Chapter 09 - Stock Valuation
Chapter 09
How to Value Stocks
Multiple Choice Questions
1. The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model. A. zero growth B. dividend growth C. capital pricing
D. earnings capitalization E. differential growth
2. Next year's annual dividend divided by the current stock price is called the: A. yield to maturity. B. total yield. C. dividend yield. D. capital gains yield. E. earnings yield.
3. The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield. A. current B. total C. dividend D. capital gains E. earnings
4. A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock. A. dual class B. cumulative C. deferred D. preferred E. common
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Chapter 09 - Stock Valuation
5. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called: A. retained earnings. B. net income. C. dividends. D. redistributions. E. infused equity.
6. The constant dividend growth model is:
A. generally used in practice because most stocks have a constant growth rate.
B. generally used in practice because the historical growth rate of most stocks is constant. C. generally not used in practice because most stocks grow at a non constant rate.
D. generally not used in practice because the constant growth rate is usually higher than the required rate of return.
E. based on the assumption Dow 30 represents a good estimate of the market index.
7. The constant dividend growth model:
I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point of time.
III. states that the market price of a stock is only affected by the amount of the dividend. IV. considers capital gains but ignores the dividend yield. A. I only B. II only
C. III and IV only D. I and II only E. I, II, and III only
8. The underlying assumption of the dividend growth model is that a stock is worth: A. the same amount to every investor regardless of their desired rate of return. B. the present value of the future income which the stock generates.
C. an amount computed as the next annual dividend divided by the market rate of return. D. the same amount as any other stock that pays the same current dividend and has the same required rate of return.
E. an amount computed as the next annual dividend divided by the required rate of return.
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9. Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:
A. market values of all stocks to increase, all else constant.
B. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate.
C. market values of all stocks to decrease, all else constant.
D. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price.
E. dividend growth rates to increase to offset this change.
10. Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from today before determining today's value. A. 4 B. 5 C. 6 D. 7 E. 8
11. The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6 years, respectively. After that, the company anticipates increasing the dividend by 4% annually. The first step in computing the value of this stock today, is to compute the value of the stock when it reaches constant growth in year: A. 3 B. 4 C. 5 D. 6 E. 7
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Chapter 09 - Stock Valuation
12. Differential growth refers to a firm that increases its dividend by: A. three or more percent per year.
B. a rate which is most likely not sustainable over an extended period of time. C. a constant rate of two or more percent per year. D. $.10 or more per year.
E. an amount in excess of $.10 a year.
13. The total rate of return earned on a stock is comprised of which two of the following? I. current yield II. yield to maturity III. dividend yield IV. capital gains yield A. I and II only B. I and IV only C. II and III only D. II and IV only E. III and IV only
14. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased
shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to _____ if Fred is to achieve his 10% rate of return. A. remain constant B. decrease by 5% C. increase by 5% D. increase by 10% E. increase by 15%
15. The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company: A. must always show a current liability of $1,000 for dividends payable. B. is obligated to continue paying $1 per share per year.
C. will be declared in default and can face bankruptcy if it does not pay $1 per year to each shareholder on a timely basis.
D. has a liability which must be paid at a later date should the company miss paying an annual dividend payment.
E. must still declare each dividend before it becomes an actual company liability.
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Chapter 09 - Stock Valuation
16. The value of common stock today depends on:
A. the expected future holding period and the discount rate. B. the expected future dividends and the capital gains.
C. the expected future dividends, capital gains and the discount rate. D. the expected future holding period and capital gains. E. None of the above.
17. The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on this information, which one of the following statements is correct?
A. The closing price on the previous day was $1.42 higher than today's closing price. B. A dealer will buy the stock at $22.87 and sell it at $26 a share.
C. The stock increased in value between yesterday's close and today's close by $.0142. D. The earnings per share are equal to 1/26th of $22.87. E. The earnings per share have increased by $1.42 this year.
18. A stock listing contains the following information: P/E 17.5, closing price 33.10,
dividend .80, YTD% chg 3.4, and net chg - .50. Which of the following statements are correct given this information?
I. The stock price has increased by 3.4% during the current year. II. The closing price on the previous trading day was $32.60. III. The earnings per share are approximately $1.89. IV. The current yield is 17.5%. A. I and II only B. I and III only C. II and III only D. III and IV only E. I, III, and IV only
19. The discount rate in equity valuation is composed entirely of: A. the dividends paid and the capital gains yield. B. the dividend yield and the growth rate. C. the dividends paid and the growth rate.
D. the capital gains earned and the growth rate. E. the capital gains earned and the dividends paid.
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