Q: If a firm has a return on equity (ROE) of 10% and retains 40% of its earnings, what is its sustainable growth rate?

$$ 0.10 \times 0.40 = 0.04 or 4$$%

Q: A company has a book value per share of $20 and an ROE of 15%. If it pays out 70% of its earnings as dividends, what is the expected dividend per share?

$$ 20 \times 0.15 \times 0.70 = \2.10$$ $

Question 1

Which of the following best describes the difference between book value and market value of a company?

Accepted Answer

Book value is based on the balance sheet, while market value reflects the price investors are willing to pay for the company's shares.

Question 2

A company expects to pay a dividend of $2.00 next year, and dividends are expected to grow at a constant rate of 5% per year. If the required rate of return is 9%, what is the intrinsic value of the stock using the Gordon Growth Model?

Accepted Answer

$$ \frac{2.00}{0.09-0.05} = \50.00$$ $

Question 3

If a firm has a return on equity (ROE) of 10% and retains 40% of its earnings, what is its sustainable growth rate?

Accepted Answer

$$ 0.10 	imes 0.40 = 0.04  or 4$$%

Question 4

An investor purchases 100 shares of a stock at the ask price of $$50.00. The company pays an annual dividend of 2.00 $$per share. What is the dividend yield?

Accepted Answer

$$ \frac{2.00}{50.00} = 0.04  or 4$$%

Question 5

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

Accepted Answer

Current liabilities

Question 6

A company forecasts dividends of $$3.00, 3.24$$, and $$3.50 for the next three years. At the end of year 3, the stock is expected to sell for 94.48. If $$the required return is 12%, what is the present value of the stock?

Accepted Answer

$$ \frac{3.00}{1.12} + \frac{3.24}{(1.12)^2$} + \frac{3.50 + 94.48}{(1.12)^3$} = \75.00$$ $

Question 7

Which statement best describes the Efficient Market Hypothesis (EMH)?

Accepted Answer

Market prices reflect all available information, making it impossible to consistently outperform the market.

Question 8

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

Accepted Answer

40%

Question 9

An investor expects a stock to pay a $$4 dividend next year and to sell for 80 at $$the end of the year. If the current price is $75, what is the expected return?

Accepted Answer

$$ \frac{4 + (80 - 75)}{75} = \frac{9}{75} = 0.12  or 12$$%

Question 10

Which of the following is a market anomaly that contradicts the Efficient Market Hypothesis?

Accepted Answer

January Effect

Question 11

A company has a book value per share of $20 and an ROE of 15%. If it pays out 70% of its earnings as dividends, what is the expected dividend per share?

Accepted Answer

$$ 20 	imes 0.15 	imes 0.70 = \2.10$$ $

Question 12

Which of the following best describes the purpose of the Dividend Discount Model (DDM)?

Accepted Answer

To estimate the present value of all expected future dividends of a stock.

Question 13

If a stock is trading at a price-to-earnings (P/E) ratio of 20 and its earnings per share (EPS) is $3, what is its market price?

Accepted Answer

$$ 20 	imes 3 = \60$$ $

Question 14

Which of the following is NOT a method used to value common stocks?

Accepted Answer

Historical Cost Accounting

Question 15

A company forecasts a $5.00 dividend next year, which represents all of its earnings. The required return is 12%. What is the value of the stock if there is no growth?

Accepted Answer

$$ \frac{5.00}{0.12} = \41.67$$ $

Question 16

Which of the following best describes the 'Random Walk Theory' in finance?

Accepted Answer

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

Question 17

If a company has a market price per share of $$100 and a book value per share of 25$$, what is its market-to-book ratio?

Accepted Answer

$$ \frac{100}{25} = 4 $$

Question 18

Which of the following is a behavioral finance concept that can affect investor decision-making?

Accepted Answer

Attitudes towards risk

Stocks, Market Values, and Valuation in Financial Accounting

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