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1、13: Asset Valuation: Equity Investments1.A: An Introduction to Security ValuationQuestion ID: 25084In the top-down approach to valuation, industry analysis should be conducted before company analysis because:A.the goal of the top-down approach is to identify those companies in non-cyclical industrie
2、s with the lowest P/E ratios.B.an industrys prospects within the global business environment are a major determinant of how well individual firms in the industry perform.C.most valuation models recommend the use of industry-wide average required returns, rather than individual returns. D.the goal of
3、 the top-down approach is to identify those companies in cyclical industries with the highest P/E ratios.BIn general, an industrys prospects within the global business environment determine how well or poorly individual firms in the industry do. Thus, industry analysis should precede company analysi
4、s. The goal is to find the best companies in the most promising industries; even the best company in a weak industry is not likely to perform well.Question ID: 16869Concerning the top-down, three-step valuation process, academic studies have shown which of the following?A.There is no relationship be
5、tween aggregate stock prices and various economic series (i.e., employment and income).B.Most changes in a firms earnings can be attributed to general economic and market factors.C.Changes in an individual stocks rate of return cannot be explained by changes in the rates of return for the aggregate
6、stock market.D.All of these are correct. BThere is a relationship between aggregate stock prices and various economic series. Changes in an individual stocks rate of return are best explained by changes in the rates of return for the aggregate stock market.Question ID: 16902Which of the following wo
7、uld NOT be a reason for market, industry, and corporate analysis?A.Firms within each industry perform differently.B.Single industries perform consistently over time.C.The market is generally a very important component of security returns.D.Different industries have different exposures to economic ri
8、sk factorsBQuestion ID: 25086Which of the following is NOT a finding of academic studies that supports the use of the top-down valuation approach?A.General economic and market factors have the largest effect on company earnings.B.Individual stock rates of return are best explained by changes in aggr
9、egate market and industry returns.C.Stock prices are strongly influenced by employment, inflation, and production.D.Investors can earn excess risk-adjusted returns by selecting value stocks, such as those with low P/E ratios, regardless of industry prospects or economic conditions.DThe logic behind
10、the top-down approach is to identify, based on expected global economic conditions, those industries with the best prospects. Then, select the best companies with those industries. While there is empirical evidence that low P/E “value” stocks outperform high P/E “growth” stocks, investing in low P/E
11、 stocks regardless of industry prospects or economic conditions is not consistent with the top-down valuation approach.Question ID: 25085Deciding how to allocate investment funds, first among countries, and then within countries to various asset classes, is the objective of which step of the top-dow
12、n valuation approach?A.Sector analysis.B.Analysis of industry influences.C.Company analysis.D.Analysis of general economic influences.DThe objective of step one, economic analysis, is to allocate your portfolio among countries and asset classes based on your analysis of future economic conditions.Qu
13、estion ID: 16906How much is a preferred stock that has a fixed perpetual dividend of $10 worth? Assume a preferred discount rate of 15 percent.A.$150.00.B.$1.50.C.$66.67.D.$8.70. CThe valuation of preferred stock is D/kp. Hence, the value of the preferred stock is 10/0.15=$66.67.Question ID: 16916Th
14、e preferred stock of the Delco Investments Company has a par value of $150 and $11.50 dividend rate. A shareholders required return on this stock is 14 percent. What is the maximum price he would pay?A.$54.79.B.$54.76.C.$161.00.D.$82.14.DValue of preferred = D / kp = $11.50 / .14 = $82.14Question ID
15、: 16914Which of the following data is NOT required when valuing preferred securities?A.Growth rate.B.None of the above.C.Dividend.D.Required rate of return.ABy definition.Question ID: 25087A company has 6% preferred stock outstanding with a par value of $100. The required return on the preferred is
16、8%. What is the value of the preferred stock?A.$92.59.B.$94.34.C.$75.00.D.$100.00.CThe annual dividend on the preferred is $100(.06) = $6.00. The value of the preferred is $6.00/0.08 = $75.00. Question ID: 25088A company has 8% preferred stock outstanding with a par value of $100. The required retur
17、n on the preferred is 5%. What is the value of the preferred stock?A.$152.81.B.$160.00.C.$62.50.D.$100.00.BThe annual dividend on the preferred is $100(.08) = $8.00. The value of the preferred is $8.00/0.05 = $160.00.Question ID: 25089Use the following information on Brown Partners, Inc. to compute
