Chapter 7 - Test Bank

Chapter 07 - Valuing Stocks
Chapter 07
Valuing Stocks
True / False Questions
1. The term "irrational exuberance" was coined by former Fed Chairman Alan Greenspan to
describe the dot-com boom.
True False
2. The dividend discount model indicates that the value of a stock is the present value of the
dividends it will pay over the investor's horizon plus the present value of the expected stock
price at the end of that horizon.
True False
3. If investors believe a company will have the opportunity to make very profitable
investments in the future, they will pay more for the company's stock today.
True False
4. The dividend discount model should not be used to value stocks in which the dividend does
not grow.
True False
5. Google's stock price tripling after the IPO suggests that valuing growth stocks is an exact
science.
True False
6. Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend
payout ratio.
True False
7-1
7. According to the dividend discount model, a stock's price today depends on the investor's
horizon for holding the stock.
True False
8. The dividend yield of a stock is much like the current yield of a bond. Both ignore
prospective capital gains or losses.
True False
9. The dividend discount model states that today's stock price equals the present value of all
expected future dividends.
True False
10. An excess of market value over the book value of equity can be attributed to going
concern value.
True False
11. Securities with the same expected risk should offer the same expected rate of return.
True False
12. The liquidation value of a firm is equal to the book value of the firm.
True False
13. Market price is not the same as book value or liquidation value.
True False
14. Market value, unlike book value and liquidation value, treats the firm as a going concern.
True False
7-2
15. At each point in time all securities of the same risk are priced to offer the same expected
rate of return.
True False
16. If the stock prices follow a random walk, successive stock prices are not related.
True False
17. If the stock prices follow a random walk, successive stock price changes are not related.
True False
18. If the market is efficient, stock prices should be expected to react only to new information
that is released.
True False
19. The intent of technical analysis is to discover patterns in past stock prices.
True False
20. Technical analysts have no effect on the efficiency of the stock market.
True False
21. Technical analysts would be more likely than other investors to index their portfolios.
True False
22. Market efficiency implies that security prices impound new information quickly.
True False
7-3
23. If the stock prices follow a random walk, successive stock prices fluctuate above and
below a normal long-run price.
True False
24. If security prices follow a random walk, then on any particular day the odds are that an
increase or decrease in price is equally likely.
True False
25. Fundamental analysts attempt to get rich by identifying patterns in stock prices.
True False
26. Strong-form market efficiency implies that one could earn above-average returns by
examining the history of a firm's stock price.
True False
Multiple Choice Questions
27. The rise of the dot-coms in the late 1990s is probably due to:
A. investors reducing their expectations from common stocks.
B. investors being reluctant to incur losses and being overconfident.
C. a sharp improvement in the prospects for dividend growth.
D. the efficiency of the markets.
28. What dividend yield would be reported in the financial press for a stock that currently
pays a $1 dividend per quarter and the most recent stock price was $40?
A. 2.5%
B. 4.0%
C. 10.0%
D. 15.0%
7-4
29. Which of the following describes a seasoned offering?

A. An IPO of common stock for a well-known firm.
B. An IPO that is offered during the best buying season.
C. An additional equity issue from a publicly traded firm.
D. Any shares traded in the secondary market are seasoned offerings.
30. Which of the following best characterizes the difference between growth stocks and
income stocks?
A. Growth stocks do not pay dividends.
B. Income stocks offer higher rates of return.
C. Income stocks are seasoned issues.
D. Growth stocks have greater PVGO.
31. If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that
the stock:
A. pays $1 quarterly, or an estimated $4 annually.
B. pays $0.25 quarterly, or an estimated $1 annually.
C. paid $1 during the past quarter, with no future dividends forecast.
D. paid $1 during the past year, with no future dividends forecast.
32. How much should you pay for a share of stock that offers a constant-growth rate of 10%,
requires a 16% rate of return, and is expected to sell for $50 one year from now?
A. $42.00
B. $45.00
C. $45.45
D. $47.00
33. How is it possible to ignore cash dividends that occur far into the future when using a
dividend discount model? Those dividends:
A. will be paid to a different investor.
B. will not be paid by the firm.
C. have an insignificant present value.
D. ignore the tax consequences of future dividends.
7-5
34. If the dividend yield for year 1 is expected to be 5% based on the current price of $25,
what will the year 4 dividend be if dividends grow at a constant 6%?
A. $1.33
B. $1.49
C. $1.58
D. $1.67
35. The value of common stock will likely decrease if:

A. the investment horizon decreases.
B. the growth rate of dividends increases.
C. the discount rate increases.
D. dividends are discounted back to the present.
36. When valuing stock with the dividend discount model, the present value of future
dividends will:
A. change depending on the time horizon selected.
B. remain constant regardless of the time horizon selected.
C. remain constant regardless of growth rate.
D. always equal the present value of the terminal price.
37. Common stock can be valued using the perpetuity valuation formula if the:
A. discount rate is expected to remain constant.
B. dividends are not expected to grow.
C. growth rate in dividends is not constant.
D. investor does not intend to sell the stock.
38. What should be the price for a common stock paying $3.50 annually in dividends if the
growth rate is zero and the discount rate is 8%?
A. $22.86
B. $28.00
C. $42.00
D. $43.75
7-6
39. If next year's dividend is forecast to be $5.00, the constant-growth rate is 4%, and the
discount rate is 16%, then the current stock price should be:
A. $31.25
B. $40.00
C. $41.67
D. $43.33
40. What price would you expect to pay for a stock with 13% required rate of return, 4% rate
of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?
A. $27.78
B. $30.28
C. $31.10
D. $31.39
41. What constant-growth rate in dividends is expected for a stock valued at $32.00 if next
year's dividend is forecast at $2.00 and the appropriate discount rate is 13%?
A. 5.00%
B. 6.25%
C. 6.75%
D. 15.38%
42. ABC common stock is expected to have extraordinary growth of 20% per year for 2 years,
at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the
most recent dividend was $2.50, what should be the approximate current share price?
A. $31.16
B. $33.23
C. $37.42
D. $47.77
7-7
43. A payout ratio of 35% for a company indicates that:

A. 35% of dividends are plowed back for growth.
B. 65% of dividends are plowed back for growth.
C. 65% of earnings are paid out as dividends.
D. 35% of earnings are paid out as dividends.
44. What would be the approximate expected price of a stock when dividends are expected to
grow at a 25% rate for 3 years, then grow at a constant rate of 5%, if the stock's required
return is 13% and next year's dividend will be $4.00?
A. $61.60
B. $62.08
C. $68.62
D. $79.44
45. What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out
$4.00 per share as dividends?
A. 25.00%
B. 33.33%
C. 66.67%
D. 75.00%
46. What happens to a firm that reinvests its earnings at a rate equal to the firm's required
return?
A. Its stock price will remain constant.
B. Its stock price will increase by the sustainable growth rate.
C. Its stock price will decline unless dividend payout ratio is zero.
D. Its stock price will decline unless plowback rate exceeds required return.
7-8
47. What can be expected to happen when stocks having the same expected risk do not have
the same expected return?
A. At least one of the stocks becomes temporarily mispriced.
B. This is a common occurrence indicating that one stock has more PVGO.
C. This cannot happen if the shares are traded in an auction market.
D. The expected risk levels will change until the expected returns are equal.
48. Dividends that are expected to be paid far into the future have:
A. great impact on current stock price due to their expected size.
B. equal impact on current stock price as near-term dividends.
C. lesser impact on current stock price due to discounting.
D. no impact on current stock price because they are uncertain.
49. Which of the following is more likely to be responsible for a firm having low PVGO?
A. ROE exceeds required return.
B. Plowback is very high.
C. Payout is very high.
D. Book value of equity is low.
50. What is the most likely value of the PVGO for a stock with current price of $50, expected
earnings of $6 per share, and a required return of 20%?
A. $10
B. $20
C. $25
D. $30
51. What is the expected constant-growth rate of dividends for a stock with current price of
$100, expected dividend payment of $10 per share, and a required return of 16%?
A. 6.00%
B. 6.25%
C. 8.00%
D. 10.00%
7-9
52. Which of the following is least assured for firms that plowback a portion of earnings into
the firm?
A. Growth in earnings per share
B. Growth in dividends per share
C. Growth in book value of equity
D. Growth in stock price
53. What should be the price of a stock that offers a $4 annual dividend with no prospects of
growth, and has a required return of 12.5%?
A. $8.50
B. $25.00
C. $32.00
D. $50.00
54. What should be the stock value one year from today for a stock that currently sells for
$35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend
growth rate of 7%?
A. $37.45
B. $37.80
C. $40.25
D. $43.05
55. What should be the current price of a share of stock if a $5 dividend was just paid, the
stock has a required return of 20%, and a constant dividend growth rate of 6%?
A. $19.23
B. $25.00
C. $35.71
D. $37.86
7-10
56. What should be the current price of a stock if the expected dividend is $5, the stock has a
required return of 20%, and a constant dividend growth rate of 6%?
A. $19.23
B. $25.00
C. $35.71
D. $37.86
57. Reinvesting earnings into a firm will not increase the stock price unless:
A. the new paradigm of stock pricing is maintained.
B. true depreciation is less than reported depreciation.
C. the firm's dividends are growing also.
D. the ROE of new investments exceeds the firm's required return.
58. How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share,
has an expected dividend of $2.50, and a required return of 20%?
A. $0
B. $6.00
C. $8.00
D. $10.00
59. In a valuation of a nonconstant dividend growth stock, the terminal value represents the:
A. point at which the present value of future dividends equals zero.
B. maturity date of the stock.
C. present value of future dividends from that point on.
D. highest value that the stock will attain.
60. What stock price reaction would you expect from a firm that unexpectedly raises its
dividend permanently and by a substantial amount?
A. Price should rise, given dividend discount models.
B. Price should decline, given discounted cash flow analysis.
C. Price will remain constant, due to market efficiency.
D. Price will remain constant, due to random-walk behavior.
7-11
61. In the calculation of rates of return on common stock, dividends are _______ and capital
gains are _____.
A. guaranteed; not guaranteed
B. guaranteed; guaranteed
C. not guaranteed; not guaranteed
D. not guaranteed; guaranteed
62. Which of the following values treats the firm as a going concern?
A. Market value
B. Book value
C. Liquidation value
D. None of these
63. The book value of a firm's equity is determined by:

A. multiplying share price by shares outstanding.
B. multiplying share price at issue by shares outstanding.
C. the difference between book values of assets and liabilities.
D. the difference between market values of assets and liabilities.
64. If the liquidation value of a firm is negative, then:

A. the firm's debt exceeds the market value of assets.
B. the firm's debt exceeds the book value of equity.
C. the book value of assets exceeds the firm's debt.
D. the market value of assets exceeds the firm's debt.
65. A firm's liquidation value is the amount:

A. necessary to repurchase all shares of common stock.
B. realized from selling all assets and paying off its creditors.
C. a purchaser would pay for the firm in bankruptcy.
D. equal to the book value of equity.
7-12
66. Which of the following is least likely to account for an excess of market value over book
value of equity?
A. Inaccurate depreciation methods
B. High rate of return on assets
C. The presence of growth opportunities
D. Valuable off-balance sheet assets
67. Firms with valuable intangible assets are more likely to show a(n):
A. excess of book value over market value of equity.
B. high going-concern value.
C. low liquidation value.
D. low P/E ratio.
68. Which of the following is inconsistent with a firm that sells for very near book value?
A. Low current earning power
B. No intangible assets
C. High future earning power
D. Low, unstable dividend payment
69. The main purpose of a market-value balance sheet is to:

A. show an inflated value of the firm.
B. avoid the recording of certain liabilities.
C. value assets and liabilities without GAAP restrictions.
D. improve the credit rating of the firm.
70. A stock paying $5 in annual dividends sells now for $80 and has an expected return of
14%. What might investors expect to pay for the stock 1 year from now?
A. $82.20
B. $86.20
C. $87.20
D. $91.20
7-13
71. Which of the following statements is correct about a stock currently selling for $50 per
share that has a 16% expected return and a 10% expected capital appreciation?
A. Its expected dividend exceeds the actual dividend.
B. Its expected return will exceed the actual return.
C. It is expected to pay $3 in annual dividends.
D. It is expected to pay $8 in annual dividends.
72. The expected return on a common stock is composed of:

A. dividend yield.
B. capital appreciation.
C. both dividend yield and capital appreciation.
D. capital appreciation minus the dividend yield.
73. Firms having a higher expected return have a higher:

A. level of expected risk.
B. dividend yield.
C. market value of equity.
D. degree of certainty concerning their returns.
74. What is the expected dividend to be paid in 3 years if yesterday's dividend was $6.00,
dividends are expected to grow at a constant 6% annual rate, and the firm has a 10% expected
return?
A. $6.75
B. $7.15
C. $7.80
D. $9.37
75. Dividing a stock's earnings per share by the expected rate of return will value the share
correctly if no new shares are issued and the dividend yield:
A. exceeds the required return.
B. equals the required return.
C. is zero.
D. is constant.
7-14
76. What rate of return is expected from a stock that sells for $30 per share, pays $1.50
annually in dividends, and is expected to sell for $33 per share in one year?
A. 5.00%
B. 10.00%
C. 14.09%
D. 15.00%
77. A company with a return on equity of 15% and a plowback ratio of 60% would expect a
constant-growth rate of:
A. 4%.
B. 9%.
C. 21%.
D. 25%.
78. What is the return on equity for a firm that has a constant dividend growth rate of 7% and
a dividend payout ratio of 60%?
A. 2.80%
B. 4.20%
C. 11.67%
D. 17.50%
79. A positive value for PVGO suggests that the firm has:
A. a positive return on equity.
B. a positive plowback ratio.
C. investment opportunities with superior returns.
D. a high rate of constant growth.
80. Which of the following situations accurately describes a growth stock, assuming that each
firm has a required return of 12%?
A. A firm with PVGO = $0.
B. A firm with investment opportunities yielding 10%.
C. A firm with investment opportunities yielding 15%.
D. All of these firms represent growth stocks.
7-15
81. Other things equal, a firm's sustainable growth rate could increase as a result of:
A. increasing the plowback ratio.
B. increasing the payout ratio.
C. decreasing the return on equity.
D. increasing total assets.
82. Which of the following is least likely to contribute to going concern value?
A. High liquidation value
B. Extra earning power
C. Future investment opportunities
D. Intangible assets
83. The terminal value of a share of stock:

A. is similar to the maturity value of a bond.
B. refers to the share value at the end of the investor's holding period.
C. is the value received by investors upon liquidation of the firm.
D. is the price for shares traded through a dealers' market.
84. Which of the following is true for a firm having a stock price of $42, an expected dividend
of $3, and a sustainable growth rate of 8%?
A. It has a required return of 15.14%.
B. It has a dividend payout ratio of 37.5%.
C. It has an ROE of 7.14%.
D. It has a plowback rate of 7.14%.
85. What is the value of the expected dividend per share for a stock that has a required return
of 16%, a price of $45, and a constant-growth rate of 12%?
A. $1.80
B. $3.60
C. $4.50
D. $7.20
7-16
86. What is the required return for a stock that has a 6% constant-growth rate, a price of $25,
an expected dividend of $2, and a P/E ratio of 10?
A. 5%
B. 10%
C. 14%
D. 22%
87. What is the minimum amount that shareholders should expect to receive in the event of a
complete corporate liquidation?
A. Market value of equity.
B. Book value of equity.
C. Zero.
D. Shareholders may be required to pay to be liquidated.
88. The required return on an equity security is comprised of a:

