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Chapter 006 - Valuing Stocks

True / False Questions

1. The term "irrational exuberance" was coined b !ed Chairman reenspan to describe thedot.com boom.TRUE

#. The $ew %ork Stock &xchange '$%S&( is an example o) an auction market.TRUE

*. +n excess o) market ,alue o,er the book ,alue o) euit can be attributed to going concern,alue.TRUE

. Securities with the same expected risk should o))er the same expected rate o) return.TRUE

/. ) in,estors belie,e a compan will ha,e the opportunit to make ,er pro)itablein,estments in the )uture the will pa more )or the compan2s stock toda.TRUE

6. The di,idend discount model should not be used to ,alue stocks in which the di,idend doesnot grow.FALSE

3. $asda operates a dealer market in which a dealer acts as the auctioneer.FALSE

4. oogle2s stock price tripling a)ter the 5 suggests that ,aluing growth stocks is an exactscience.FALSE

7. The liuidation ,alue o) a )irm is eual to the book ,alue o) the )irm.FALSE

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10. Sustainable growth rates can be estimated b multipling a )irm2s 8& b its di,idend paout ratio.FALSE

11. + "round lot" on the stock exchange signi)ies 100 shares o) common stock.TRUE

1#. +ccording to the di,idend discount model a stock2s price toda depends on the in,estor2shori9on )or holding the stock.FALSE

1*. ) the market is e))icient stock prices should onl be expected to react to new in)ormationthat is released.TRUE

1. The intent o) technical analsis is to disco,er patterns in past stock prices.TRUE

1/. Technical analsts ha,e no e))ect upon the e))icienc o) the stock market.FALSE

16. Technical analsts would be more likel than other in,estors to index their port)olios.FALSE

13. :arket e))icienc implies that securit prices impound new in)ormation uickl.TRUE

14. ne o) the uickest was to pro)it in the stock market is to own stocks that split.FALSE

17. ) securit prices )ollow a random walk then on an particular da the odds are that anincrease or decrease in price is euall likel.TRUE

#0. !undamental analsts attempt to get rich b identi)ing patterns in stock prices.FALSE

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#1. Strong-)orm market e))icienc implies that one could earn abo,e a,erage returns bexamining the histor o) a )irm2s stock price.FALSE

##. :arket price is not the same as book ,alue or liuidation ,alue.

TRUE #*. :arket ,alue unlike book ,alue and liuidation ,alue treats the )irm as a going concern.TRUE

#. The di,idend ield o) a stock is much like the current ield o) a bond. ;oth ignore prospecti,e capital gains or losses.TRUE

#/. +t each point in time all securities o) the same risk are priced to o))er the same expectedrate o) return.TRUE

#6. The di,idend discount model states that toda2s stock price euals the present ,alue o) allexpected )uture di,idends.TRUE

AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Easy

Learning Objectie: !"#!$ Calculate t%e &resent alue of a stoc gien forecasts of future diidends and future stoc &rice(

#3. The di,idend discount model indicate that the ,alue o) a stock is the present ,alue o) thedi,idends it will pa o,er the in,estor2s hori9on plus the present ,alue o) the expected stock price at the end o) that hori9on.TRUE

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#4. n,estors known as )undamental analsts tr to achie,e superior returns b spotting andexploiting patterns in stock prices.FALSE

#7. ) the stock prices )ollow a random walk successi,e stock prices are not related.

FALSE

*0. ) the stock prices )ollow a random walk successi,e stock price changes are not related.TRUE

*1. ) the stock prices )ollow a random walk successi,e stock prices )luctuate abo,e and below a normal long-run price.FALSE

*#. ) the stock prices )ollow a random walk the histor o) stock prices cannot be used to predict )uture returns to in,estors.

TRUE

Multiple Choice Questions

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**. ) stock prices )ollow a random walk which o) the )ollowing statement's( is'are( correct<+. Successi,e stock price changes are not related.;. The histor o) stock prices cannot be used to predict )uture returns to in,estors.C. ;oth + and ;.=. $either + nor ;.

*. n the calculation o) rates o) return on common stock di,idends are >>>>>>> and capitalgains are >>>>>.+. guaranteed? not guaranteed;. guaranteed? guaranteedC. not guaranteed? not guaranteed=. not guaranteed? guaranteed

*/. @hat di,idend ield would be reported in the )inancial press )or a stock that currentl pas a A1 di,idend per uarter and the most recent stock price was A0<+. #./B

;. .0BC. 10.0B=. 1/.0B

A1 di,idend per uarter A annuall.ADA0 10B di,idend ield.

*6. @hich o) the )ollowing ,alues treats the )irm as a going concern<A. market ,alue;. book ,alueC. liuidation ,alue

=. none o) the abo,e.

*3. ) a stock2s 5D& ratio is 1*./ at a time when earnings are A* per ear what is the stock2scurrent price<+. A./0;. A14.00C. A##.##D. A0./0

5D& 1*./EThen 5 1*./ x A*5rice A0./0

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*4. Fow man round lots were traded in a speci)ic stock on a da in which 63400 shareschanged hands<+. 63.4 round lotsB. 634 round lotsC. 63400 round lots

=. 5rice must be known to determine round lots.

