Q&A Hero

Q: 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

Q: Ace Frisbee Corporation produces a good that is very mature in the firm's product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today. A. $13.07 B. $13.58 C. $18.25 D. $18.78

Q: Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today. A. $63.80 B. $65.13 C. $67.95 D. $85.60

Q: Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the constant-growth DDM, the intrinsic value of the stock is _________. A. $50 B. $100 C. $150 D. $200

Q: Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the CAPM, the return you should require on the stock is _________. A. 2% B. 5% C. 8% D. 9%

Q: Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. Using the constant-growth DDM, the intrinsic value of the stock is _________. A. $10 B. $22.73 C. $27.78 D. $41.67

Q: 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

Q: Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the intrinsic value of the stock is _________. A. 4 B. 17.65 C. 37.50 D. 50

Q: Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the CAPM, the return you should require on the stock is _________. A. 7.25% B. 10.25% C. 14.75% D. 21%

Q: Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is _________. A. $24.29B. $27.39C. $31.13D. $34.52

Q: Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________. A. 8% B. 10.8% C. 15.6% D. 16.8%

Q: Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is _________. A. 1.4 B. .9 C. .8 D. .5

Q: 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.

Q: 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

Q: 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.

Q: 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.

Q: Flanders, Inc., has expected earnings of $4 per share for next year. The firm's ROE is 8%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A. -$6.33 B. $0 C. $20.34 D. $26.67

Q: Annie's Donut Shops, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 18%, and its earnings retention ratio is 60%. If the firm's market capitalization rate is 12%, what is the value of the firm excluding any growth opportunities? A. $25 B. $50 C. $83.33 D. $208

Q: Ace Ventura, Inc., has expected earnings of $5 per share for next year. The firm's ROE is 15%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities? A. $25 B. $50 C. $75 D. $100

Q: Grott and Perrin, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 20%, and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A. $20 B. $70 C. $90 D. $115

Q: Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is _________. A. 9% B. 12% C. 14% D. 18%

Q: Rose Hill Trading Company is expected to have EPS in the upcoming year of $6. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________. A. $20.93 B. $69.77 C. $128.57 D. $150

Q: Rose Hill Trading Company is expected to have EPS in the upcoming year of $8. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be _________. A. $1.12 B. $1.44 C. $2.40 D. $5.60

Q: A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today? A. $25 B. $16.87 C. $19.24 D. $20.99

Q: Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earnings in the form of dividends. A. 5% B. 15% C. 17.5% D. 45%

Q: A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth _________. A. $13.50 B. $45.50 C. $91 D. $114.29

Q: Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____. A. 4.5% B. 10.5% C. 15% D. 30%

Q: Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate? A. .5% B. 1% C. 1.5% D. 2%

Q: Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45 million in liabilities, and $25 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is _________. A. $16.67 B. $25 C. $37.50 D. $40.83

Q: The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 60%, its P/E ratio will be _________. A. 7.14 B. 14.29 C. 16.67 D. 22.22

Q: The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be _________. A. 8.33 B. 12.5 C. 19.23 D. 24.15

Q: You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return. A. $31.25B. $32.37C. $38.47D. $41.32

Q: 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.

Q: 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.

Q: 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.

Q: Suppose that in 2012 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%

Q: 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

Q: 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%

Q: 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

Q: __________ 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

Q: 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

Q: 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

Q: 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.

Q: 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

Q: 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

Q: A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is ________. A. 1.83 B. 1.5 C. 1.35 D. 1.46

Q: 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

Q: 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

Q: Earnings yields tend to _______ when Treasury yields fall. A. fall B. rise C. remain unchanged D. fluctuate wildly

Q: 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.

Q: P/E ratios tend to be _______ when inflation is ______. A. higher; higher B. lower; lower C. higher; lower D. They are unrelated.

Q: New-economy companies generally have higher _______ than old-economy companies. A. book value per share B. P/E multiples C. profits D. asset values

Q: The value of Internet companies is based primarily on _____. A. current profits B. Tobin's q C. growth opportunities D. replacement cost

Q: 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.

