Chapter 11 (Equity Securities Valuation)

Question 1

This is the term used to describe a business that is operating and expected to continue operations indefinitely.

Answer 1

Going Concern

Question 2

Present Value models are sometimes referred to as (x)

Answer 2

Discounted Cash Flow models

Question 3

Po= (CF1/(1+k)^1 + (CF2/1+k)^2 + …(CFt/1+k)^t

Po = Value of security today
CFt = Cash flow for period t
k = discount rate based on type of security and risk level
t = number of cash flows to be evaluated

Answer 3

Present Value

Question 4

Vo = D1/(k-g)

V= Price per share
D1= dividend per share one period from today
k= investor’s required return
g= the dividend growth rate

Answer 4

Constant Growth Dividend Model (CGDM)

Question 5

g = ROE x Retention Ratio

Answer 5

Growth Rate (For dividends)

Question 6

r = (D1/P) + g

P= Current price of stock

Answer 6

Implicit Required Rate of Return

Question 7

V = D0/k

Answer 7

Zero Growth Dividend (Perpetuity)

Question 8

V0= Dt/(1+k)^t + Pn/(1+k)^n

V = Price of stock
Dt = Dividend per share for period t
k = Required return of the investor
Pn = price of the stock at time periodnbased on CGDM

Answer 8

Two Stage Dividend Discount Model

Question 9

PE x EPS
or Stock Price/EPS = PE

PE=Dividend Payout Ratio/(required return-div growth)

Answer 9

Stock Price

Question 10

Dividend/Stock Price OR EPSxPayout Ratio/Stock Price

Answer 10

Dividend Yield

Question 11

PE Ratio/EPS Growth

Answer 11

PEG Ratio