*7. The book ,alue o) a )irm2s euit is determined bG+. multipling share price b shares outstanding.;. multipling share price at issue b shares outstanding.C. the di))erence between book ,alues o) assets and liabilities.=. the di))erence between market ,alues o) assets and liabilities.

0. @hat is the current price o) a share o) stock )or a )irm with A/ million in balance-sheeteuit /00000 shares o) stock outstanding and a priceDbook ,alue ratio o) <

+. A#./0;. A10.00C. A#0.00D. A0.00

book ,alue per share A/000000D/00000 A10) priceDbook ,alue then price A10 x A0

1. ) the liuidation ,alue o) a )irm is negati,e thenGA. the )irm2s debt exceeds the market ,alue o) assets.

;. the )irm2s debt exceeds the book ,alue o) euit.C. the book ,alue o) assets exceeds the )irm2s debt.=. the market ,alue o) assets exceeds the )irm2s debt.

#. + )irm2s liuidation ,alue is the amountG+. necessar to repurchase all shares o) common stock.B. reali9ed )rom selling all assets and paing o)) its creditors.C. a purchaser would pa )or the )irm in bankruptc.=. eual to the book ,alue o) euit.

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*. @hich o) the )ollowing is least likel to account )or an excess o) market ,alue o,er book,alue o) euit<A. naccurate depreciation methods.;. Figh rate o) return on assets.C. The presence o) growth opportunities.

=. Valuable o))-balance sheet assets.

. !irms with ,aluable intangible assets are more likel to show a'n(G+. excess o) book ,alue o,er market ,alue o) euit.B. high going-concern ,alue.C. low liuidation ,alue.=. low 5D& ratio.

/. @hich o) the )ollowing is inconsistent with a )irm that sells )or ,er near book ,alue<+. How current earning power ;. $o intangible assets

C. Figh )uture earning power =. How unstable di,idend pament

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6. The main purpose o) a market-,alue balance sheet is toG+. show an in)lated ,alue o) the )irm.;. a,oid the recording o) certain liabilities.C. ,alue assets and liabilities without ++5 restrictions.=. impro,e the credit rating o) the )irm.

3. + stock paing A/ in annual di,idends sells now )or A40 and has an expected return o)1B. @hat might in,estors expect to pa )or the stock one ear )rom now<+. A4#.#0B. A46.#0C. A43.#0=. A71.#0

&xpected return

1B A11.#0 ) 1 - A3/A46.#0 ) 1

4. @hich o) the )ollowing statements is correct about a stock currentl selling )or A/0 pershare that has a 16B expected return and a 10B expected capital appreciation<+. ts expected di,idend exceeds the actual di,idend.;. ts expected return will exceed the actual return.C. t is expected to pa A* in annual di,idends.=. t is expected to pa A4 in annual di,idends.

&xpected return expected di,idend ield I expected capital appreciation.16B expected di,idend ield I 10B6B expected di,idend ieldA/0 share price x 6B A* expected di,idend pament

7. The expected return on a common stock is composed o)G+. di,idend ield.;. capital appreciation.C. both di,idend ield and capital appreciation.

=. capital appreciation minus the di,idend ield.

/0. !irms ha,ing a higher expected return ha,e a higherGA. le,el o) expected risk.;. di,idend ield.C. market ,alue o) euit.=. degree o) certaint concerning their returns.

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/1. Fow much should ou pa )or a share o) stock that o))ers a constant growth rate o) 10Breuires a 16B rate o) return and is expected to sell )or A/0 one ear )rom now<+. A#.00;. A/.00C. A/./

=. A3.00

The easiest wa to sol,e this problem is to reali9eG&xpected return expected di,idend ieldI expected capital appreciationThenG.16 .06 I expected capital appreciation.10 expected capital appreciation+nd ) 1 110B o) ) oA/0.00 1.1 ) o

A/./ ) o

/#. +ccording to the di,idend discount model the current ,alue o) a stock is eual to theGA. present ,alue o) all expected )uture di,idends.;. sum o) all )uture expected di,idends.C. next expected di,idend discounted to the present.=. discounted ,alue o) all di,idends growing at a constant rate.

/*. Fow is it possible to ignore cash di,idends that occur )ar into the )uture when using adi,idend discount model< Those di,idendsG+. will be paid to a di))erent in,estor.

;. will not be paid b the )irm.C. ha,e an insigni)icant present ,alue.=. ignore the tax conseuences o) )uture di,idends.

/. ) the di,idend ield )or ear one is expected to be /B based on the current price o) A#/what will the ear )our di,idend be i) di,idends grow at a constant 6B<+. A1.**B. A1.7C. A1./4=. A1.63

.0/ x #/ 1.#/ Di*

t%en D+ 1.#/ x '1.06(* A1.7

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