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Exam 8: Stock Valuation

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Question 61

Multiple Choice

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Treehouse Inc.'s $50 par value preferred stock pays a dividend fixed at 8% of par. To earn 9% on an investment in this stock, you need to purchase the shares at a per share price of

A) $4.00.
B) $44.44.
C) $50.00.
D) $56.25.

E) A) and B)
F) A) and C)

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Question 62

Multiple Choice

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Allston Inc. just paid an annual dividend of $1.00. The expected dividend next year $1.50, and the year after that, $2.00. After the third year, dividends will grow at a constant rate of 5% per year. If your required rate of return for Allston is 10%, what is the most you should pay for this stock.

A) $31.05
B) $36.73
C) $37.73
D) $45.50

E) A) and C)
F) B) and C)

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Question 63

Multiple Choice

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For the next three years MBA Inc. is expected to pay $1.50, $2.00 and $2.50 in dividends and after that dividends will grow at the rate of 4% in perpetuity. The required rate of return is 12%. Assuming the first dividend will be paid in exactly one year, the intrinsic value of MBA shares is

If a stock's market price is greater than its intrinsic value then

A stock's required rate of return as determined by the capital asset pricing model is influenced by

What is the required rate of return on a common stock that is expected to pay a $0.75 annual dividend next year if dividends are expected to grow at 2 percent annually and the current stock price is $8.59?

A stock will be an attractive investment if the required rate of return exceeds the expected rate of return.

Columbus Co.'s sales revenue for the most recent quarter was $2.5 million and cost of goods sold was $1.5 million. If sales grow by 15% in the next quarter and all ratios remain the same, gross profit will be

When intrinsic value equals market value, the stock's internal rate of return is equal to its required rate of return.

List the key variables that affect the P/E ratio and explain the relationship between each variable and the P/E ratio.

Over the last year, a firm's earnings per share increased from $1.20 to $1.40, its dividends per share increased from $0.50 to $0.60, and its share price increased from $21 to $24. The firm maintained a relative P/E of 1.10 over the entire time period. Given this information, it follows that the

Which of the following variables affect the P/E ratio? I. capital structure of a firm II. amount of dividends to be paid III. inflation rate IV. earnings rate of growth

The free cash flow to equity approach does not require present value calculations.

The required rate of return estimated by the Capital Asset Pricing Model is not suitable for use in dividend valuation models.

If the market multiple is 20.24 and the P/E ratio of a company is 24.5, then the stock's relative P/E is

In mature, well-established companies book value should be close to market value.

To use the Price-to-Sales valuation approach you also need to know the after tax profit margin.

One of the easiest aspects of the dividend valuation model (DVM) is specifying the appropriate growth rate for a firm's dividends over time.

When evaluating a firm's stock, past performance

Early in 2019, Mathew is analyzing shares of Janeff Corp. He expects the following dividends per share (end of year) . 2019 $1.00 2020 $1.25 2021 $1.50 He expects 2021 earnings per share to be $4.50 and Janeff's P/E ratio to be 20. His required rate of return for this stock is 12%. He should pay no more than