is the cost of borrowing money or issuing equity to finance operations.

Question 12

Which of the following models incorporates debt financing,including both the repayment and interest on existing debt as the sale of new debt,as well as preferred stock financing?

Accepted Answer

The FCFF (Free Cash Flow to Firm) model incorporates all sources of financing, including debt financing (repayment and interest on existing debt, sale of new debt) and preferred stock financing. The FCFE (Free Cash Flow to Equity) model only takes into account the equity financing. The constant growth rate and multiple growth rate models are both methods for determining the value of a stock using the dividend discount model and do not incorporate debt or preferred stock financing.

Question 13

Which of the following statements concerning price to book value is true?

Accepted Answer

Stocks with low price to book values are often considered undervalued and have historically shown potential to outperform the market.

Question 14

A relatively new valuation technique that emphasizes the difference between a firm's operating profits and its cost of capital is called:

Accepted Answer

The economic value added (EVA) model emphasizes the difference between a firm's operating profits and its cost of capital. It aims to calculate the residual income generated by a company after considering the cost of debt and equity capital. This approach is used to determine the true economic profit of a company and has gained popularity in recent years. The other options listed are different valuation techniques, but do not specifically focus on operating profits and cost of capital.

Question 15

Relatively small changes in inputs used in DDM can change the estimated value by large percentage amounts.

Accepted Answer

The estimated value in DDM is highly sensitive to changes in inputs such as the growth rate, discount rate, and dividends. Small changes in these inputs can result in significant changes in the estimated value of the stock. Therefore, the statement is true.

Question 16

Which of the following changes will likely lead to a higher P/E,assuming other factors are equal?

Accepted Answer

A higher P/E ratio indicates that investors are willing to pay more for each dollar of earnings. An increase in the growth rate of earnings suggests that the company is expected to have higher future earnings, which makes investors willing to pay more. A decrease in the dividend payout ratio (A) or dividend yield (D) may increase the earnings retained by the company, but it does not necessarily lead to higher future earnings or expectations. An increase in the required rate of return (C) would decrease the P/E ratio.

Question 17

A firm has net income of $1 million with 250,000 shares outstanding with a total market value of $8 million.What is its P/E ratio?
a.4
b.8
c.16
d.32

Accepted Answer

The answer of A firm has net income of $1...

Question 18

If all investors use the constant growth dividend model to value the same stock,they will all arrive at the same estimate of value.

Accepted Answer

The constant growth dividend model requires assumptions about the growth rate and required rate of return, which can vary among investors, leading to different valuations.

Question 19

The price/sales ratio indicates:

Accepted Answer

The price/sales ratio is calculated by dividing the market capitalization of a company by its annual sales. This ratio indicates what the market is willing to pay for each dollar of a company's revenue. A high price/sales ratio suggests that the market is valuing the company's growth potential, while a low ratio can indicate an undervaluation or lack of growth prospects. Hence, option B is the correct choice. The other options do not accurately describe the purpose of the price/sales ratio.

Question 20

Which of the following variables has an inverse relationship with the P/E ratio?

Accepted Answer

The P/E ratio is calculated by dividing the stock price by earnings per share (EPS). The required rate of return is the minimum rate of return an investor expects to earn from an investment. A higher required rate of return implies a lower stock price, which leads to a lower P/E ratio. Therefore, the required rate of return has an inverse relationship with the P/E ratio. The payout ratio, expected growth rate of dividends and expected growth rate of earnings, on the other hand, have a direct relationship with the P/E ratio.

Quiz 10: Common Stock Valuation