18、the current stock price. Dividend just paid = $0.80 Expected dividend growth rate = 4% Expected stock price in one year = $60 Risk-free rate = 3% Equity risk premium = 12% A.$52.90.B.$54.31.C.$59.06.D.$52.17.AThe current stock price is equal to (D1 + P1) / (1 + ke). D1 equals $0.80(1.04) = $0.832. T
19、he equity discount rate is 3% + 12% = 15%. Therefore the current stock price is ($0.832 + $60)/(1.15) = $52.90 Question ID: 25170A stock is expected to pay a dividend of $1.50 at the end of each of the next three years. At the end of three years the stock price is expected to be $25. The equity disc
20、ount rate is 16%. What is the current stock price?A.$24.92.B.$17.18.C.$19.39.D.$18.90.CThe value of the stock today is the present value of the dividends and the expected stock price, discounted at the equity discount rate: $1.50/1.16 + $1.50/1.162 + $1.50/1.163 + $25.00/1.163 = $19.39 Question ID:
21、16925The company is currently earning $5 per share and this year paid out 40 percent in dividends. The earnings and dividend growth rate for the next 3 years (T1, T2 and T3) will be 20 percent. At the end of the third year the company will start paying out 100 percent of earnings in dividends (D3 =
22、E3). If a 12 percent rate of return is required, what would you pay for this company?A.$72.80.B.$61.84.C.$82.10.D.$32.14. BD1 = (.4)(5)(1.2)1 = 2.40; D2 = 2.88; D3 = E3 = 5(1.2)3 = 8.64 g after T3 onward will be zero because of the 100% payout ratio. Solve for the price P2 = D3/(k - g) = 8.64/(.12 -
23、 0) = $72 At 12% PVD1 = 2.14; PVD2 = 2.30; and PVP2 = 57.40: Sum = 61.84 Question ID: 16922Assume that a stock paid a dividend of $1.50 last year. Next year, an investor believes that the dividend will be 20 percent higher and that the stock will be selling for $50 at year-end. Assume a firms beta o
24、f 2.0, a risk-free market of 6 percent, and a market return of 15 percent. Given the above information, what is the value of the stock?A.$41.77. B.$45.00.C.$51.50.D.$40.32. AThe discount rate is equal to 0.06 + 2(0.15 0.06) =0.24. The dividends next year are expected to be $1.5 x 1.2 = $1.8. The pre
25、sent value of the future stock price and the future dividend are (50 + 1.8)/1.24 = $41.77.Question ID: 16927An investors required holding period return for two different stocks (is):A.depends on the industry each firm is in.B.always the same.C.depends on the beta of each stock.D.always different.CTw
26、o different stocks could have the same or different holding period returns. Likewise, within an industry the holding period returns could be the same or different. The stocks beta is a determining factor that affects the overall return of the stock. If two stocks have different betas they will have
27、different holding period returns.Question ID: 16934Which of the following is NOT an assumption of the constant growth dividend discount model (DDM)?A.Dividend payout is constant.B.ROE is constant.C.Price appreciation can fluctuate over time, but dividend growth is constant.D.Required rate of return
28、k is greater than the dividend growth rate g.CDividend growth rate can and does fluctuate.Question ID: 16935The constant growth dividend discount model would be most appropriate in valuing the stock of a(n):A.established trucking company.B.start-up software company.C.bio-medical research and develop
29、ment firm.D.firm with substantial pending liability and regulatory issues on the horizon. AOne of the assumptions of the infinite period dividend discount model, also called the constant growth dividend discount model, is that the stock pays dividends and they grow at a constant rate. The establishe
30、d trucking company is the only choice that would meet this criteria.Question ID: 16937An advantage of the constant growth dividend discount model over more sophisticated valuation measures is:A.required inputs can be estimated.B.all of these choices are correct.C.it has a logical, intuitive footing
31、in finance theory.D.simplicity of computation.BQuestion ID: 16930What is the value of a stock that paid a $0.25 dividend last year, if dividends are expected to grow at a rate of 6 percent forever? Assume that the risk-free rate is 5 percent, the expected return on the market is 10 percent, and the
32、stocks beta is 0.5. A.$16.67.B.$17.67.C.$6.63.D.$3.53. BThe discount rate is ke = 0.05 + 0.5(0.10-0.05) = 0.075. Use the infinite period dividend discount model to value the stock. The stock value = D1/(ke g) = (0.25 x 1.06)/(0.075 0.06) = $17.67.Question ID: 16942A company that can earn rates of re
33、turn greater than its required return is called a:A.defensive company.B.growth stock.C.cyclical company.D.growth firm.DQuestion ID: 16939All else remaining equal, if there is an increase in the estimated required rate of return, a stocks value as estimated by the constant growth dividend discount mo
34、del (DDM) is:A.no change.B.decrease.C.not enough information given.D.increase.BQuestion ID: 16946A growth company can invest in projects that generate a return greater than the firms.A.cost of debt.B.return on equity.C.cost of equity.D.cost of capital.DQuestion ID: 16943In a negative growth model:A.
