SET 3 PRACTICE QUESTIONS Chapters 10-15: Common Stocks (Valuation and
Management), Efficient Markets, Market/Economy, Industry, Company Analysis
CHAPTER 10:
1.
A stock’s intrinsic value is
a.
The estimated present value of the future stream of cash flows for the stock
b.
The same as its market price
c.
The sum of all dividends expected to be paid from now to infinity
d.
Based on the accounting value of the assets
2.
The basic premise of the DDM is that
a.
the present value of all future dividends, properly discounted, is the intrinsic value
of the stock
b.
the present value of all future earnings, properly discounted, is the intrinsic value
of the stock
c.
the price of a stock is the sum of all dividends to be paid from now to infinity
d.
investors can accurately access the future levels of dividends, and therefore can
determine what a stock is worth
3.
Which of the following statements is CORRECT concerning the DDM?
a.
earnings are the foundation of valuation for common stocks
b.
the DDM states that the value of a stock is the discounted value of all future
dividends
c.
the DDM is operationalized by estimating the expected future earnings to be paid
by a company, estimating the required rate of return, and discounting
d.
earnings are the only cash flow stream to be received directly by investors
4.
Choose the INCORRECT statement concerning the DDM:
a.
It is based on the position that the price of a stock is the discounted value of all
future dividends
b.
Not all of its three growth rate cases involve a present value process
c.
The no growth rate case is the least likely case to be encountered
d.
The multiple growth rate case involves at least two different growth rates
5.
Using the constant growth version of the DDM to determine the intrinsic value of a
stock
a.
the formula calls for the dividend to be paid this period
b.
the required rate of return is expected to be larger than the growth rate in
dividends
c.
there is no present value process involved in the simple equation used in this case
d.
the answer obtained from this equation is the definitive value for the stock for all
investors
6.
Which of the following statements is INCORRECT about dividends?
a.
dividends are the foundation of valuation for common stocks
b.
the DDM states that the value of a stock is the discounted value of all future
earnings
c.
the DDM is operationalized by estimating the expected future dividends to be
paid by a company and estimating the required rate of return
d.
dividends are the only cash flow stream to be received directly by investors
7.
Sardi Company currently earns $3.00 per share and currently pays $1.20 per share in
dividends. It is expected to have a constant growth rate of 7% per year. The required
rate of return is 14%. The stock price is
a.
$42.86
b.
$18.34
c.
$17.14
d.
$40.05
8.
Johnson stock is currently selling for $40. The expected dividend is $2. This is a constant
growth firm. If investors require a return of 15% on this stock, what do they think the
growth rate will be?
a.
6%
b.
7%
c.
8%
d.
11%
e.
none of the above
9.
Calculate the estimated price of the following stock. Required rate of return: 15%;
Expected dividend next year: $20
Expected constant growth rate of dividends: 10%
a.
4
b.
400
c.
440
d.
none of the above
10.
BLC Industries is expected to pay a dividend of $1.50, and the dividend is expected to
grow at a constant rate of 7%. This stock is 15% less risky than the market as a whole.
The risk-free rate is 6%, and the equity risk premium for the market is 8%. The
estimated price of the stock is
a.
$18.75
b.
$21.43
c.
$27.76
d.
$25.86
11.
Your required rate of return is 15%. Z Corp. is currently selling for $40 and the most
recent dividend paid was $2.55. The expected constant growth rate is 8%. What is the
maximum you should pay for this stock?
a.
$39.29
b.
$40
c.
$36.43
d.
none of the above
12.
Percy Pondscum & Company currently earns $3.00 per share and currently pays $1.20
per share in dividends. It is expected to have a constant growth rate of 7% per year. The
risk free rate of return is 6%, the market risk premium is 8%, and the beta for this
company is 1.0. The stock price is
a.
$42.86
b.
$18.34
c.
$17.14
d.
$40.05
e.
none of the above
13.
Xila expects to earn $4.00 per share next year, with an expected payout of 30%.
