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Q:
Firms with P/E ratios higher than the overall market ratio are expected to provide greater than normal returns with equal or less risk.
Q:
Debt-utilization ratios do not consider current liabilities.
Q:
The liquidity ratios measure how quickly a firm can dispose of inventory.
Q:
Financial ratios are meaningless unless they are compared to a company standard or historical or industry data.
Q:
According to Z score analysis, the higher the Z score, the greater the firm's bankruptcy potential.
Q:
The Beaver and Altman bankruptcy studies indicated that ratios of failing firms signal failure as much as five years ahead of bankruptcy.
Q:
The Beaver and Altman bankruptcy studies found that firms can survive at least two years once they declare bankruptcy.
Q:
Cash flows from financing activities would include the repurchase of debt and equity.
Q:
Cash flows from operating activities would include the payment of cash dividends.
Q:
Cash flows from investing activities would involve the purchase or sale of plant and equipment.
Q:
A primary use of the source and use of funds statement is to determine how current assets and longer-term assets are financed.
Q:
Balance sheet items are carried at original cost or market value, at the discretion of the individual firm.
Q:
Harding Corp. has to cover a $65,000 sinking fund payment. The firm is in the 35% tax bracket, and the treasurer wants to know how much before-tax income is required for the firm to cover its sinking fund.
Q:
Pacific Storage expects to have earnings per share of $5.25 in 2005, and $5.65 in 2006. The average price-earnings ratio for General industry is 10X (times). Pacific Storage has traditionally had a P/E ratio 12% higher than the industry, and in 2005 it is expected to be 15% higher than the industry. Calculate the expected price of Pacific's stock price in 2005 and 2006, based on expectations of EPS and P/E ratios.
Q:
Security analysts following the Witczak Corporation use a simplified income-statement method of forecasting. Assume that current sales are $30 million, and are expected to grow by 10.5% in year 1 and 2. The after-tax profit margin is projected at 7% in year 1, and 7.2% in year 2. The number of shares outstanding is anticipated to be 450,000 for year 1, and 500,000 for year 2. Calculate the project earnings per share for the next two years.
Q:
Widji Outfitters is expected to pay a dividend (D1) of $1.00 next year, with an expected constant growth in dividends of 5%. The required rate of return is 11%.a) Calculate the present value of this stock.b) What will be the new price of this stock if the discount rate rises to 12%?c) What will be the new price of this stock if the discount rate falls to 10%?
Q:
Tate Realty is expected to pay a dividend (D1) of $3.00 next year, with the growth in dividends expected to remain constant at 5%. The required rate of return, Ke, is 10%. Calculate P0.
Q:
Between 1926 and 2009, the mean return of large company stocks was:
A. 8.4%.
B. 9.4%.
C. 9.8%.
D. 11.4%.
E. 12.4%.
Q:
If the company's profit margin is constant over time, the number of common shares remains the same, and the dividend payout ratio stays the same, the price to sales ratio, the price to earnings ratio and the price to book value ratio should:
A. provide similar valuations for the company's stock value.
B. provide very different valuations for the company's stock value.
C. not be related in any way.
D. None of the above are true
Q:
If the company's profit margin is constant over time, and the number of shares of stock remains the same, the price to sales ratio and the price to earnings ratio:
A. should provide similar valuations for the company's stock value.
B. should provide very different valuations for the company's stock value.
C. should not be related in any way.
D. All of the above are true
Q:
The valuation models using price to sales, price to earnings, price to book value, price to cash flow, and price to dividends, assume that:
A. there is a historical relationship between these ratios and the current price ratio.
B. when the current price ratio is below the historical ratio, the stock may be undervalued.
C. there is some general accounting relationship between these five ratios, based on historical performance.
D. All of the above are true
Q:
Studies generally show that the price-earnings ratio is a function of:
A. expected changes in interest rates.
B. future estimated growth of earnings for the individual company.
C. expected changes in the required rate of return, Ke.
D. All of the above impact price-earnings ratios
Q:
The reason price-earnings ratios and inflation are related is because:
A. as inflation increases, the required return in the market rises, pushing down the prices of securities.
B. as inflation increases, the required return in the market rises, pushing up the prices of securities.
C. as price-earnings ratios fall, the market changes its expectations about the future rate of inflation.
D. as price-earnings ratio rise, the market anticipates that inflation will decrease, sending stock prices higher.
Q:
The use of many valuation models provides the analyst with
A. one model that gives the right answer.
B. multiple models of how the market might value the firm's stock price.
C. a confusing array of answers.
D. the ability to choose the best model that matches his or her previous judgment.
Q:
The nonconstant dividend discount model is best applied to companies in the:
A. maturity stage of their life cycle.
B. development stage of their life cycle.
C. expansion stage of their life cycle.
D. A and B
Q:
Beta measures:
A. the relationship of the P/E ratio to the earnings growth rate.
B. individual company stock price risk, relative to the market.
C. the risk within a portfolio than cannot be diversified away.
D. the stock price growth of one company compared to that of a second company.
Q:
The value of common stock can be viewed as:
A. a dividend stream, plus a market price at the end of the dividend stream.
B. a present value of a dividend stream, plus a market price at the end of the dividend stream.
C. the terminal value of the dividend stream.
D. the sum of the dividend stream, taken to infinity.
Q:
Dividend models are best suited for those companies that are in the:
A. introduction phase of the life cycle.
B. expansion phase of the life cycle.
C. maturity phase of the life cycle.
D. Both B and C
Q:
P/E ratios are influenced by a company's
A. growth rate.
B. risk.
C. capital structure.
D. management.
E. All of the above and more
Q:
A good example of an industry that has a lot of growth companies in it is the:
A. automobile industry.
B. biotechnology industry.
C. food and beverage industry.
D. consumer products industry.
Q:
The basis of stock valuation includes an analysis of
A. economic variables.
B. industry variables.
C. financial statements.
D. All of the following
Q:
Forecasts for companies that follow economic cycles are best based on analysis of
A. 2 economic peaks and troughs.
B. 1 economic peak and trough.
C. the last 3 to 5 years of data.
D. None of the above
Q:
The pure, short-term earnings model:
A. ignores present value analysis and its long-term forecasts of dividends and earnings per share.
B. uses the past three months to estimate earnings per share.
C. disregards the long-term growth forecasts for earnings per share.
D. uses the payout ratio and return on equity to derive the P/E ratio.
Q:
The value of the price-earnings ratio is affected by:
A. the earnings period used for its calculation.
B. expected growth in earnings per share.
C. overall conditions in the stock market.
D. inflationary expectations.
E. All of the above
Q:
The best time period for use in the combined earnings and dividend valuation model is:
A. 2 years.
B. 5 years.
C. 10 years.
D. Any time period is acceptable
Q:
Which of the following statements about stock valuation based on asset value is NOT true?
A. Natural resources often give a company value, even if an income stream is not produced
B. The value of the assets may not even appear on the balance sheet
C. Current assets are usually excluded from the valuation process, since they will be used up in the next business cycle
D. Hidden assets can add substantial value to the firm
Q:
Which of the following is NOT a characteristic of a growth company?
A. The company has sales growth greater than the economy by a reasonable margin
B. The company usually pays a dividend equal to 40-50% of earnings
C. The company has consistently stable and high profit margins
D. The company has a growth rate that is significantly higher than the growth of GDP
Q:
In developing a least squares trend line, the analyst should:
A. include several business cycles.
B. fit the trendline between a peak and a trough, or vice versa.
C. use as many data points as are practical.
D. All of the above
Q:
Least squares trend analysis involves fitting a straight line through a series of data, which, by definition:
A. minimizes the distance of each data point from the line, and minimizes the squared area above and below the trendline.
B. minimizes the distance between each data point.
C. must include at least one peak and at least one trough.
D. must include a minimum of 20 points to get a usable trendline.
Q:
An individual investor could rely on earnings forecasts from any of the following, except:
A. Standard and Poor's earnings forecaster.
B. a firm's annual report.
C. Value Line Investment Survey.
D. Zacks, I/B/E/S, or other professional consensus reporting firms.
Q:
The P/E ratio approach to stock valuation is based on:
A. a yearly range of historical P/E ratios resulting in an average expected P/E ratio, an earnings forecast derived from expected growth rates in earnings, and the stock's current P/E ratio.
B. the average yearly P/E ratio, relative to the market; a yearly range of P/E ratios; and earnings based on an assumed constant growth rate.
C. an increasing yearly range of P/E ratios and an earnings forecast based on the EPS of previous years.
D. The current P/E ratio, compared to the P/E ratio of some market index.
Q:
Stock valuation based on the relationship between a stock's P/E ratio and the market may result in superior returns if:
A. the firm is riskier than the market.
B. the firm has a high P/E ratio, relative to the market.
C. the stock is trading at the low end of its P/E ratio, relative to the market.
D. More than one of the above
Q:
The P/E ratio of a particular firm would probably be affected by which of the following?
A. Investors' perception of the quality of the firm's management
B. The firm's accounting practices
C. Supply and demand for the security
D. All of the above
Q:
A high P/E ratio calculated using the latest 12 months of earnings may be misleading
A. in an inflationary economy.
B. if the firm is in a cyclical industry, like automobiles.
C. if the firm has a strong future growth rate.
D. More than one of the above
Q:
Which of the following would most likely affect the P/E ratio of the market in general?
A. A significant change in government fiscal policy
B. Declining earnings of the S&P 500 companies
C. Investors' expectations about inflation changes and becomes either more positive or more negative
D. All of the above could have a significant impact.
Q:
In general, the P/E ratio of a stock _______________ as inflation _____________.
A. increases; decreases
B. increases; increases
C. decreases; decreases
D. none of the above
Q:
Short-term speculators would probably NOT use _________ to develop a stock value.
