Difficulty: Moderate18-53

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97. Dividend discount models and P/E ratios are used by __________ to try to find mispricedsecurities.A. technical analystsB. statistical analystsC. fundamental analystsD. dividend analystsE. psychoanalystsFundamental analysts look at the basic features of the firm to estimate firm value.Difficulty: Easy98. Which of the following is the best measure of the floor for a stock price?A. book valueB. liquidation valueC. replacement costD. market valueE. Tobin's QIf the firm's market value drops below the liquidation value the firm will be a possibletakeover target. It would be worth more liquidated than as a going concern.Difficulty: Easy99. Who popularized the dividend discount model, which is sometimes referred to by hisname?A. Burton MalkielB. Frederick MacaulayC. Harry MarkowitzD. Marshall BlumeE. Myron GordonThe dividend discount model is also called the Gordon model.Difficulty: Easy

Chapter 18 - Equity Valuation Models100. If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividendswill be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan.A. higher, higherB. lower, lowerC. lower, higherD. higher, lowerE. It is not possible to tell.By retaining less of its income for plowback, the firm is able to pay more dividends initially.But this will lead to a lower growth rate for dividends and a lower level of dividends in thefuture relative to a firm with a high-reinvestment-rate plan. Figure 18.1 illustrates thisgraphically.Difficulty: Moderate101. The present value of growth opportunities (PVGO) is equal toI) the difference between a stock's price and its no-growth value per share.II) the stock's priceIII) zero if its return on equity equals the discount rate.IV) the net present value of favorable investment opportunities.A. I and IVB. II and IVC. I, III, and IVD. II, III, and IVE. III and IVAll are correct except II - the stock's price equals the no-growth value per share plus thePVGO.Difficulty: Moderate18-55

102. Which of the following combinations will produce the highest growth rate? Assume thatthe firm's projects offer a higher expected return than the market capitalization rate.A. a high plowback ratio and a high P/E ratioB. a high plowback ratio and a low P/E ratioC. a low plowback ratio and a low P/E ratioD. a low plowback ratio and a high P/E ratioE. Neither the plowback ratio nor the P/E ratio is related to a firm's growth.The firm will grow more rapidly if it retains earnings to invest in positive NPV projects. Asfor the P/E ratio's relationship to growth, the growth rate will increase as long as the projects'expected returns are higher than the market capitalization rates. If the expected returns arelower than the market capitalization rates, the growth rate will fall.

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Dividend yield, P E ratio, Equity Valuation Models