Investors expect the dividend to grow at a constant rate of 8% for the foreseeable future.
The risk-free rate is 5%, and the beta that is 10% more volatile than the market as a
whole, and the expected return on the market is 14%. What is the estimated price of the
stock?
a.
$12.12
b.
$50
c.
$13.33
d.
none of the above
14.
Johnsey Industries' current dividend is $2. The average growth rate for the past many
years has been steady at 8%, but the consensus of analysts is that the expected growth
rate is 6% . k = 16%. The intrinsic value of this stock is:
a.
$20
b.
$18.80
c.
$9.09
d.
$21.20
15.
Jack buys Wealth Enterprises for $40. He expects the firm's earnings and dividends to
grow at an annual rate of 7%. The firm expects to pay a dividend of $2.00 next year.
The market risk premium is 8%. Jack's expected rate of return is
a.
10%
b.
12%
c.
12.35%
d.
15%
16.
Walter Company currently earns $3.00 per share and pays $1.00 in dividends. The
dividend is expected to double in 9 years and also to grow at that rate beyond that time.
The required rate of return is 15%. The estimated stock price is
a.
$15.42
b.
$6.66
c.
$14.29
d.
none of the above
17.
Your required rate of return is 15.1%. Davis Drives is currently selling for $38 per share
and is expected to pay a dividend of $3 next period. The expected constant growth rate is
7%. Which of the following statements is true in making a stock decision?
a.
you can justify buying this stock because: expected return > the required return
b.
you cannot justify buying this stock because: the required return > the expected
return
c.
you cannot justify buying this stock because: the required return < the expected
return
d.
you can justify buying this stock because: the required return > than the expected
return
18.
Investor A and investor B both have required rates of return of 12%. They are
considering the purchase of XTRA stock, which each views as a constant growth case.
Both have estimated the dividend for the next period at $1.00, and both agree that the
expected growth rate in dividends will be 6% a year. However, investor A plans to buy
the stock and hold it for 10 years, while investor B plans to buy the stock and hold it for
ONLY 1 year. Which of the following statements is CORRECT about stock valuation?
a.
Investor A should be willing to pay more for this stock than B.
b.
Investor B should be willing to pay more for this stock than A.
c.
Both investors should be willing to pay the same price for the stock.
d.
None of these.
19.
Using the constant growth model, an increase in the required rate of return from 15 to
16%, combined with an increase in the growth rate from 7 to 8%, would cause the price
of a constant growth stock, to: (assume the next dividend is $2.00)
a.
increase in price
b.
decrease in price
c.
stay the same
d.
not enough information to answer the question
20.
Low Labs. last dividend was $1.50. Its current equilibrium stock price is $15.75, and its
expected growth rate is a constant 5 percent. If the stockholders' required rate of return is
15 percent, what is the expected dividend yield and expected capital gains yield for the
coming year?
a.
0%; 15%
b.
5%; 10%
c.
10%; 5%
d.
15%; 0%
21.
The Smith Reclamation Company has been hit hard due to increased competition. The
company’s analysts predict that earnings (and dividends) will decline at a rate of 5
percent annually from now on. k = 14% and D0 = $2.00. What will be the estimated
price of the company’s stock four years from now (this will be the price at the
beginning of year 5)? Round all calculations to two places.
a.
$27.17
b.
$11.11
c.
$28.50
d.
$10.18
e.
$8.16
22.
A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50,
$2.00, and $3.50. If growth is then expected to level off at 8 percent, and if you require a
14 percent rate of return, what is the estimated price of this stock? Round calculations
to two places.
a.
$67.81
b.
$22.49
c.
$58.15
d.
$31.00
e.
none of the above
23.
Find the estimated price of Robot Communications if the expected growth rate in
dividends is 14% for the next three years, after which the dividend is expected to slow
down and grow at a rate of 6%. The current dividend is $2.00 per share, and the required
rate of return is 18%. Round calculations to two decimal places.
a.
