Study Guide-Chapter 10

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

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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) 3. Discounted cash flow techniques used in valuing common stock are based on: (b) 4. Which of the following is not one of the dividend growth rate models? (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.

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Chapter Ten Common Stock Valuation 120 d. estimated growth rate in earnings. (c) 6. The zero-growth dividend model: (c) 7. Under the multiple growth model, at least ------ different growth rates are used. (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) 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
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?

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