A. dividend yield and ROE.
B. current yield and a terminal value.
C. sustainable growth rate and a plowback yield.
D. dividend yield and a capital gains yield.
89. What proportion of earnings is being plowed back into the firm if the sustainable growth
rate is 8% and the firm's ROE is 20%?
A. 8%
B. 12%
C. 20%
D. 40%
90. What is the expected constant-growth rate of dividends for a stock currently priced at $50,
that just paid a dividend of $4, and has a required return of 18%?
A. 3.41%
B. 5.50%
C. 9.26%
D. 12.5%
7-17
91. If the liquidation value of a corporation exceeds the market value of the equity, then the:
A. firm has no value as a going concern.
B. firm's stock will sell for book value.
C. firm is not taking advantage of available growth opportunities.
D. dividend payout ratio has been too high.
92. An investor is faced with the decision of whether to invest in a stock with an expected
return of 14% or a stock in the same industry with an expected 20% return. Which of the
following seems most likely?
A. The 20% stock is a better investment.
B. The 14% stock is overpriced.
C. Both stocks will have approximately the same return.
D. Both stocks are priced correctly given their perceived risk.
93. If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's
current price?
A. $4.50
B. $18.00
C. $22.22
D. $40.50
94. What is the current price of a share of stock for a firm with $5 million in balance-sheet
equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4?
A. $2.50
B. $10.00
C. $20.00
D. $40.00
7-18
95. Assuming all of the following firms have a required return of 14%, which would you
expect to have a positive present value of growth opportunities?
A. A firm with a P/E ratio of 9.
B. A firm with a P/E ratio of 6.
C. A firm with an E/P ratio of 20%.
D. None of these firms are expected to have positive PVGO.
96. Investors are willing to purchase stocks having high P/E ratios because:
A. they expect these shares to sell for a lower price.
B. they expect these shares to offer higher dividend payments.
C. these shares are accompanied by guaranteed earnings.
D. they expect these shares to have greater growth opportunities.
97. BestFirm has a 50-year history of solid growth and ever-increasing profits. It is widely
regarded as the leading firm of its industry. Hence, BestFirm's stock:
A. should be a good buy.
B. cannot be a good buy.
C. should be a safe buy.
D. cannot be a safe buy.
98. LookGood, Inc. has just announced the bad news that its earnings have dropped by 30%.
In fact, its investors had anticipated even worse results (a decrease of 40%). As a result,
LookGood's stock price:
A. increases.
B. remains the same.
C. decreases.
D. follows a random walk as usual.
99. What is the difference between a fundamental analyst and a technical analyst?
A. Only a fundamental analyst believes markets are inefficient.
B. A technical analyst focuses on financial statement analysis.
C. Only a technical analyst helps keep the market efficient.
D. A fundamental analyst analyzes such information as earnings and asset values.
7-19
100. Which of the following observations provides evidence against strong-form market
efficiency?
A. Some mutual funds outperformed the market in 1997.
B. Managers trading in their own stock obtain superior returns.
C. You cannot make superior profits by trading stocks after earnings reports are issued.
D. Stock prices follow a random walk.
101. According to the semistrong form of market efficiency, when new information becomes
available in the market:
A. stock prices will remain unchanged because they already reflect this information.
B. stock prices will accurately and rapidly adjust to reflect this new information.
C. stock prices will adjust to accurately reflect this new information over the course of the
next few days.
D. stock prices will most likely increase because all new information has a positive effect on
stock prices.
102. With respect to the notion that stock prices follow a random walk, several researchers
have concluded that:
A. stock prices reflect a majority of available information about the firm.
B. successive price changes are predictable.
C. past stock price changes provide little useful information about current stock prices.
D. stock prices always rise excessively in January.
103. A company reports significantly higher earnings on a Monday. You purchase the stock on
Tuesday and earn superior returns in the absence of other new information. The market
appears to be:
A. weak-form efficient at best.
B. weak-form efficient at the least.
C. semistrong-form efficient at best.
D. strong-form efficient at the least.
7-20
104. Under which of the following forms of market efficiency would stock prices always
reflect fair value?
A. Weak-form efficiency.
B. Semistrong-form efficiency.
C. Strong-form efficiency.
D. All of these are correct due to capital market efficiency.
105. Technical analysts are most likely to be successful in a market that is considered:
A. semistrong-form efficient.
B. not to be strong-form efficient.
C. not to be weak-form efficient.
D. to follow a random walk.
106. If the correlation of prices between two stocks is 0.35, then the price of one stock would
be expected to:
A. rise when the other stock price falls.
B. rise by 35% when the other stock price is unchanged.
C. fall when the other stock price falls.
D. fall by 35% when the other stock price is unchanged.
107. If the price of a stock falls on 4 consecutive days of trading, then stock prices:
A. cannot be following a random walk.
B. can still be following a random walk.
C. are almost certain to increase today.
D. are almost certain to decrease today.
108. According to random-walk theory, what are the odds that a stock will increase in price
after having increased on 2 consecutive days of trading?
A. 0.0%
B. 12.5%
C. 50.0%
D. 100.0%
7-21
109. What is the maximum gain after two coin tosses for a person who starts with $1 if the
occurrence of a head produces a 50% gain while the occurrence of a tail produces a 50%
loss?
A. $1.00
B. $1.25
C. $1.75
D. $2.25
110. Which of the following situations is most likely to occur today for a stock that went
down in price yesterday?
A. The stock will increase in price.
B. The stock will decrease in price.
C. The stock has a 30% chance of decreasing in price.
D. The stock has no predictable price-change pattern.
111. If a stock's price decreased during the past week, what is the most likely prediction about
this week's price change?
A. Price will reverse last week's loss and go up.
B. Price will continue last week's decline.
C. Price will stand still until new information is released.
D. Either direction of price change is equally likely.
112. Research indicates that the correlation coefficient between successive days' stock price
changes is:
A. quite close to +1.
B. quite close to -1.
C. quite close to zero.
D. directly related to the stock's beta.
113. An analyst who relies on past cycles of stock pricing to make investment decisions is:
A. performing fundamental analysis.
B. relying on strong-form market efficiency.
C. assuming that the market is not weak-form efficient.
D. relying on the random walk of stock prices.
7-22
114. If it proves possible to make abnormal profits based on information regarding past stock
prices, then the market:
A. is weak-form efficient.
B. is not weak-form efficient.
C. is semistrong-form efficient.
D. is strong-form efficient.
115. The study of published financial information on a company in order to make investment
decisions is known as:
A. technical analysis.
B. fundamental analysis.
C. efficiency analysis.
D. random pricing analysis.
116. A fundamental analyst:

A. relies on the same information as the technical analyst, but believes in the random walk.
B. studies a firm's financial statements to determine pricing inefficiencies.
C. believes that the market is strong-form efficient.
D. performs an unnecessary function, since markets are efficient.
117. If investors can consistently profit from thorough reading of published financial
information, then the market can, at best, be characterized as:
A. weak-form efficient.
B. semistrong-form efficient.
C. strong-form efficient.
D. all of these.
118. If no price change occurs in a stock on the day that it announces its next dividend, it can
be assumed that:
A. the stock market is inefficient.
B. the dividend was reduced.
C. the market was expecting this information.
D. technical analysts are not following this stock.
7-23
119. When investors are not capable of making superior investment decisions on a continual
basis based on past prices or public or private information, the market is said to be:
D. fundamentally efficient.
120. Which group of investors is capable of earning consistent, superior profits if financial
markets are strong-form efficient?
A. Only technical analysts will be able to profit.
B. Only fundamental analysts will be able to profit.
C. Only inside traders will be able to profit.
D. No one will be capable of sustained, superior profits.
121. Given that markets are efficient, what is the most logical explanation of the fact that a
portfolio manager can outperform the S&P 500 by 5% annually?
A. The manager is an expert stock selector.
B. The manager has relied on insider information.
C. Stocks do not follow a random-walk pattern.
D. The manager's results have not been adjusted for the riskiness of the portfolio.
122. When new information becomes available in the market, evidence suggests that:
A. insiders will be the only investors to gain.
B. it takes at least 10 trading days for stock prices to adjust.
C. stock prices will adjust to the information rapidly.
D. transaction costs will erase any benefit of trading on the information.
123. An example that specifically contradicts strong-form market efficiency in U.S. stock
markets is that:
A. excess profits are observed in cases of insider trading.
B. stock prices follow predictable patterns in each month.
C. random-walk behavior is reliable.
D. fundamental analysts outperform the S&P 500.
7-24
124. Your broker suggests that you can make consistent, excess profits by purchasing stocks
on the 20th of the month and selling them on the last day of the month. If this is true, then:
A. the market is only semistrong-form efficient.
B. the market violates even weak-form efficiency.
C. insiders will be the only investors to profit.
D. prices follow a random walk.
125. The statement that there are no free lunches on Wall Street suggests that:
A. the market is strong-form efficient.
B. there is no return to technical or fundamental analysis.
C. security prices reflect all available information.
D. food purveyors are capitalists.
Essay Questions
126. How can you reconcile the fact that whether an investor favors dividends or capital
gains, the investor should accept the dividend discount model as a determination of share
value?
127. A stock offers an expected dividend of $3.50, has a required return of 14%, and has
historically exhibited a growth rate of 6%. Its current price is $35.00 and shows no tendency
to change. How can you explain this price based on the constant growth dividend discount
model?
7-25
128. Develop a current stock value for a firm that is expected to have extraordinary growth of
25% for 4 years, after which it will face more competition and slip into a constant-growth rate
of 5%. Its required return is 14% and next year's dividend is expected to be $5.00.
129. Show numerically that investment horizon has no bearing on current stock price. For
your illustration assume investment horizons of 3 versus 5 years and the following facts: The
stock is correctly priced at $40.00, has a required return of 17%, a growth rate of 7%, and has
just paid a $3.74 dividend.
130. For a firm that expects earnings next year of $10.00 per share, has a plowback ratio of
35%, a return on equity of 20%, and a required return of 15%, show the current stock value
and next year's expected stock value, assuming that growth is to be constant.
7-26
131. Show the breakdown of stock price between a firm's assets that are already in place and
its present value of growth opportunities, assuming: next year's expected earnings equal
$5.00, 13% required rate of return, 17% return on equity, and 45% plowback ratio.
132. How can an analyst feel comfortable in stating that the value of a stock is equal to the
discounted value of all future dividends when a company may pay dividends indefinitely and
it is virtually impossible to predict dividends beyond some reasonable horizon?
133. Geothermal Corp. just announced good news: Its earnings have increased by 20%. Most
investors had anticipated an increase of 25%. Will Geothermal's stock price increase or
decrease when the announcement is made?
7-27
134. Discuss (with formula) the general dividend discount model and its three major
submodels as introduced in the chapter.
135. Moonshine Industries has produced a barrel per week for the past 20 years but cannot
grow because of certain legal hazards. It earns $25 per share per year and pays it all out to
stockholders. The stockholders have alternative, equivalent-risk ventures yielding 20% per
year on average. How much is one share of Moonshine worth? Assume the company can keep
going indefinitely.
136. What are some common errors investors make in assessing the probability of uncertain
outcomes? How did such errors reinforce the dot-com boom?
7-28
137. Explain why the market value of common stock often differs from its liquidation value
or its book value.
138. How do you estimate expected rates of return in the constant-growth dividend discount
model?
139. Explain the relationships among the earnings-price (E/P) ratio, required rate of return,
and present value of growth opportunities.
140. How does competition among investors lead to efficient markets?
7-29
141. What are index funds and exchange-traded funds? Why are many investors simply
choosing to buy and hold index funds or exchange-traded portfolios (ETFs) that track the
entire stock market?
142. Is there a tall order when there are many talented and competitive fundamental analysts?
7-30
Chapter 07 Valuing Stocks Answer Key
True / False Questions
1. The term "irrational exuberance" was coined by former Fed Chairman Alan Greenspan to
describe the dot-com boom.
TRUE
AACSB: Communication Abilities

