Investments Final UPDATED Exam
Questions and CORRECT Answers
tobin's Q - Correct Answer- equal to the total market value of the firm's common stock
divided by the replacement cost of the firm's assets less liabilities
high P/E ratios tend to indicate that a company will - Correct Answer- grow quickly
__________ is equal to common shareholders equity/common shares outstanding - Correct
Answer- book value per share
________ are analysts who use info concerning current and prospective profitability of a firm
to asses the firm's fair market value - Correct Answer- fundamental analysts
the ______ is defined as the present value of all cash proceeds to the investor in the stock -
Correct Answer- intrinsic value
________ is the amount of money per common share that could be realized by breaking up
the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders -
Correct Answer- liquidation value per share
since 1955, treasury bond yields and earnings yields on stocks were - Correct Answer-
positively correlated
historically P/E ratios have tended to be - Correct Answer- lower when inflation has been
high
the ____ is a common term for the market consensus value of the required return on a stock -
Correct Answer- market capitalization rate
market capitalization rate - Correct Answer- consists of the risk-free rate, the systematic risk
of the stock, and the market risk premium
,the _______ is the fraction of earnings reinvested in the firm - Correct Answer- retention rate
and plowback ratio
dividend payout = - Correct Answer- (1-plowback) or retention rate
the Gordon model - Correct Answer- assumes constant growth indefinitely, valid only when g
is less than k
given that k and g are equal, a stock with a larger dividend - Correct Answer- will have a
higher value than that of a stock with a smaller dividend
given that dividends are equal, stock with a higher growth rate - Correct Answer- will have a
higher value than that of a stock with smaller growth rate
given that dividends are equal, the stock with the larger required return - Correct Answer-
will have the lower value
if the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to -
Correct Answer- V0 = (expected EPS in year 1)/k
if no growth is occuring, - Correct Answer- return on equity = required return
beta = 0
EPS = DPS
low tech company has an expected ROE of 10%. The dividend growth rate will be ______ if
the firm follows a policy of paying 40% of earnings in the form of dividends - Correct
Answer- 6%
Xlink company has an expected ROE of 15%. the dividend growth rate will be ______ if the
firm follows a policy of plowing back 75% of earnings - Correct Answer- 11.25%
a preferred stock will pay a dividend of $2.75 in the upcoming year and every year thereafter;
i.e. dividends are not expected to grow. You require a return of 10% on this stock. Use the
constant growth DDM to calculate the intrinsic value of this preferred stock. - Correct
Answer- $27.50
, you are considering acquiring a common stock that you would like to hold for one year. You
expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the
year. The maximum price you would pay for the stock today is _____ if you wanted to earn a
10% return. - Correct Answer- 30.23
paper express company has a balance sheet which lists $85 million in assets, 40 million in
liabilities, and 45 million in common shareholder's equity. it has 1,400,000 common shares
outstanding. the replacement cost of the assets is 115 million, the market share price is $90.
what is paper express's book value per share? - Correct Answer- $32.14
market value per share - Correct Answer- equal to market share price
paper express company has a balance sheet which lists $85 million in assets, 40 million in
liabilities, and 45 million in common shareholder's equity. it has 1,400,000 common shares
outstanding. the replacement cost of the assets is 115 million, the market share price is $90.
what is paper express's market value per share? - Correct Answer- $90
one of the problems with attempting to forecast stock market values is that - Correct Answer-
the level of uncertainty surrounding the forecast will always be quite high
the most popular approach to forecast - Correct Answer- the aggregate earnings multiplier
a company is expected to pay a dividend of $2 in the upcoming year. the risk-free rate of
return is 4% and the expected return on the market portfolio is 14%. analysts expect the price
of the company's shares to be $22 a year from now. the beta of the company's stock is 1.25.
the market's required rate of return on the stock is - Correct Answer- 4% + 1.25(14%-4%) =
16.5%
a company is expected to pay a dividend of $2 in the upcoming year. the risk-free rate of
return is 4% and the expected return on the market portfolio is 14%. analysts expect the price
of the company's shares to be $22 a year from now. the beta of the company's stock is 1.25.