$31.77
b.
$26.17
c.
$21.52
d.
$15.94
24.
ABC Company has been growing at a 10% rate, and it just paid a dividend of D0 = $3.00.
Due to a new product, ABC expects to achieve a dramatic increase in its short-run growth
rate, to 20% annually for the next 2 years, after which growth is expected to return to the
long-run constant rate of 10 percent. The company’s beta is 2.0, the required return on an
average stock is 11 percent, and the risk-free rate is 7 percent. Calculate the expected
dividend yield, D1/P0. Round calculations to two places.
a.
3.93%
b.
4.58%
c.
10.00%
d.
7.54%
25.
Which of the following statements about stock valuation is INCORRECT?
a.
dividends are the foundation of valuation for common stocks
b.
the DDM states that the value of a stock is the discounted value of all future
earnings
c.
the DDM is based on a present value process
d.
dividends are the only cash flow stream to be received directly by investors
26.
Common stocks are difficult to value because
a.
The price change component of total return, unlike the income component,
cannot be known with certainty
b.
The DDM equation involves an infinity sign
c.
Inflation affects stock returns more than bond returns
d.
Both the cash flows and the required rate of return must be estimated
27.
ABC corp. expects to earn $4.00 per share next year, and pay $3.00 per share in
dividends. Expected growth rate in dividends is 6%, required rate of return is 16%. The
P/E ratio is
a.
6
b.
10
c.
7.5
d.
5
28.
X Corp. retains 70% of its earnings in the business. The long-run earnings growth is
expected to be 10%. The risk-free rate is 8%, the expected return on the market is 12%,
the beta is 2.0, and the most recent dividend was $1.50. What are the most likely market
price and P/E for this stock today?
a.
$27.50, 5x
b.
$33, 6x
c.
$25, 5x
d.
$22.50, 4.5x
e.
$45, 4.5x
29. Price to book value is
a.
the ratio of book value to stockholder's equity
b.
most useful when book value and market value differs sharply
c.
sometimes used to value companies
d.
useful because it avoids any accounting problems
CHAPTER 11:
30.
Which statement about the required rate of return is INCORRECT?
a.
There are many required rates of return.
b.
The average required rate of return on bonds is different from that generally
required in common stocks.
c.
Investor optimism leads to an increase in the required return for a particular stock.
d.
The level of the required rates of return changes over time.
31.
The INCORRECT statement involving the required rate of return for a stock is:
a.
it equals the risk-free rate plus the market risk premium
b.
ex ante, it must slope upward
c.
the overall level of required rates of return changes as the risk premiums change
d.
it is the minimum expected rate of return needed to induce an investor to purchase
a security
32.
Select the INCORRECT statement concerning a buy-and-hold strategy
a.
it is applicable to the investor's portfolio, whatever its composition
b.
it emphasizes the avoidance of transaction costs
c.
investors must still perform several functions while the strategy is in existence
d.
it avoids the decision of having to make an initial selection
33.
Sector rotation is
a.
one form of passive investing
b.
an active strategy similar to stock selection
c.
an attempt to earn excess returns by varying the percentage of portfolio assets in
equity securities
d.
not dependent on an accurate assessment of current economic conditions
34.
With regard to security analysts,
a.
there are more sell side analysts than buy side analysts
b.
security analyst have become more and more respected over the years
c.
analysts’ estimates have become more and more accurate
d.
investors can use analysts reports and information intelligently
35.
Fundamental analysts assume that the market price and intrinsic value of a stock
a.
are always identical
b.
can differ from time to time
c.
bear no relationship to each other
d.
none of these
36.
Which of the following statements about valuation is CORRECT?
a.
valuation is an art and not a science
b.
required rates of return for an asset remain unchanged over time
c.
earnings per share for next year can be estimated with little error
d.
an investor’s holding period is relevant for valuation
37.
