Study Guide-Chapter 10 - Chapter 10 COMMON STOCK VALUATION...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter Ten Common Stock Valuation 119 Chapter 10 COMMON STOCK VALUATION Multiple Choice Questions 1. All of the following are relative valuation techniques except: a. P/E ratio. b. Price/book value ratio c. Price/sales ratio d. Price/dividend ratio (d) 2. The estimated value of common stock is the: a. present value of all expected cash flows. b. present value of all capital gains. c. future value of all dividend payments. d. present value of all dividend payments. (a) 3. Discounted cash flow techniques used in valuing common stock are based on: a. future value analysis. b. present value analysis. c. the CAPM. d. the APT. (b) 4. Which of the following is not one of the dividend growth rate models? a. the infinite growth model b. the zero growth model c. the constant growth model d. the multiple growth model (a) 5. The constant growth dividend model uses the: a. historical growth rate in dividends. b. historical growth rate in earnings. c. estimated growth rate in dividends.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter Ten Common Stock Valuation 120 d. estimated growth rate in earnings. (c) 6. The zero-growth dividend model: a. gives the highest value for a common stock. b. is the most accurate model to use. c. is equivalent to the valuation model for preferred stock. d. assumes the highest required return possible. (c) 7. Under the multiple growth model, at least ------ different growth rates are used. a. two b. three c. four d. five (a,) 8. Which of the following is not one of the reasons two investors both using the constant-growth version of the DDM on the same stock might arrive at different estimates of the stock's value? a. They used different expected returns. b. They used different growth rates of dividends. c. They used different required returns. d. All of the above are possible reasons they might arrive at different values. (a) 9. What is the estimated value of a stock with a required rate of return of 15 percent, a projected constant growth rate of dividends of 10 percent and expected dividend of $2.00 . a. $4 Solution: P 0 = D 1 /(r – g) b. $40 = 2/(.15 - .10) c. $44 = $40 d. $20 (b) 10. XYZ Company has expected earnings of $3.00 for next year and usually retains 40 percent for future growth. Its dividends are expected to grow at
Background image of page 2
Chapter Ten Common Stock Valuation 121 a rate of 10 percent indefinitely. If an investor has a required rate of return of 16 percent, what price would he be willing to pay for XYZ stock? a. $12.50 Solution: Dividends = $3(1 - .4) b. $25.00 = $1.80 c. $30.00 P 0 = D 1 /(r – g) d. $40.00 = 1.80/(.16 - .1) = $30 (c) 11. WWW Company currently (t = 0) earns $4.00 per share, and has a payout of 40 percent. Dividends are expected to grow at a constant rate of 8 percent per year. The required rate of return is 15 percent. The price of this stock would be estimated at
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 9

Study Guide-Chapter 10 - Chapter 10 COMMON STOCK VALUATION...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online