Questions and CORRECT Answers
tobin's Q - Correct Answer- equal to the total market value of the firm's common stock
divided by the replacement cost of the firm's assets less liabilities
high P/E ratios tend to indicate that a company will - Correct Answer- grow quickly
__________ is equal to common shareholders equity/common shares outstanding - Correct
Answer- book value per share
________ are analysts who use info concerning current and prospective profitability of a firm
to asses the firm's fair market value - Correct Answer- fundamental analysts
the ______ is defined as the present value of all cash proceeds to the investor in the stock -
Correct Answer- intrinsic value
________ is the amount of money per common share that could be realized by breaking up
the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders -
Correct Answer- liquidation value per share
since 1955, treasury bond yields and earnings yields on stocks were - Correct Answer-
positively correlated
historically P/E ratios have tended to be - Correct Answer- lower when inflation has been
high
the ____ is a common term for the market consensus value of the required return on a stock -
Correct Answer- market capitalization rate
market capitalization rate - Correct Answer- consists of the risk-free rate, the systematic risk
of the stock, and the market risk premium
,the _______ is the fraction of earnings reinvested in the firm - Correct Answer- retention rate
and plowback ratio
dividend payout = - Correct Answer- (1-plowback) or retention rate
the Gordon model - Correct Answer- assumes constant growth indefinitely, valid only when g
is less than k
given that k and g are equal, a stock with a larger dividend - Correct Answer- will have a
higher value than that of a stock with a smaller dividend
given that dividends are equal, stock with a higher growth rate - Correct Answer- will have a
higher value than that of a stock with smaller growth rate
given that dividends are equal, the stock with the larger required return - Correct Answer-
will have the lower value
if the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to -
Correct Answer- V0 = (expected EPS in year 1)/k
if no growth is occuring, - Correct Answer- return on equity = required return
beta = 0
EPS = DPS
low tech company has an expected ROE of 10%. The dividend growth rate will be ______ if
the firm follows a policy of paying 40% of earnings in the form of dividends - Correct
Answer- 6%
Xlink company has an expected ROE of 15%. the dividend growth rate will be ______ if the
firm follows a policy of plowing back 75% of earnings - Correct Answer- 11.25%
a preferred stock will pay a dividend of $2.75 in the upcoming year and every year thereafter;
i.e. dividends are not expected to grow. You require a return of 10% on this stock. Use the
constant growth DDM to calculate the intrinsic value of this preferred stock. - Correct
Answer- $27.50
, you are considering acquiring a common stock that you would like to hold for one year. You
expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the
year. The maximum price you would pay for the stock today is _____ if you wanted to earn a
10% return. - Correct Answer- 30.23
paper express company has a balance sheet which lists $85 million in assets, 40 million in
liabilities, and 45 million in common shareholder's equity. it has 1,400,000 common shares
outstanding. the replacement cost of the assets is 115 million, the market share price is $90.
what is paper express's book value per share? - Correct Answer- $32.14
market value per share - Correct Answer- equal to market share price
paper express company has a balance sheet which lists $85 million in assets, 40 million in
liabilities, and 45 million in common shareholder's equity. it has 1,400,000 common shares
outstanding. the replacement cost of the assets is 115 million, the market share price is $90.
what is paper express's market value per share? - Correct Answer- $90
one of the problems with attempting to forecast stock market values is that - Correct Answer-
the level of uncertainty surrounding the forecast will always be quite high
the most popular approach to forecast - Correct Answer- the aggregate earnings multiplier
a company is expected to pay a dividend of $2 in the upcoming year. the risk-free rate of
return is 4% and the expected return on the market portfolio is 14%. analysts expect the price
of the company's shares to be $22 a year from now. the beta of the company's stock is 1.25.
the market's required rate of return on the stock is - Correct Answer- 4% + 1.25(14%-4%) =
16.5%
a company is expected to pay a dividend of $2 in the upcoming year. the risk-free rate of
return is 4% and the expected return on the market portfolio is 14%. analysts expect the price
of the company's shares to be $22 a year from now. the beta of the company's stock is 1.25.