With regard to active and passive strategies for stocks,
a.
market timing is to be preferred over stock selection
b.
sector rotation is a passive strategy
c.
3 possible active strategies were discussed in the text
d.
indexing is a passive strategy while buy-and-hold is an active strategy
38.
The recommended framework for fundamental analysis
a.
puts heavy emphasis on value versus growth stocks
b.
concerns the relationship between active and passive strategies
c.
is, in order, economy/market, industry and then company
d.
uses the concept of efficient markets to make decisions
39.
Which of the following statements concerning stock investing is INCORRECT?
a.
Technical analysis refers to the methodology of forecasting fluctuations in
securities prices
b.
momentum investing involves buying companies whose earnings or stock prices
are falling, with heavy emphasis on price momentum
c.
fundamental analysis is based on the premise that any security has an intrinsic
value
d.
behavioral finance recognized that investors can, and do, behave irrationally
CHAPTER 12:
40.
An efficient market does not require that
a.
stock prices incorporate all information
b.
all known information be reflected in prices
c.
the adjustments occur very quickly
d.
each adjustment be perfect
41.
A "Random Walk" occurs when:
a.
stock price changes are random but predictable.
b.
stock prices respond slowly to both new and old information.
c.
future price changes are uncorrelated with past price changes.
d.
past information is useful in predicting future prices.
42.
The semi-strong form of the efficient market hypothesis asserts that stock prices:
a.
fully reflect all historical price information.
b.
fully reflect all publicly available information.
c.
fully reflect all relevant information including insider information.
d.
may be predictable.
43.
Testing investor reactions to announcements and news is
a.
a weak-form statistical test
b.
a weak-form test of technical trading rules
c.
a semi-strong form test
d.
a strong-form test
44.
An efficient market can be shown to exist if
a.
a large number of profit-seeking participants are present
b.
information is widely available and is generated in a random fashion
c.
both a and b occur
d.
an efficient market cannot be shown to exist with any conditions present
45.
Weak form market efficiency
a.
is identical to the random walk hypothesis
b.
involves only price and volume information
c.
incorporates semi-strong form efficiency
d.
is compatible with technical analysis
46.
Statistically testing the independence of stock price changes is a test of
a.
weak form efficiency
b.
semi-strong form efficiency
c.
strong form efficiency
d.
the seasonal effect
47.
Which of the following is not a test of semi-strong form efficiency?
a.
insider transactions
b.
stock splits
c.
accounting changes
d.
dividend announcements
48.
With regard to the efficient market hypothesis, choose the INCORRECT statement.
a.
The strong form of the EMH incorporates the other two forms
b.
Technical analysis and the weak form of the EMH are direct opposites
c.
The anomalies were apparent exceptions to market efficiency, and all have now
been refuted
d.
Stock prices can have some degree of statistical dependence while being
economically independent
49.
Which of the following portfolio management tasks do not have to be performed if the
market is efficient?
a.
minimization of transaction costs
b.
ensuring the proper amount of diversification
c.
adjusting the asset allocation percentages based on perceived changes in
economic conditions
d.
achieving a level of risk appropriate for the portfolio
50.
If the anomalies work, investors should prefer
a.
low SUE, high P/E, small cap stocks
b.
low SUE, low P/E, large cap stocks
c.
high SUE, low P/E, small cap stocks
d.
high SUE, high P/E, small cap stocks
51.
Which of the following is not a market anomaly?
a.
higher risk-adjusted returns for small firms than for large firms
b.
high returns for stocks in January
c.
lag in adjustment of stock prices to earnings announcements
d.
the relationship between accounting changes and stock prices
CHAPTER 13:
52.
Relative to the business cycle, stock prices tend to
a.
move up following a spurt in economic growth.
b.
move in tandem with economic growth.
c.
turn down a few months prior to a general down turn in the economy.
d.
move in a random fashion.
53.
Which of the following relationships are INVERSE, other things equal?
a.
interest rates and stock prices
b.
