Question 1

Todd Mountain development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 12%. The shares of Todd Mountain Development Corporation have a beta of 0.75. Using the CAPM, the return you should require on the shares is ________.

Accepted Answer

A)  7.25%
B)  10.25%
C)  14.75%
D)  21.00%E) A) and B)
F) A) and C)

Question 2

Value shares are more likely to have a PEG ratio ________.

Accepted Answer

A)  less than one
B)  equal to one
C)  greater than one
D)  less than zeroE) A) and B)
F) A) and C)

Question 3

A firm increases its dividend plowback ratio. All else equal you know that ________.

Accepted Answer

A)  earnings growth will increase and the share's P/E will increase
B)  earnings growth will decrease and the share's P/E will increase
C)  earnings growth will increase and the share's P/E will decrease
D)  earnings growth will increase and the share's P/E may or may not increaseE) A) and C)
F) B) and D)

Question 4

Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be ________.

Accepted Answer

A)  4.5%
B)  10.5%
C)  15.0%
D)  30.0%E) A) and C)
F) All of the above

Question 5

Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be ________ if it follows a policy of paying 30% of earning in the form of dividends.

Accepted Answer

A)  5.0%
B)  15.0%
C)  17.5%
D)  45.0%E) A) and D)
F) A) and C)

Question 6

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60 and the increase in net working capital is $30. What is the free cash flow to the firm?

Accepted Answer

A)  $85
B)  $125
C)  $185
D)  $305E) None of the above
F) A) and B) B

Question 7

A firm has PVGO of 0 and a market capitalisation rate of 12%. What is the firm's P/E ratio?

Accepted Answer

A)  12.00
B)  8.33
C)  10.25
D)  18.55E) A) and B)
F) A) and C)

Question 8

The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14% and the WACC is 10%. If the market value of the debt is $1.0 billion, what is the value of the equity using the free cash flow valuation approach?

Accepted Answer

A)  $1 billion
B)  $2 billion
C)  $3 billion
D)  $4 billionE) None of the above
F) A) and C) B

Question 9

The greatest value to an analyst from calculating a share's intrinsic value is ________.

Accepted Answer

A)  how easy it is to come up with accurate model inputs
B)  the precision of the value estimate
C)  how the process forces analysts to understand the critical variables that have the greatest impact on value
D)  how all the different models typically yield identical value resultsE) None of the above
F) A) and B)

Question 10

________ is the amount of money per common share that could be realised by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

Accepted Answer

A)  Book value per share
B)  Liquidation value per share
C)  Market value per share
D)  Tobin's qE) A) and D)
F) C) and D)

Question 11

Bill, Jim and Shelly are all looking to buy the same shares that pay dividends. Bill plans on holding the shares for one year. Jim plans on holding the shares for three years. Shelly plans on holding the shares until she retires in 10 years. Which one of the following statements is correct?

Accepted Answer

A)  Bill will be willing to pay the most for the shares because he will get his money back in one year when he sells.
B)  Jim should be willing to pay three times as much for the shares as Bill because his expected holding period is three times as long as Bill's.
C)  Shelly should be willing to pay the most for the shares because she will hold them the longest and hence she will get the most dividends.
D)  All three should be willing to pay the same amount for the shares regardless of their holding period.E) All of the above
F) C) and D)

Question 12

The constant growth dividend discount model (DDM)  can be used only when the ________.

Accepted Answer

A)  growth rate is less than or equal to the required return
B)  growth rate is greater than or equal to the required return
C)  growth rate is less than the required return
D)  growth rate is greater than the required returnE) A) and D)
F) A) and C)

Question 13

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

Accepted Answer

A)  book value
B)  market value
C)  liquidation value
D)  Tobin's qE) A) and B)
F) B) and C)

Question 14

Firm A is high risk and Firm B is low risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

Accepted Answer

A)  Firm A
B)  Firm B
C)  Both would have the same P/E if they were in the same industry
D)  There is not necessarily any link between risk and P/E ratiosE) None of the above
F) A) and C)

Question 15

Which one of the following statements about market and book value is correct?

Accepted Answer

A)  All firms sell at a market-to-book ratio above 1.
B)  All firms sell at a market-to-book ratio greater than or equal to 1.
C)  All firms sell at a market-to-book ratio below 1.
D)  Most firms have a market-to-book ratio above 1, but not all.E) B) and D)
F) A) and C)

Question 16

Rose Hill Trading Company is expected to have EPS in the upcoming year of $8.00. The expected ROE is 18.0%. An appropriate required return on the shares is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be ________.

Accepted Answer

A)  $1.12
B)  $1.44
C)  $2.40
D)  $5.60E) A) and B)
F) All of the above

Question 17

Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalisation rate, and the constant growth DDM to determine the value of the shares. The share is currently priced at $84.00. Using the constant growth DDM, the market capitalisation rate is ________.

