Q&A Hero

Q: A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is ________. A) 8.4 B) 11.9 C) 17.62 D) 47.6

Q: Operating ROA can be found as the product of ________. A) return on sales ATO B) tax burden interest burden C) interest burden leverage ratio D) ROE dividend payout ratio

Q: Which of the following is NOT a liquidity ratio? A) Inventory turnover ratio B) Current ratio C) Quick ratio D) Cash ratio

Q: Which of the following is not a ratio used in the DuPont analysis? A) Interest burden B) Profit margin C) Asset turnover D) Earnings yield ratio

Q: The process of decomposing ROE into a series of component ratios is called ________. A) DuPont analysis B) technical analysis C) comparative analysis D) liquidity analysis

Q: Which one of the following ratios is used to calculate the times-interest-earned ratio? A) Net profit/Interest expense B) Pretax profit/EBIT C) EBIT/Sales D) EBIT/Interest expense

Q: The highest possible value for the interest-burden ratio is ________, and this occurs when the firm ________. A) 0; uses as much debt as possible B) 1; uses debt to the point where ROA = interest cost of debt C) 1; uses no interest-bearing debt D) 1; pays down its existing debts

Q: A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal, this change will probably increase the firm's: I. Beta II. Earnings variability over the business cycle III. ROE IV. Stock price A) I and II only B) III and IV only C) I, III, and IV only D) I, II, and III only

Q: Operating ROA is calculated as ________, while ROE is calculated as ________. A) EBIT/total assets; net profit/total assets B) net profit/total assets; EBIT/total assets C) EBIT/total assets; net profit/equity D) net profit/EBIT; sales/total assets

Q: Common-size balance sheets are prepared by dividing all quantities by ________. A) total assets B) total liabilities C) shareholders' equity D) fixed assets

Q: Cash Flow Data for Interceptors, Inc. 2015 2016 2017 2018 Cash $ 35 $ 40 $ 45 $ 50 Cash from Operations $ 127 $ 125 $ 122 $ 117 Net Capital Spending $ 140 $ 130 $ 140 $ 145 Cash from Financing $ 18 $ 15 $ 23 Based on the cash flow data in the table for Interceptors Inc., which of the following statements is (are) correct? I. This firm appears to be a good investment because of its steady growth in cash. II. This firm has been able to generate growing cash flows only by borrowing or selling equity to offset declining operating cash flows. III. Financing activities have been increasingly important for this firm's operations, at least in the short run. A) I only B) II and III only C) II only D) I and II only

Q: Cash Flow Data for Interceptors, Inc. 2015 2016 2017 2018 Cash $ 35 $ 40 $ 45 $ 50 Cash from Operations $ 127 $ 125 $ 122 $ 117 Net Capital Spending $ 140 $ 130 $ 140 $ 145 Cash from Financing $ 18 $ 15 $ 23 What must cash flow from financing have been in 2018 for Interceptors, Inc.? A) $5 B) $28 C) $30 D) $33

Q: In 2017 Huge-Packing repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million, and Huge-Packing's total cash flow from financing was $6,077 million. How much did the long-term debt accounts of Huge-Packing change? A) increased $138 million B) decreased $138 million C) increased $836 million D) decreased $836 million

Q: Which of the following is not one of the three key financial statements available to investors in publicly traded firms? A) income statement B) balance sheet C) statement of operating earnings D) statement of cash flows

Q: If the interest rate on debt is higher than the ROA, then by using debt a firm's ROE will ________. A) decrease B) increase C) not change D) change but in an indeterminable manner

Q: Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had ________ over his long professional life. A) increased greatly B) increased slightly C) remained constant D) decreased

Q: One of the biggest impediments to a global capital market has been ________. A) volatile exchange rates B) the lack of common accounting standards C) lower disclosure standards in the United States than abroad D) the lack of transparent reporting standards across the EU

Q: Firm A acquires firm B when firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This purchase would result in goodwill for firm A equal to ________. A) $175 million B) $155 million C) $120 million D) $55 million