GDP and corporate profits
c.
interest rates and P/E ratios
d.
both a and c
e.
none of the above
54.
Based on the last 10 economic slumps, the market P/E ratio
a.
usually falls just before the end of a slump
b.
usually falls just before the end of a slump and then rises strongly
c.
usually rises just before the end of a slump and then falls sharply
d.
usually rises just before the end of a slump and then remains roughly unchanged
over the next year
55.
The dividend payout ratio on the S&P 100 is 40% when RF = 9%. Investors demand an
equity risk premium of 8 percent. If the growth rate of dividends is expected to be 10
percent, what is the estimated price of the market index if the earnings expectation is
$30?
a.
$384.00
b.
$213.44
c.
$266.56
d.
$171.43
56.
Stock prices have almost always risen as the business cycle
a.
approaches a peak
b.
approaches a trough
c.
coincides with a peak
d.
hits a peak
57.
With regard to market P/E ratios, choose the INCORRECT statement
a.
the multiplier is more volatile than the earnings component in determining the
market’s level
b.
P/E ratios tend to be high when inflation and interest rates are low
c.
when analyzing the market, P/E ratios are always calculated using historical data
d.
by historical standards, P/E ratios were unusually high in the late 1990s
58.
In using the business cycle to make market forecasts, which of the following statements
is INCORRECT?
a.
it is particularly important to switch into stocks before business cycle troughs
b.
as the economy recovers, stock prices may level off or even decline
c.
based on the last 10 economic slumps, the market P/E usually falls just before the
end of the slump
d.
if the investor can recognize the bottoming out of the economy before it occurs, a
market rise can be predicted, at least based on past experience, before the bottom
is hit
59.
With regard to yield curves and the economy,
a.
every recession since WW II has been preceded by a downward sloping yield
curve
b.
a flat yield curve suggests that the economy is accelerating in terms of activity
c.
several studies suggest that the yield curve is not useful in making economic
forecasts
d.
a steepening yield curve suggests the economy is slowing down because interest
rates are increasing.
60.
Which of the following statements is INCORRECT about the market and the
economy?
a.
Stock prices generally lead the economy
b.
The market has given false signals, particularly with regard to recessions.
c.
The market almost always rises before a recession’s trough
d.
Typically, as investors recognize what the economy is doing, the stock market
also recognizes the event and reacts to it
61.
Which of the following statements about market/economy analysis is INCORRECT?
a.
it is the first step in top-down fundamental security analysis
b.
it is not the first step in bottom-up fundamental security analysis
c.
what happened in the markets in 2000-2003 indicate that market analysis is less
important than it used to be
d.
market timing is very difficult to do, if indeed it can be done successfully at all
CHAPTER 14:
62.
In which stage of the industry life cycle do firms often offer stability in earnings and
dividend growth?
a.
pioneering stage
b.
expansion stage
c.
stabilization stage
d.
in all three stages equally
63.
What stage of the industry life cycle is likely to be of most interest to the majority of
investors?
a.
pioneering stage
b.
expansion stage
c.
maturity stage
d.
declining stage
64.
During the maturity stage of the industry life cycle, companies often tend to pay high
dividends because of
a.
high capital gains
b.
small risk
c.
few growth opportunities
d.
good stability
65.
Based on the industry life cycle, investor risk is the highest during the
a.
pioneering stage.
b.
expansion stage.
c.
stabilization stage.
d.
declining stage.
66. Which of the following statements about the industry life cycle is INCORRECT?
a.
All industries can be classified very accurately into a specific phase of the life
cycle.
b.
Companies may not always fit into a particular stage of the life cycle.
c.
Even the general framework may not apply to some industries.
d.
It does not explicitly lead to stock price determination.
67.
According to Michael Porter,
a.
the issue of competitive strategy involves the search for a competitive position in
an industry
b.
industry profitability determines the five competitive forces
c.
industry structure is a function of industry profitability
d.
investors must analyze industry profitability to assess the strength of the five
competitive forces
68.