A. dividend growth rates
B. discount rates
C. a stream of earnings or dividends
D. the income-statement method
E. any of the above
Q:
In the non-constant growth model where the first phase of growth is 5 years, followed by a second phase of constant growth:
A. P5= D6/(Ke-g).
B. P0 = the present value of dividends from years 1 - 5 plus the present value of P5.
C. the company's growth rate is probably higher than Ke during the first 5 years.
D. All of the above are correct
Q:
The primary difference between dividend valuation models and earnings valuation models is:A. selecting the appropriate discount rate.B. dividends are never considered in earnings models.C. whether the investor's income stream or the firm's income stream is measured.D. More than one of the above
Q:
In order for any dividend valuation model to reflect a valid stock price for a company,
A. the company must pay dividends.
B. the dividend growth rate must remain constant.
C. the required rate of return (discount rate) must remain constant.
D. More than one of the above is true
Q:
What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.
A. $26.75
B. $30.00
C. $32.10
D. $21.42
E. $13.38
Q:
If the equity risk premium (ERP) expands, Ke will:
A. increase by beta times the equity risk premium.
B. not be affected.
C. go down.
D. decrease by beta times the equity risk premium.
E. increase by beta minus the equity risk premium.
Q:
If the Treasury bill rate (RF) increases, then Ke will
A. decrease.
B. increase.
C. stay the same.
D. go up by beta times the Treasury bill rate.
Q:
One basic problem with the application of the Capital Asset Pricing Model when computing Ke is that
A. (Km- RF) is not observable in the market.
B. the analyst needs to forecast dividends for next year.
C. beta is a historical number.
D. the risk-free rate changes every day.
Q:
One way of calculating Ke is to use the Capital Asset Pricing model, as follows:
A. Ke = RF + (KM - RF)
B. Ke = RR + IP + ERP
C. Ke = RF + b(KM - RF)
D. Ke = D1/P0 + g
E. Ke = RF + b(KM)
Q:
The required rate of return is intended to provide
A. compensation for expected inflation.
B. a premium for risk assumed.
C. a minimum real rate of return.
D. All of the above
Q:
The constant growth dividend valuation model assumesA. a constant annual dividend.B. a constant dividend growth rate for no more than the first 10 years.C. that the discount rate must be greater than the dividend growth rate.D. that the dividend growth rate must be greater that the discount rate.E. A and B are true assumptions
Q:
The general dividend valuation model assumes the investor knows the _______ and the discount rate.
A. exact dividend to be paid in each and every year
B. current year's dividend, the anticipated annual dividend growth rate
C. investor's required rate of return
D. book value per share of the company
Q:
The purpose of stock valuation isA. to set the fair market price for a given common stock.B. to determine whether the common stock's value is fairly represented by its market price.C. of limited value, since the efficient market hypothesis proves that all common stock is always fairly priced.D. to find common stocks whose market price equals the intrinsic value.
Q:
When an analyst uses the income statement method of forecasting earnings, she has a limited amount of flexibility in adjusting the inputs.
Q:
The problem with the pure short-term earnings model is that the stock value is highly sensitive to short-term swings in earnings per share (EPS).
Q:
It is thought that historical growth rates have more impact on an individual company's P/E ratio than expected future growth rate.
Q:
In general, if the market perceives that the direction of interest rates and inflation is down, this perception will have a positive effect on price-earnings ratios.
Q:
History shows that, as inflation increases, price-earnings ratios increase along with inflation.
Q:
All things being equal, the less debt that a firm has, the more likely it is to be highly valued in the marketplace.
Q:
Mathematically, the price-earnings ratio (P/E) is simply the price per share divided by earnings per share.
Q:
Hidden assets refer to assets that are not readily apparent to investors in a traditional sense, but add substantial value to the firm.
Q:
As inflation increases, the required rate of return on common stocks falls, as well as the prices.
Q:
Every valuation method has its limitations.
Q:
Valuation models using average price ratios and 10-year averages can be more useful with cyclical companies, because valuation of cyclical companies benefits from an analysis of longer time periods including at least one business cycle.
Q:
Inflation has an indirect effect on price-earnings ratios through its impact on Ke.
Q:
For cyclical companies, the most accurate price-earnings ratio would be derived by dividing the current stock price by the latest 12 months earnings.
Q:
Firms with highly liquid cash positions may be attractive merger candidates, mainly because their cash can be used to pay dividends.
Q:
Assets must be currently producing income in order to give a company value.
Q:
There is little relationship between R&D expenditures as a percent of sales, and growth of earnings per share.
Q:
With the income-statement method of forecasting earnings per share (EPS), you start with a forecast of profits.
Q:
Least squares trend analysis is used to take a simple average of past data.
Q:
All things being equal, the more rapid growth a firm enjoys, the higher the P/E ratio.
Q:
The combined earnings and dividend model considers the present value of dividends, plus the present value of a future P/E ratio times future projected earnings.
Q:
Dividend valuation models are best suited for firms in the expansion or maturity phase of their life cycle.