Chapter 13 Flashcards
What is Book Value?
The calculated value of a company’s equity based on accounting rules for tracking assets and cash flow
What is most firms market-to-book ratio?
above 1
What is book value per share?
the ratio of common shareholders’ equity to common shares outstanding
What is the liquidation value per share?
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
If a tock is correctly priced, then you know that the sum of the stock’s _______ _______ ____ and _______ ______ is equal to the stock’s _______ _____ __ ______
expected capital gain , dividend yield, required rate of return
What is the Market Capitalization Rate?
a common term for the market consensus value of the required return on a stock
What is a positive-alpha stock?
if the actual stock price is less than intrinsic value, the company provides better than a fair rate of return relative to its risk
What is the greatest value to an analyst from calculating a stock’s intrinsic value?
how the process forces analysts to understand the critical variables that have the greatest impact on value
You want to earn a return of 10% on each of two stocks, A and B. Each of the stock s is expected to pay a dividend of $4. The expected growth rate of dividends is 6% (A) and 5% (B). Using the constant-growth DDM, which stock will have the higher intrinsic value?
A will be greater than B
Each of two stocks, A and B, is expected to pay a dividend of %5.2/ The expected growth rate of dividends is 4.5% for both stocks. You require a rate of return of 11.3% on stock A and a return of 14.2% on stock B. Using the constant growth DDM, which intrinsic value will be higher?
Stock A higher than stock B
You want to earn a return of 14.2% on each of two stocks, A and B. Stock A is expected to pay a dividend of $5.2, while Stock B pays $3.9. The expected growth rate of dividends for both stocks is 3.3%. Using the constant growth DDM, which stock will have the higher intrinsic value?
stock A higher than stock B
If a firm cuts its dividend payout ratio, what happens as a result?
firm’s earning retention ratio will increase
Assuming all other factors remain unchanged, a reduction in investor risk aversion would….
increase a firm’s price-earnings ratio
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 dividend yield which is less than that of the typical company
Generally speaking, as a firm progresses through the industry life cycle, you would expect…
the PVGO to decrease as a percentage of share price
What is plowback ratio?
percentage of net earnings a company keeps (reinvests) instead of paying out as dividends to shareholder
High plowback ratio → The company reinvests most of its profits for growth.
Low plowback ratio → The company returns more profits to shareholders as dividends
What is the price-to-sales ratio used for?
to compare firms that have no earnings
When is the price-to-sales ratio most useful?
for firms in the start-up phase of the industry life cycle
If a firm increases its plowback ratio, what happens to the P/E ratio?
cannot be determined
Firms with higher expected growth rates tend to have P/E ratios that are _______ than the P/E/ ratios of firms with ______ expected
higher , lower
new-economy companies generally have ______ P/E multiples than old-economy companies
higher
what is the value of internet companies primarily based on?
growth opportunities
What is the Enterprise Value?
the VALUE of the whole company
Estimates of a stock’s intrinsic value calculated with the free cash flow methodology depend most critically on …
the terminal value used
