chapter 13 Flashcards

Question 1

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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

Question 2

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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

Question 3

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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.

Question 4

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4) The value of Internet companies is based primarily on ________. A) current profits B) Tobin’s q C) growth opportunities D) replacement cost

Question 5

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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

Question 6

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6) P/E ratios tend to be ________ when inflation is ________. A) higher; higher B) lower; lower C) higher; lower D) they are unrelated

Question 7

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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.

Question 8

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8) Earnings yields tend to ________ when Treasury yields fall. A) fall B) rise C) remain unchanged D) fluctuate wildly

Question 9

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9) Which one of the following is a common term for the market consensus value of the required return on a stock? A) dividend payout ratio B) intrinsic value C) market capitalization rate D) plowback ratio

Question 10

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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

Question 11

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12) If a stock is correctly priced, then you know that ________. A) the dividend payout ratio is optimal B) the stock’s required return is equal to the growth rate in earnings and dividends C) the sum of the stock’s expected capital gain and dividend yield is equal to the stock’s required rate of return D) the present value of growth opportunities is equal to the value of assets in place

Question 12

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13) A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________. A) has a Tobin’s q value < 1 B) will generate a positive alpha C) has an expected return less than its required return D) has a beta > 1

Question 13

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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.

Question 14

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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

Question 15

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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

Question 16

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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

Question 17

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18) An underpriced stock provides an expected return that is ________ the required return based on the capital asset pricing model (CAPM). A) less than B) equal to C) greater than D) greater than or equal to

Question 18

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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%

Question 19

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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

Question 20

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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 ________. A) -10% B) -20% C) -25% D) -33%

Question 21

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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.

Question 22

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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.

Question 23

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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.

Question 24

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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

Question 25

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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.

Question 26

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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

Question 27

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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.

Question 28

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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

Question 29

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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

Question 30

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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

Question 31

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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

Question 32

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Everything else equal, which variable is negatively related to the intrinsic value of a company? A) D1 B) D0 C) g D) k

Question 33

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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

Question 34

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Estimates of a stock’s intrinsic value calculated with the free cash flow methodology depend most critically on ________. A) the terminal value used B) whether one uses FCFF or FCFE C) the time period used to estimate the cash flows D) whether the firm is currently paying dividends

Question 35

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The greatest value to an analyst from calculating a stock’s intrinsic value is ________. A) how easy it is to come up with accurate model inputs B) the precision of the value estimate C) how the process forces analysts to understand the critical variables that have the greatest impact on value D) how all the different models typically yield identical value results

Question 36

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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

Question 37

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The term “residual claimant” refers to A) bond holders. B) option holders. C) equity/shareholders. D) suppliers.

Question 38

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The SEC requires public U.S. companies to file registration statements and periodic reports electronically through A) Yahoo. B) Google. C) EDGAR. D) FINRA.

Question 39

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The PEG ratio normalizes the P/E ratio by the A) tax rate. B) growth rate. C) market cap. D) book rate.

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chapter 13 Flashcards

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