Q: A company just paid a dividend of $2.00, expects to grow dividends at 6% per year, and the required return is 10%. What is the value of the stock today?

$$P_0$$ = \frac{2.00 \times 1.06}{0.10-0.06} = \frac{2.12}{0.04} = 53.00$$

Q: What is the formula for the Sustainable Growth Rate (SGR)?

$$SGR = ROE \times (1 - \text{Payout Ratio})$$

Q: Which equation is used to calculate the PEG ratio?

$$PEG = \frac{P/E}{\text{Growth Rate}}$$

Question 1

Which formula represents the value of a stock using the Gordon Growth Model (GGM)?

Accepted Answer

$$P_0$$ = \frac{$$Div_1$$}{R-g}$$

Question 2

A company just paid a dividend of $2.00, expects to grow dividends at 6% per year, and the required return is 10%. What is the value of the stock today?

Accepted Answer

$$P_0$$ = \frac{2.00 	imes 1.06}{0.10-0.06} = \frac{2.12}{0.04} = 53.00$$

Question 3

Which of the following is NOT a strength of the Residual Income Model (RIM)?

Accepted Answer

Terminal values make up a large portion of the total present value

Question 4

What is the formula for the Sustainable Growth Rate (SGR)?

Accepted Answer

$$SGR = ROE 	imes (1 - 	ext{Payout Ratio})$$

Question 5

If a company has negative earnings but positive free cash flow, what does this imply about its value?

Accepted Answer

The company may still have positive value

Question 6

Which equation is used to calculate the PEG ratio?

Accepted Answer

$$PEG = \frac{P/E}{	ext{Growth Rate}}$$

Question 7

In the DCF method, what is the purpose of calculating Terminal Value?

Accepted Answer

To estimate the value of cash flows beyond the forecast period

Question 8

Which of the following is a key assumption of the Gordon Growth Model?

Accepted Answer

Dividends grow at a constant rate forever

Question 9

A company will pay dividends of $$1, 2$$, and $2.50 for the next three years, then grow dividends at 5% forever. If the required return is 10%, what is the present value of the stock?

Accepted Answer

$$PV = 1/(1.10) + 2/(1.10^2$) + (2.50+52.50)/(1.10^3$) = 43.88$$

Question 10

Which of the following is a weakness of the Residual Income Model?

Accepted Answer

Accounting data used as inputs may require significant adjustments

Question 11

What is the formula for Free Cash Flow (FCF) in annual calculations?

Accepted Answer

$$FCF = EBIT 	imes (1-tc) + Depreciation - CAPX - \Delta NWC$$

Question 12

Which of the following ratios is used for relative valuation of companies?

Accepted Answer

Price/Earnings (P/E) ratio

Question 13

If a stock's market price is $$20 and your valuation is 30$$, what does this suggest?

Accepted Answer

The market disagrees with your assessment of value

Question 14

What is the formula for the price-earnings (P/E) ratio?

Accepted Answer

$$P/E = \frac{	ext{Price per share}}{	ext{Earnings per share}}$$

Question 15

Which of the following is a key difference between NYSE and Nasdaq?

Accepted Answer

Nasdaq has a multiple market maker system, while NYSE uses designated market makers

Question 16

What does the DuPont Identity decompose?

Accepted Answer

Return on Equity (ROE) into Profit Margin, Total Asset Turnover, and Equity Multiplier

Question 17

Which formula is used to calculate the required return (R) in the Gordon Growth Model?

Accepted Answer

$$R = \frac{$$Div_1$$}{P_0$} + g$$

Question 18

Which of the following is NOT included in the calculation of Enterprise Value?

Accepted Answer

Cash

Question 19

What is the main purpose of using price ratio analysis in stock valuation?

Accepted Answer

To compare companies based on multiples such as P/E, P/Sales, and EV/EBITDA

Equity Valuation: Dividend Discount, Residual Income, Price Ratio, and DCF Methods

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