35、dividends are zero.B.rates of return are negative.C.earnings are less than preceding year.D.earnings are negative.CQuestion ID: 25173According to the earnings multiplier model, all else equal, as the required rate of return on the stock increases, the: A.P/E ratio will decrease.B.P/E ratio will incr
36、ease.C.earnings per share will increase.D.earnings per share will decrease.AAccording to the earnings multiplier model, the P/E ratio is equal to P0/E1 = (D1/E1)/(ke - g). As ke increases, P0/E1 will decrease, all else equal.Question ID: 25171The earnings multiplier model, derived from the dividend
37、discount model, expresses a stocks P/E ratio (P0/E1) as the:A.dividend yield plus the expected dividend growth rate.B.expected dividend in one year divided by the difference between the required return on equity and the expected dividend growth rate.C.expected dividend payout ratio divided by the su
38、m of the expected dividend growth rate and the required return on equity.D.expected dividend payout ratio divided by the difference between the required return on equity and the expected dividend growth rate.DStarting with the dividend discount model P0 = D1/(ke - g), and dividing both sides by E1 y
39、ields: P0/E1 = (D1/E1)/(ke - g)Thus, the P/E ratio is determined by: The expected dividend payout ratio (D1/E1). The required rate of return on the stock (ke). The expected growth rate of dividends (g). Question ID: 16956All else remaining equal, if there is a decrease in a firms retention rate, a s
40、tocks value as estimated by the constant growth dividend discount model (DDM) is:A.no change.B.increase.C.not enough information given.D.decrease.BQuestion ID: 16949Assume that a firm has an expected dividend payout ratio of 20 percent, a required rate of return of 9 percent, and an expected dividen
41、d growth of 5 percent. What is the firms estimated price-to-earnings (P/E) ratio? A.10.00.B.2.22.C.5.00.D.20.00. CThe price-to-earnings (P/E) ratio is equal to (D1/E1)/(k g) = 0.2/(.09 0.05) = 5.00.Question ID: 25174According to the earnings multiplier model, all else equal, as the dividend payout r
42、atio on the stock increases, the:A.required return on the stock will decrease.B.required return on the stock will increase.C.P/E ratio will increase.D.P/E ratio will decrease.CAccording to the earnings multiplier model, the P/E ratio is equal to P0/E1 = (D1/E1)/(ke - g). As D1/E1 increases, P0/E1 wi
43、ll increase, all else equal.Question ID: 16954All else remaining equal, if there is an increase in a firms dividend payout ratio, a stocks value as estimated by the constant growth dividend discount model (DDM) is:A.not enough information given.B.no change.C.decrease.D.increase.DQuestion ID: 16958Al
44、l else remaining equal, an increase in g will cause a stocks P/E ration to:A.no change.B.decrease.C.cannot be determined from the information given.D.increase.DQuestion ID: 16955All else remaining equal, if there is an increase in a firms return on equity (ROE), a stocks value as estimated by the constant growth dividend discount model (DDM) is:A.decrease.B.no change.C.not enough information given.D.increase.DQuestion ID: 16959Baker Computer Company, currently retains 55 percents of its earnings, which this past year to
