Chap018 - Chapter 18 Equity Valuation Models Multiple...

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Unformatted text preview: Chapter 18 Equity Valuation Models Multiple Choice Questions 1. ________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities). A) Book value per share B) Liquidation value per share C) Market value per share D) Tobin's Q E) None of the above. Answer: D Difficulty: Easy Rationale: Book value per share is assets minus liabilities divided by number of shares. Liquidation value per share is the amount a shareholder would receive in the event of bankruptcy. Market value per share is the market price of the stock. 2. High P/E ratios tend to indicate that a company will _______, ceteris paribus. A) grow quickly B) grow at the same speed as the average company C) grow slowly D) not grow E) none of the above Answer: A Difficulty: Easy Rationale: Investors pay for growth; hence the high P/E ratio for growth firms; however, the investor should be sure that he or she is paying for expected, not historic, growth. 3. _________ is equal to (common shareholders' equity/common shares outstanding). A) Book value per share B) Liquidation value per share C) Market value per share D) Tobin's Q E) none of the above Answer: A Difficulty: Easy Rationale: See rationale for test bank question 18.1 1 Chapter 18 Equity Valuation Models 4. ________ are analysts who use information concerning current and prospective profitability of a firms to assess the firm's fair market value. A) Credit analysts B) Fundamental analysts C) Systems analysts D) Technical analysts E) Spets Answer: B Difficulty: Easy Rationale: Fundamentalists use all public information in an attempt to value stock (while hoping to identify undervalued securities). 5. The _______ is defined as the present value of all cash proceeds to the investor in the stock. A) dividend payout ratio B) intrinsic value C) market capitalization rate D) plowback ratio E) none of the above Answer: B Difficulty: Easy Rationale: The cash flows from the stock discounted at the appropriate rate, based on the perceived riskiness of the stock, the market risk premium and the risk free rate, determine the intrinsic value of the stock. 6. _______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the 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 E) None of the above Answer: B Difficulty: Easy Rationale: See explanation for test bank question 18.1. 2 Chapter 18 Equity Valuation Models 7. Since 1955, Treasury bond yields and earnings yields on stocks were_______. A) identical B) negatively correlated C) positively correlated D) uncorrelated Answer: C Difficulty: Easy Rationale: The earnings yield on stocks equals the expected real rate of return on the stock market, which should be equal to the yield to maturity on Treasury bonds plus a risk premium, which may change slowly over time. The yields are plotted in Figure...
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This note was uploaded on 02/24/2010 for the course FINA 4310 taught by Professor Impson during the Spring '10 term at North Texas.

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Chap018 - Chapter 18 Equity Valuation Models Multiple...

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