Q: 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

Q: 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

Q: Stalwarts are typically found in the _________ stage of the industry life cycle. A. start-up B. consolidation C. maturity D. relative decline

Q: At what point in the industry life cycle are inefficiencies in competitors most likely to be removed? A. Start-up stage B. Consolidation stage C. Maturity stage D. Relative decline stage

Q: Cash cows are typically found in the _________ stage of the industry life cycle. A. start-up B. consolidation C. maturity D. relative decline

Q: Items that are ____________ and product purchases for which ________ is not important tend to be less cyclical in nature. A. necessities; income B. luxuries; leverage C. discretionary goods; time of purchase D. produced with high fixed costs; entertainment

Q: Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ______________. A. demand shock B. equilibrium event C. expanding commodity event D. supply shock

Q: During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event? A. Demand shock B. Equilibrium event C. Expanding commodity event D. Supply shock

Q: The classification system used to classify firms into industries is now called the _____ code. A. SIC B. NAICS C. ISO 57 D. ISM

Q: The supply of funds in the economy is controlled primarily by ____________. A. the Federal Reserve System B. Congress C. money center banks D. the Treasury department

Q: The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ___________. A. expanding economy B. increased inflation C. interest rate declines D. lower GDP

Q: An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of ____________. A. asset allocation B. capacity utilization C. employment management D. strategic planning

Q: An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy? A. An economic slowdown is likely B. Employment trends will reverse and unemployment will occur C. Government deficits will result from capacity utilization D. Inflation may result from upward wage pressures

Q: The federal government decides to pay for the transition to private social security accounts with a one-time $1 trillion bond issue. What will be the biggest concern to businesses relative to the "crowding out" effect? A. Higher interest rates due to the new government borrowing B. Inflation resulting from more government purchases C. A negative supply shock D. Shortage of investment due to new accounts

Q: What economic variable is most closely associated with increasing corporate profits? A. Exchange rates B. Inflation C. Gross domestic product D. Budget deficits

Q: You would expect the beta of cyclical industries to be ______ and the beta of defensive industries to be ______. A. greater than 1; less than 1 B. less than 1; less than 1 C. less than 1; greater than 1 D. greater than 1; greater than 1

Q: Which of the following are examples of cyclical industries? I. Maytag II. Computer chip manufacturers III. Kellogg's Frosted Flakes IV. Pfizer A. I and II only B. I, II, and III only C. II, III, and IV only D. I, II, III, and IV

Q: The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan? A. U.S. goods will increase in cost, and Japan will import more. B. U.S. goods will increase in cost, and Japan will import less. C. U.S. goods will decrease in cost, and Japan will import more. D. U.S. goods will increase in cost, and Japan will export less.

Q: Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation? A. Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand. B. Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand. C. Decrease the discount rate, lowering interest rates and causing both costs and prices to fall. D. Increase taxes, reducing costs and causing prices to fall.

Q: A supply-side economist would likely agree with which of the following statements? A. Real output and aggregate employment are primarily determined by aggregate demand. B. Real income will rise when government expenditures and tax rates increase. C. Real output and aggregate employment are primarily determined by tax rates. D. Increasing the money supply will increase real output without causing higher inflation.

Q: Countercyclical fiscal policy is best described by which of the following statements? A. Government surpluses are planned during economic booms, and deficits are planned during economic recessions. B. The annual budget should always be balanced. C. Deficits should always equal surpluses. D. Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

Q: An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Which of the characteristics would be typical of an industry that is in the maturity stage? A. 1, 2, and 3 B. 4 and 5 C. 6, 7, and 8 D. all of these options

Q: An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics ____ would be typical of an industry that is in the consolidation stage. A. 6 and 7 B. 1 and 4 C. 5 and 6 D. 2 and 8

Q: An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics _______ would be typical of an industry that is in the start-up stage. A. 4 and 7 B. 1 and 4 C. 2 and 5 D. none of these options

Q: An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics 4 and 5 would indicate that the industry is in the _________ stage. A. start-up B. consolidation C. maturity D. relative decline

Q: The goal of supply-side policies is to _______. A. increase government involvement in the economy B. create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods C. maximize tax revenues of the government D. focus more on wealth redistribution policies