Q: A company forecasts a $5 dividend next year, which represents all of its earnings. The expected return is 12%. If the company decides to plow back 40% of earnings at a current ROE of 20%, what is the sustainable growth rate?

$$ 0.40 \times 0.20 = 0.08 or 8$$%

Q: If a firm has a book value per share of $11.10, ROE of 12.5%, and plowback ratio of 38%, what is the expected dividend per share?

$$ 11.10 \times 0.125 \times (1 - 0.38) = 0.86 $$

Question 1

Which of the following best describes the difference between the primary and secondary markets for stocks?

Accepted Answer

The primary market is where new securities are sold by corporations, while the secondary market is where previously issued securities are traded among investors.

Question 2

A company has a stock price of $$150 and earnings per share (EPS) of 10. $$What is its P/E ratio?

Accepted Answer

$$ \frac{150}{10} = 15 $$

Question 3

If a stock pays a $$2.50 annual dividend and its current price is 50$$, what is its dividend yield?

Accepted Answer

$$ \frac{2.50}{50} = 0.05  or 5$$%

Question 4

Which of the following is NOT a factor contributing to a firm's 'going concern value'?

Accepted Answer

Liquidation value of assets

Question 5

A company has a book value per share of $$20 and a market price per share of 100. $$What is its market-to-book ratio?

Accepted Answer

$$ \frac{100}{20} = 5 $$

Question 6

Using the Dividend Discount Model, what is the intrinsic value of a stock if the expected dividend is $$3, the expected price in one year is 81$$, and the discount rate is 12%?

Accepted Answer

$$ \frac{3 + 81}{1.12} = 75 $$

Question 7

If a stock is purchased at $$75, pays a 3 $$dividend, and is sold at $81 after one year, what is the expected return?

Accepted Answer

$$ \frac{3 + (81 - 75)}{75} = \frac{9}{75} = 0.12  or 12$$%

Question 8

A company forecasts a $5 dividend next year, which represents all of its earnings. The expected return is 12%. If the company decides to plow back 40% of earnings at a current ROE of 20%, what is the sustainable growth rate?

Accepted Answer

$$ 0.40 	imes 0.20 = 0.08  or 8$$%

Question 9

Using the constant-growth Dividend Discount Model, what is the value of a stock that expects to pay a $0.86 dividend next year, with dividends growing at 4.75% per year indefinitely, and an expected return of 7%?

Accepted Answer

$$ \frac{0.86}{0.07 - 0.0475} = 39.03 $$

Question 10

If a firm has a book value per share of $11.10, ROE of 12.5%, and plowback ratio of 38%, what is the expected dividend per share?

Accepted Answer

$$ 11.10 	imes 0.125 	imes (1 - 0.38) = 0.86 $$

Question 11

What does the Present Value of Growth Opportunities (PVGO) represent in stock valuation?

Accepted Answer

The present value of a firm's future investments

Question 12

Which of the following statements about the Efficient Market Theory is correct?

Accepted Answer

In a strong-form efficient market, prices reflect all information, both public and private.

Question 13

Which market anomaly describes the tendency for stocks of smaller firms to outperform those of larger firms?

Accepted Answer

Small Firm Effect

Question 14

If a company pays out 60% of its earnings as dividends, what is its plowback ratio?

Accepted Answer

40%

Question 15

Which of the following best describes the random walk theory in stock prices?

Accepted Answer

Stock prices change randomly, with no predictable trend or pattern.

Question 16

A stock is expected to pay dividends of $$2.16, 2.38$$, $$2.61, 2.87$$, and $3.16 over the next five years. If the discount rate is 8.5% and the growth rate after year 5 is 6%, what is the present value of the dividends for the first five years?

Accepted Answer

$$ \frac{2.16}{1.085} + \frac{2.38}{1.085^2$} + \frac{2.61}{1.085^3$} + \frac{2.87}{1.085^4$} + \frac{3.16}{1.085^5$} = 10.23 $$

Question 17

Which of the following is a method used by fundamental analysts to value stocks?

Accepted Answer

Analyzing accounting data and business prospects

Question 18

If a company’s market value is significantly higher than its book value, what is the most likely explanation?

Accepted Answer

The company has substantial going concern value, including intangible assets and future earning power.

Stocks, Market Values, and Valuation in Financial Accounting

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