Q: Depreciation expense is in what broad category of expenditures? A) operating expenses B) general and administrative expenses C) debt interest expense D) tax expenditures

Q: Many observers believe that firms "manage" their income statements to ________. A) minimize taxes over time B) maximize expenditures C) smooth their earnings over time D) generate level sales

Q: Cost of goods sold refers to ________. A) direct costs attributable to producing the product sold by the firm B) salaries, advertising, and selling expenses C) payments to the firm's creditors D) payments to federal and local governments

Q: Which of the following assets is most liquid? A) cash equivalents B) receivables C) inventories D) plant and equipment

Q: Cash Cow, Inc. earned $750,000,000 last year. If it retains 40% of its earnings, and has 100 million shares outstanding, what was its dividend last year? A) $3.00 B) $3.75 C) $4.50 D) $7.50

Q: You are considering purchasing the Zions Bank $4.50 preferred stock. If you require a 4% return on this investment, what should you be willing to pay for this stock? A) $11.25 B) $112.50 C) $4.50 D) $45.00

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

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

Q: The term "residual claimant" refers to A) bond holders. B) option holders. C) equity/shareholders. D) suppliers.

Q: 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

Q: 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

Q: 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

Q: 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

Q: A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment? A) 27 years B) 37 years C) 55 years D) 75 years

Q: When Google's share price reached $475 per share, Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google's stock price was represented by PVGO? A) 92% B) 87% C) 77% D) 64%

Q: Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities? A) $6 B) $24.50 C) $44.44 D) $75

Q: Next year's earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities? A) $9.09 B) $10.10 C) $11.11 D) $12.21

Q: A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock? A) $27.27 B) $37.50 C) $66.67 D) $70

Q: Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that: I. Stock A will give us a higher return than Stock B. II. An investment in stock A is probably riskier than an investment in stock B. III. Stock A has higher forecast earnings growth than stock B. A) I only B) I and II only C) II and III only D) I, II, and III

Q: The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%? A) $1,950 billion B) $2,497 billion C) $2,585 billion D) $3,098 billion

Q: The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%? A) $2,168 billion B) $2,445 billion C) $2,565 billion D) $2,998 billion

Q: The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm? A) $269 million B) $296 million C) $305 million D) $327 million

Q: The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm? A) $405.6 million B) $454.2 million C) $505.8 million D) $553.5 million

Q: If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%? A) $679.81 million B) $715.54 million C) $769.23 million D) $803.03 million

Q: The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach? A) $1 billion B) $2 billion C) $3 billion D) $4 billion

Q: A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm? A) $57 B) $65 C) $75 D) $95

Q: ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. At what P/E ratio would you expect ART to sell? A) 8.33 B) 11.43 C) 14.29 D) 15.25

Q: ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. At what price would you expect ART to sell? A) $25 B) $34.29 C) $42.86 D) $45.67

Q: A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio? A) 1.5 B) 1.25 C) 1.1 D) 1

Q: A firm increases its dividend plowback ratio. All else equal, you know that ________. A) earnings growth will increase and the stock's P/E will increase B) earnings growth will decrease and the stock's P/E will increase C) earnings growth will increase and the stock's P/E will decrease D) earnings growth will increase and the stock's P/E may or may not increase

Q: A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock's PVGO? A) $23.57 B) $15 C) $19.78 D) $21.34

Q: Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the constant-growth rate of TTT dividends? A) 5% B) 10% C) 20% D) none of these options

Q: A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock? A) $17.78 B) $20 C) $40 D) none of these options

Q: A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio? A) 12.82 B) 7.69 C) 8.33 D) 9.46

Q: A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio? A) 12 B) 8.33 C) 10.25 D) 18.55

Q: Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is ________. A) $26.67 B) $35.19 C) $42.94 D) $59.89

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

Q: 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

Q: 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

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: 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 1.4. Using the constant-growth DDM, the intrinsic value of the stock is ________. A) $45.45 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: 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: 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: 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: 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) $31.25 B) $32.37 C) $38.47 D) $41.32