69.
Which of the following in not one of the five competitive forces of Porter?
a.
structural changes in the economy
b.
bargaining power of buyers
c.
threat of substitute products or services
d.
threat of new entrants
The most important point of Michael Porter’s analysis is that industry profitability is a
function of the
a.
economy.
b.
interest-rate level.
c.
industry structure.
d.
industry beta.
70.
With regard to the consistency of industry performance, choose the INCORRECT
statement.
a.
industry analysis is clearly valuable over time
b.
even over very short periods, such as one month, industries can perform very
differently.
c.
industry rankings on a periodic basis such as yearly or quarterly are consistent
d.
investors cannot choose those industries that have performed well recently and
reliably expect them to continue to do so for the next several periods
71.
An industry which is least affected by recessions and economic adversity is a(n)
a.
growth industry.
b.
defensive industry.
c.
cyclical industry.
d.
aggressive industry.
72.
In which source of industry information can you find a ranking of industries in terms of
timeliness?
a.
Forbes
b.
Value Line Investment Survey
c.
Standard and Poor’s Industry Survey
d.
Robert Morris Associates’ Annual Studies
73.
Investors who are interested primarily in capital gains should avoid industries that are in
the __stage because they have ______.
a.
stabilization stage; low dividend payouts
b.
stabilization stage; high dividend payouts and low growth prospects
c.
pioneering; low dividend payouts
d.
expansion stage; high risk
CHAPTER 15:
74.
Under fundamental analysis, a security is considered attractive for purchase if its
computed intrinsic value is
a.
less than its current price.
b.
greater than its current price.
c.
less than its book value.
d.
greater than its book value.
75.
A stock’s intrinsic value is
a.
The estimated present value of the future stream of cash flows for the stock
b.
The same as its market price
c.
The sum of all dividends expected to be paid from now to infinity
d.
Based on the accounting value of the assets
76.
The cash flow statement is designed to track the flow of cash through the firm and
consists of three parts. Which of the following is not one of the designated parts?
a.
cash from operating activities
b.
cash from spending activities
c.
cash from financing activities
d.
cash from investing activities
77.
ROA
a.
b.
c.
d.
Is usually equal to or greater than ROE.
Is calculated using book value and turnover.
Is calculated using leverage and book value.
Is calculated using net income margin and turnover.
Given the following, answer the next two questions:
operating efficiency = 0.1
net income = $50,000,000; net income margin = 0.15
turnover = 2; leverage = 1.5; retention rate = 0.3
78.
Find ROA
a.
0.30
b.
0.10
c.
0.15
d.
0.225
79.
Find ROE
a.
.225
b.
.3375
c.
.15
d.
.45
80.
If a firm’s ROA and ROE are equal, it can be concluded that the firm is
a.
losing money.
b.
liquid enough to pay some extra dividends.
c.
financed by all equity.
d.
financed by a high proportion of debt
81.
The two components of EPS are
a.
ROA and leverage
b.
book value and leverage
c.
ROE and book value
d.
leverage and profit margin
82.
Assume ROA is 18.45%, the leverage factor is 2.278, and the BV ps is $3.41. The EPS
will be
a.
$.63
b.
$1.43
c.
$.42
d.
none of the above
83.
Bilbro Co., has a book value of $10, pays a current dividend of $1, has an ROE of .10, an
ROA of .05, a leverage ratio of 2, and a profit margin of 15%. Its EPS are
a.
$3
b.
$2
c.
$1.50
d.
none of the above
84.
Calculate the expected growth rate, g, of a firm which has a current dividend of $1.50
and a ROE of 20%.
a.
20%
b.
10%
c.
40%
d.
answer cannot be calculated from this information.
85.
The internal growth rate of a firm, g, can be calculated as the product of
a.
the retention rate and ROA.
b.
the dividend payout ratio and leverage.
c.
the retention rate and the return on equity.
d.
the payout ratio and the return on equity.
