Chapter 006 - Valuing Stocks

True / False Questions

1. The term "irrational exuberance" was coined b !ed Chairman "reenspan to describe the
dot.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) e-uit can be attributed to going concern
,alue.
TRUE
.. Securities with the same expected risk should o))er the same expected rate o) return.
TRUE
/. 0) in,estors belie,e a compan will ha,e the opportunit to make ,er pro)itable
in,estments in the )uture1 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 does
not grow.
FALSE
3. $asda- operates a dealer market1 in which a dealer acts as the auctioneer.
FALSE
4. "oogle2s stock price tripling a)ter the 056 suggests that ,aluing growth stocks is an exact
science.
FALSE
7. The li-uidation ,alue o) a )irm is e-ual to the book ,alue o) the )irm.
FALSE

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Chapter 006 - Valuing Stocks
10. Sustainable growth rates can be estimated b multipling a )irm2s 86& 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 model1 a stock2s price toda depends on the in,estor2s
hori9on )or holding the stock.
FALSE
1*. 0) the market is e))icient1 stock prices should onl be expected to react to new in)ormation
that 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. 6ne o) the -uickest was to pro)it in the stock market is to own stocks that split.
FALSE
17. 0) securit prices )ollow a random walk1 then on an particular da1 the odds are that an
increase or decrease in price is e-uall likel.
TRUE
#0. !undamental analsts attempt to get rich b identi)ing patterns in stock prices.
FALSE

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Chapter 006 - Valuing Stocks
#1. Strong-)orm market e))icienc implies that one could earn abo,e a,erage returns b
examining the histor o) a )irm2s stock price.
FALSE
##. :arket price is not the same as book ,alue or li-uidation ,alue.
TRUE
#*. :arket ,alue1 unlike book ,alue and li-uidation ,alue1 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 expected
rate o) return.
TRUE
#6. The di,idend discount model states that toda2s stock price e-uals the present ,alue o) all
expected )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) the
di,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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Chapter 006 - Valuing Stocks
#4. 0n,estors known as )undamental analsts tr to achie,e superior returns b spotting and
exploiting patterns in stock prices.
FALSE
#7. 0) the stock prices )ollow a random walk1 successi,e stock prices are not related.
FALSE
*0. 0) the stock prices )ollow a random walk1 successi,e stock price changes are not related.
TRUE
*1. 0) the stock prices )ollow a random walk1 successi,e stock prices )luctuate abo,e and
below a normal long-run price.
FALSE
*#. 0) the stock prices )ollow a random walk1 the histor o) stock prices cannot be used to
predict )uture returns to in,estors.
TRUE
Multiple Choice Questions

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Chapter 006 - Valuing Stocks
**. 0) stock prices )ollow a random walk1 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 ;.
*.. 0n the calculation o) rates o) return on common stock1 di,idends are >>>>>>> and capital
gains are >>>>>.
+. guaranteed? not guaranteed
;. guaranteed? guaranteed
C. 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 A.0<
+. #./B
;. ..0B
C. 10.0B
=. 1/.0B
A1 di,idend per -uarter C A. annuall.
A.DA.0 C 10B di,idend ield.
*6. @hich o) the )ollowing ,alues treats the )irm as a going concern<
A. market ,alue
;. book ,alue
C. li-uidation ,alue
=. none o) the abo,e.
*3. 0) a stock2s 5D& ratio is 1*./ at a time when earnings are A* per ear1 what is the stock2s
current price<
+. A../0
;. A14.00
C. A##.##
D. A.0./0
5D& C 1*./E
Then 5 C 1*./ x A*
5rice C A.0./0
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Chapter 006 - Valuing Stocks
*4. Fow man round lots were traded in a speci)ic stock on a da in which .631400 shares
changed hands<
+. .63.4 round lots
B. .1634 round lots
C. .631400 round lots
=. 5rice must be known to determine round lots.
*7. The book ,alue o) a )irm2s e-uit 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-sheet
e-uit1 /001000 shares o) stock outstanding1 and a priceDbook ,alue ratio o) .<
+. A#./0
;. A10.00
C. A#0.00
D. A.0.00
book ,alue per share C A/10001000D/001000 C A10
0) priceDbook ,alue C .
then price C A10 x . C A.0
.1. 0) the li-uidation ,alue o) a )irm is negati,e1 thenG
A. the )irm2s debt exceeds the market ,alue o) assets.
;. the )irm2s debt exceeds the book ,alue o) e-uit.
C. the book ,alue o) assets exceeds the )irm2s debt.
=. the market ,alue o) assets exceeds the )irm2s debt.

.#. + )irm2s li-uidation ,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.
=. e-ual to the book ,alue o) e-uit.

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Chapter 006 - Valuing Stocks
.*. @hich o) the )ollowing is least likel to account )or an excess o) market ,alue o,er book
,alue o) e-uit<
A. 0naccurate 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) e-uit.
B. high going-concern ,alue.
C. low li-uidation ,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
=. How1 unstable di,idend pament
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Chapter 006 - Valuing Stocks
.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)
1.B. @hat might in,estors expect to pa )or the stock one ear )rom now<
+. A4#.#0
B. A46.#0
C. A43.#0
=. A71.#0
&xpected return C
1.B C
A11.#0 C )1 - A3/
A46.#0 C )1
.4. @hich o) the )ollowing statements is correct about a stock currentl selling )or A/0 per
share that has a 16B expected return and a 10B expected capital appreciation<
+. 0ts expected di,idend exceeds the actual di,idend.
;. 0ts expected return will exceed the actual return.
C. 0t is expected to pa A* in annual di,idends.
=. 0t is expected to pa A4 in annual di,idends.
&xpected return C expected di,idend ield I expected capital appreciation.
16B C expected di,idend ield I 10B
6B C expected di,idend ield
A/0 share price x 6B C 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 higherG
A. le,el o) expected risk.
;. di,idend ield.
C. market ,alue o) e-uit.
=. degree o) certaint concerning their returns.
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Chapter 006 - Valuing Stocks
/1. Fow much should ou pa )or a share o) stock that o))ers a constant growth rate o) 10B1
re-uires a 16B rate o) return1 and is expected to sell )or A/0 one ear )rom now<
+. A.#.00
;. A./.00
C. A./../
=. A.3.00
The easiest wa to sol,e this problem is to reali9eG
&xpected return C expected di,idend ield
I expected capital appreciation
ThenG
.16 C .06 I expected capital appreciation
.10 C expected capital appreciation
+nd
)1 C 110B o) )o
A/0.00 C 1.1)o
A./../ C )o
/#. +ccording to the di,idend discount model1 the current ,alue o) a stock is e-ual to theG
A. present ,alue o) all expected )uture di,idends.
;. sum o) all )uture expected di,idends.
C. next expected di,idend1 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 a
di,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 conse-uences o) )uture di,idends.
/.. 0) the di,idend ield )or ear one is expected to be /B based on the current price o) A#/1
what will the ear )our di,idend be i) di,idends grow at a constant 6B<
+. A1.**
B. A1..7
C. A1./4
=. A1.63
.0/ x #/ C 1.#/ C Di*
t%en1 D+ C 1.#/ x '1.06(
*
C A1..7
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