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Exam 8: Stock Valuation

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Question 41

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List the key variables that affect the P/E ratio and explain the relationship between each variable and the P/E ratio.

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(a)growth rate in earnings; the higher t...

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Question 42

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John requires a 12% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock.Which of the following will happen?

A) John will have to pay more for the stock than he was willing to pay.
B) Investors with different required rates of return will pay different prices for the stock.
C) John will not be able to buy the stock unless the price changes.
D) John will buy the stock at a lower price.

E) C) and D)
F) A) and B)

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Question 43

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Commonly used multiples for determining a stock's value include I.price to earnings. II.price to sales. III.price to cash flow. IV.price to dividends.

The value of a stock is a function of

Lindor Inc.'s $100 par value preferred stock pays a dividend fixed at 8% of par.To earn 12% on an investment in this stock, you need to purchase the shares at a per share price of

The intrinsic value of a stock provides a purchase price for the stock

Both beta and the expected return on the market portfolio incorporate risk into the Capital Asset Pricing Model.

Zephyr Inc.sells wind based systems for generating electricity.The company pays no dividends, but you estimate the stock will be worth $50 per share 5 years from now and you require a 15% rate of return for stock investments of this type.What price should you be willing to pay for this stock?

The first step in predicting a stock's future price is to forecast profits.

Which of the following will most directly influence a company's market value?

The intrinsic value of an asset equals the present value of all future cash flows at a given discount rate.

The free cash flow to equity approach does not require present value calculations.

Which of the following variables used in determining a stock's intrinsic value can be known with the greatest level of confidence?

One of the easiest aspects of the dividend valuation model (DVM)is specifying the appropriate growth rate for a firm's dividends over time.

The approach to stock valuation which holds that the value of a share of stock is a function of its future dividends is known as the dividend valuation model (DVM).

Over the last year, a firm's earnings per share increased from $1.20 to $1.40, its dividends per share increased from $0.50 to $0.60, and its share price increased from $21 to $24.The firm maintained a relative P/E of 1.10 over the entire time period.Given this information, it follows that the

The investor's internal rate of return is always equal to the firm's rate of return on equity.

DMC3 Inc.will pay no dividend for 2016 or 2017.At the end of 2018, it will pay a dividend of $1.50. Thereafter dividends will grow at 4% per year.The required rate of return is 10%.The intrinsic value of DMC3 shares is (assume you are at the beginning of 2016)

Explain how the time value of money concept is used in stock valuation.

An investor should purchase a stock when