86.
Which of the following statements about company analysis is INCORRECT?
a.
g = ROE x ( 1 – payout ratio)
b.
what matters is the future expected growth rate, not the actual historical growth
rate
c.
leverage = stockholders’ equity / total assets
d.
EBIT / Sales is a measure of the pretax, preinterest profit margin
87.
When estimating the internal growth rate for a company,
a.
what matters is the future growth rate
b.
g = b x ROA
c.
it is best to estimate the internal growth rate on the basis of one year’s results
d.
empirical evidence clearly indicates that earnings trends persist.
88.
Which of the following statements is INCORRECT?
a.
turnover is a measure of efficiency
b.
leverage measures how the firm finances its assets
c.
EPS is solely a function of ROE
d.
ROA is a fundamental measure of firm profitability
89.
You are considering a stock with a current market price of $20. The stock's last dividend
was $2.00, and earnings and dividends are expected to increase at a constant growth rate
of 10 percent. Your required return on this stock is 20 percent. From the standpoint of
making a valuation decision, you should:
a.
Not buy the stock; it is overvalued by $3.00.
b.
Buy the stock; it is undervalued by $3.00.
c.
Buy the stock; it is undervalued by $2.00.
d.
Not buy the stock; it is overvalued by $3.00.
90.
With regard to the class discussion about earnings, we can conclude:
a.
GAAP generally produces the highest EPS figure of the alternatives used
b.
Each company can use its own rules in producing Operating Earnings numbers
c.
Pro forma earnings numbers are typically less favorable to a company than the
earnings number produced under GAAP
d.
Investors can have confidence in comparing pro forma EPS numbers among
companies
91.
Stock prices tend to ___________ earnings surprises.
a.
lead
b.
lag behind
c.
be coincident with
d.
be independent of
92.
Given the SUE's of 4 different stocks, which has the greatest unexpected earnings?
a.
-3.5
b.
-2.5
c.
2.0
d.
3.0
93.
Other things equal, concerning k, the discount rate for stocks, we can say
a.
as k rises, the P/E ratio rises
b.
if the risk premium rises, k will fall
c.
if the risk-free rate rises, k will rise
d.
discount rates and P/E ratios move directly with each other
94.
Select the INCORRECT statement involving the required rate of return
a.
it equals the risk-free rate plus the risk premium
b.
ex ante, it must slope upward
c.
the overall level of required rates of return changes as the risk premiums change
d.
it is the maximum expected rate of return needed to induce an investor to
purchase a security.
95.
Other things equal, concerning the P/E ratio, we can say that if
a.
required rate of return increases, the P/E ratio will rise.
b.
risk premium increases, the P/E ratio will rise.
c.
risk-free rate rises, the P/E ratio will fall.
d.
dividend payout increases, the P/E ratio will fall.
96.
How would you explain P/E ratio differences among companies? By investor
a.
expectations about the future growth of the market.
b.
estimates of the recent growth of earnings.
c.
expectations about the future growth of earnings.
d.
estimates about the recent growth of dividends.
97.
High P/E stocks are generally associated with
a.
mature companies.
b.
cyclical companies.
c.
young fast-growing companies.
d.
defensive companies.
98.
A P/E ratio
a.
can only be calculated based on the prior 12-month earnings
b.
can be calculated using prior earnings or estimated earnings
c.
for the market as a whole is not likely to change much from one year to the next
d.
can be calculated for every company every year
99.
When considering the determinants of the P/E ratio,
a.
the higher the expected payout ratio, the higher the P/E ratio, other things equal.
b.
P/E and g are inversely related.
c.
the relationship between k and the P/E ratio is direct.
d.
as k declines, the P/E ratio declines.
100.
Wibex is expected to earn $4.00 next year, and pay $2.00 per share in dividends. The
expected growth rate in dividends is 6% and required rate of return is 16%. Calculate
the P/E ratio.
a.
6
b.
10
c.
50
d.
5