SU4: Valuation

Question 1

Book Value Per Share

Answer 1

(Total Stockholders Equity - Preferred Equity)/Total Number of Shares Outstanding

Question 2

Book Balue Per Commons Share

Answer 2

(Total Equity - Liquidation Value of Preferred Equity)/Common Shares Outstanding

Question 3

Market to book ratio

Answer 3

Market price per share / book value per share

Question 4

PE Ratio

Answer 4

Market Price Per Share / Earnings per share OR

Total Market Value / Net Income

Question 5

A decrease in an investsors required rate of return will…

Answer 5

cause share prices to increase, higher PE Ratio

Question 6

A decline in the rate of dividend growth will…

Answer 6

cause share price to decline, resulting in a lower PE ratio

Question 7

A increasing dividend yield indicates that…

Answer 7

a share price is declining, resulting in a lower PE ratio

Question 8

Price to EBITDA ratio

Answer 8

Market price per share / ebitda per share

Question 9

Price sales ratio

Answer 9

Market price per share / sales per share

Question 10

BEPS

Answer 10

Income available to common shareholders / weighted-average number of common shares outstanding

Question 11

DEPS

Answer 11

Dilutive earnings per share

Question 12

Earnings Yield

Answer 12

earnings per share/market price per share

Question 13

Dividend Payout Ratio

Answer 13

dividends to commons shareholders / income available to commons shareholders

Question 14

Dividend Yield

Answer 14

dividend per share / market price per share

Question 15

Constant Growth Dividend Model

Answer 15

Expected dividend / (discount rate - dividend growth rate)

Question 16

Expected dividend

Answer 16

Last Annual Dividend Paid x (1 + Growth Rate)

Question 17

Shareholder Return

Answer 17

(Ending Stock Price - Beginning Stock Price +Annual Dividends Per Share) / Beginning Stock Price

Question 18

Put Call Parity Formula

Answer 18

Value of call + PV of exercise price = Value of put + Value of underlying

Question 19

An increase in the exercise price of an option will..

Answer 19

Decrease the value of the call option and increase the value of the put option

Question 20

An increase in the price of underlying item will…

Answer 20

Increase the value of the call option and decrease the value of the put option

Question 21

An increase in interest rates will…

Answer 21

Increase the value of a call option and decrease the value of a put option

Question 22

Component Cost of Debt

Answer 22

Effective Rate x (1 - marginal tax rate)

Question 23

Component Cost of Preferred Stock

Answer 23

Cash Dividend on Preferred Stock / Market Price of Preferred Stock

Question 24

Component Cost of Common Stock

Answer 24

Cash Dividend on Common Stock / Market Price of Common Stock

Question 25

Cost of new Debt

Answer 25

Annual Interest / Net Issue Proceeds

Question 26

Cost of New Preferred Stock

Answer 26

Next Dividend / Net Issue Proceeds

Question 27

Cost of New Common Stock

Answer 27

(Next Dividend / Net Issue Proceeds) + Dividend Growth Rate

Question 28

Cost of Preferred Stock

Answer 28

Dividend Per Share / Cost of Capital

Question 29

The use of derivatives to either hedge or speculate results in

Answer 29

Offsetting risk when hedging and increased risk when speculating

Question 30

For the purposes of EPS, Stock Dividends and Stock Splits are considered…

Answer 30

Issued over the entire term in question

Question 31

The date when the right to a divident expires is called the

Answer 31

Ex-dividend date

Question 32

When calculating the cost of capital, the cost to retained earnings should be <> than the cost of external common equity

Answer 32

Lower. Newly issued or esternal common equity is more costly than retained earnings.

Question 33

A firm’s target or optimal capital structure is consistent with

Answer 33

Minimum weighted average cost of capital

Question 34

How would a 5% stock dividend affect a companies paid in capital and retaine earnings when declared?

Answer 34

Increase APIC, Decrease RE

A declaration of a stock dividend reclassifies from RE to APIC

Question 35

The formula for the conversion ratio of a convertible bond

Answer 35

Conversion ratio = par value of the convertible bond / conversion price