Blooms: Knowledge
Difficulty: 1 Easy
Learning Objective: 07-01 Understand the stock trading reports on the Internet or in the financial pages of the newspaper.
Topic: Stocks and the Stock Market
2. The dividend discount model indicates that the value of a stock is the present value of the
dividends it will pay over the investor's horizon plus the present value of the expected stock
price at the end of that horizon.
TRUE
AACSB: Reflective Thinking Skills

Blooms: Understanding
Difficulty: 1 Easy
Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and future stock price.
Topic: The Dividend Discount Model
3. If investors believe a company will have the opportunity to make very profitable
investments in the future, they will pay more for the company's stock today.
TRUE

Difficulty: 1 Easy
7-31
4. The dividend discount model should not be used to value stocks in which the dividend does
not grow.
FALSE

Difficulty: 2 Medium
5. Google's stock price tripling after the IPO suggests that valuing growth stocks is an exact
science.
FALSE

6. Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend
payout ratio.
FALSE

Topic: Valuing Common Stocks
7. According to the dividend discount model, a stock's price today depends on the investor's
horizon for holding the stock.
FALSE

7-32
8. The dividend yield of a stock is much like the current yield of a bond. Both ignore
prospective capital gains or losses.
TRUE

9. The dividend discount model states that today's stock price equals the present value of all
expected future dividends.
TRUE

Blooms: Knowledge
Difficulty: 1 Easy
10. An excess of market value over the book value of equity can be attributed to going
concern value.
TRUE

Learning Objective: 07-03 Use stock valuation formulas to infer the expected rate of return on a common stock.
Topic: Market, Book, and Liquidation Values
11. Securities with the same expected risk should offer the same expected rate of return.
TRUE

7-33
12. The liquidation value of a firm is equal to the book value of the firm.
FALSE

13. Market price is not the same as book value or liquidation value.
TRUE

Difficulty: 1 Easy
14. Market value, unlike book value and liquidation value, treats the firm as a going concern.
TRUE

Difficulty: 1 Easy
15. At each point in time all securities of the same risk are priced to offer the same expected
rate of return.
TRUE

Difficulty: 1 Easy
7-34
16. If the stock prices follow a random walk, successive stock prices are not related.
FALSE