Accepted Answer

A)  9%
B)  12%
C)  14%
D)  18%E) All of the above
F) B) and C) B

Question 18

The market capitalisation rate on the shares of Aberdeen Wholesale Company is 10%. Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plouwback ratio is 50%, its P/E ratio will be ________.

Accepted Answer

A)  8.33
B)  12.50
C)  19.23
D)  24.15E) B) and C)
F) C) and D)

Question 19

Firm A has a share price of $35 and 60% of the value of the shares is in the form of PVGO. Firm B also has a share price of $35 but only 20% of the value of Share B is in the form of PVGO. We know that ________.
I. Share A will give us a higher return than Share B
II. an investment in Share A is probably riskier than an investment in Share B
III. Share A has higher forecast earnings growth than Share B

Accepted Answer

A)  I only
B)  I and II only
C)  II and III only
D)  I, II and IIIE) All of the above
F) C) and D)

Question 20

Earnings yields tend to ________ when Treasury yields fall.

Accepted Answer

A)  fall
B)  rise
C)  remain unchanged
D)  fluctuate wildlyE) All of the above
F) B) and D)

Exam 11: Equity Valuation

Correct Answer
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Value shares are more likely to have a PEG ratio ________.

Correct Answer
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A firm increases its dividend plowback ratio. All else equal you know that ________.

Correct Answer
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Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be ________.

Correct Answer
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Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be ________ if it follows a policy of paying 30% of earning in the form of dividends.

Correct Answer
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The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60 and the increase in net working capital is $30. What is the free cash flow to the firm?

Correct Answer
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B

A firm has PVGO of 0 and a market capitalisation rate of 12%. What is the firm's P/E ratio?

Correct Answer
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The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14% and the WACC is 10%. If the market value of the debt is $1.0 billion, what is the value of the equity using the free cash flow valuation approach?

Correct Answer
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B

The greatest value to an analyst from calculating a share's intrinsic value is ________.

Correct Answer
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________ is the amount of money per common share that could be realised by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

Correct Answer
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Bill, Jim and Shelly are all looking to buy the same shares that pay dividends. Bill plans on holding the shares for one year. Jim plans on holding the shares for three years. Shelly plans on holding the shares until she retires in 10 years. Which one of the following statements is correct?

Correct Answer
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The constant growth dividend discount model (DDM) can be used only when the ________.

Correct Answer
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The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

Correct Answer
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Firm A is high risk and Firm B is low risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

Correct Answer
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Which one of the following statements about market and book value is correct?

Correct Answer
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Rose Hill Trading Company is expected to have EPS in the upcoming year of $8.00. The expected ROE is 18.0%. An appropriate required return on the shares is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be ________.

Correct Answer
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Correct Answer
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B

The market capitalisation rate on the shares of Aberdeen Wholesale Company is 10%. Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plouwback ratio is 50%, its P/E ratio will be ________.

Correct Answer
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Correct Answer
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Earnings yields tend to ________ when Treasury yields fall.

Correct Answer
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Exam 11: Equity Valuation

Correct AnswerverifiedShow Answer

Value shares are more likely to have a PEG ratio ________.

Correct AnswerverifiedShow Answer

A firm increases its dividend plowback ratio. All else equal you know that ________.

Correct AnswerverifiedShow Answer

Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be ________.

Correct AnswerverifiedShow Answer

Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be ________ if it follows a policy of paying 30% of earning in the form of dividends.

Correct AnswerverifiedShow Answer

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60 and the increase in net working capital is $30. What is the free cash flow to the firm?

Correct AnswerverifiedB

A firm has PVGO of 0 and a market capitalisation rate of 12%. What is the firm's P/E ratio?

Correct AnswerverifiedShow Answer

The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14% and the WACC is 10%. If the market value of the debt is $1.0 billion, what is the value of the equity using the free cash flow valuation approach?

Correct AnswerverifiedB

The greatest value to an analyst from calculating a share's intrinsic value is ________.

Correct AnswerverifiedShow Answer

________ is the amount of money per common share that could be realised by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

Correct AnswerverifiedShow Answer

Bill, Jim and Shelly are all looking to buy the same shares that pay dividends. Bill plans on holding the shares for one year. Jim plans on holding the shares for three years. Shelly plans on holding the shares until she retires in 10 years. Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

The constant growth dividend discount model (DDM) can be used only when the ________.

Correct AnswerverifiedShow Answer

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

Correct AnswerverifiedShow Answer

Firm A is high risk and Firm B is low risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

Correct AnswerverifiedShow Answer

Which one of the following statements about market and book value is correct?

Correct AnswerverifiedShow Answer

Rose Hill Trading Company is expected to have EPS in the upcoming year of $8.00. The expected ROE is 18.0%. An appropriate required return on the shares is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

The market capitalisation rate on the shares of Aberdeen Wholesale Company is 10%. Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plouwback ratio is 50%, its P/E ratio will be ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Earnings yields tend to ________ when Treasury yields fall.

Correct AnswerverifiedShow Answer

Correct Answer
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B

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B

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B

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