Learning Objective: 07-05 Understand what professionals mean when they say that there are no free lunches on Wall Street.
17. If the stock prices follow a random walk, successive stock price changes are not related.
TRUE

18. If the market is efficient, stock prices should be expected to react only to new information
that is released.
TRUE

Blooms: Knowledge
Difficulty: 1 Easy
19. The intent of technical analysis is to discover patterns in past stock prices.
TRUE

Blooms: Knowledge
Difficulty: 1 Easy
Topic: Market Analysis
7-35
20. Technical analysts have no effect on the efficiency of the stock market.
FALSE

21. Technical analysts would be more likely than other investors to index their portfolios.
FALSE

Difficulty: 1 Easy
22. Market efficiency implies that security prices impound new information quickly.
TRUE

Difficulty: 1 Easy
23. If the stock prices follow a random walk, successive stock prices fluctuate above and
below a normal long-run price.
FALSE

7-36
24. If security prices follow a random walk, then on any particular day the odds are that an
increase or decrease in price is equally likely.
TRUE

Difficulty: 1 Easy
25. Fundamental analysts attempt to get rich by identifying patterns in stock prices.
FALSE

Blooms: Knowledge
Difficulty: 1 Easy
26. Strong-form market efficiency implies that one could earn above-average returns by
examining the history of a firm's stock price.
FALSE

Blooms: Knowledge
Difficulty: 1 Easy
7-37
Multiple Choice Questions
27. The rise of the dot-coms in the late 1990s is probably due to:
A. investors reducing their expectations from common stocks.
B. investors being reluctant to incur losses and being overconfident.
C. a sharp improvement in the prospects for dividend growth.
D. the efficiency of the markets.

28. What dividend yield would be reported in the financial press for a stock that currently
pays a $1 dividend per quarter and the most recent stock price was $40?
A. 2.5%
B. 4.0%
C. 10.0%
D. 15.0%
$1 dividend per quarter = $4 annually

$4/$40 = 10% dividend yield

Blooms: Application
7-38
29. Which of the following describes a seasoned offering?

A. An IPO of common stock for a well-known firm.
B. An IPO that is offered during the best buying season.
C. An additional equity issue from a publicly traded firm.
D. Any shares traded in the secondary market are seasoned offerings.

Blooms: Knowledge
30. Which of the following best characterizes the difference between growth stocks and
income stocks?
A. Growth stocks do not pay dividends.
B. Income stocks offer higher rates of return.
C. Income stocks are seasoned issues.
D. Growth stocks have greater PVGO.

Difficulty: 1 Easy
31. If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that
the stock:
A. pays $1 quarterly, or an estimated $4 annually.
B. pays $0.25 quarterly, or an estimated $1 annually.
C. paid $1 during the past quarter, with no future dividends forecast.
D. paid $1 during the past year, with no future dividends forecast.

7-39
32. How much should you pay for a share of stock that offers a constant-growth rate of 10%,
requires a 16% rate of return, and is expected to sell for $50 one year from now?
A. $42.00
B. $45.00
C. $45.45
D. $47.00
The easiest way to solve this problem is to realize:

Expected return = expected dividend yield + expected capital appreciation
Then:
.16 = .06 + expected capital appreciation
.10 = expected capital appreciation
And
P1 = 110% of Po
$50.00 = 1.1Po
$45.45 = Po

Blooms: Application
Difficulty: 3 Hard
33. How is it possible to ignore cash dividends that occur far into the future when using a
dividend discount model? Those dividends:
A. will be paid to a different investor.
B. will not be paid by the firm.
C. have an insignificant present value.
D. ignore the tax consequences of future dividends.

7-40
34. If the dividend yield for year 1 is expected to be 5% based on the current price of $25,
what will the year 4 dividend be if dividends grow at a constant 6%?
A. $1.33
B. $1.49
C. $1.58
D. $1.67
.05  $25 = $1.25 = DIV1

Then, DIV4 = $1.25  (1.06)3 = $1.49

Blooms: Application
35. The value of common stock will likely decrease if:

A. the investment horizon decreases.
B. the growth rate of dividends increases.
C. the discount rate increases.
D. dividends are discounted back to the present.

Difficulty: 1 Easy
36. When valuing stock with the dividend discount model, the present value of future
dividends will:
A. change depending on the time horizon selected.
B. remain constant regardless of the time horizon selected.
C. remain constant regardless of growth rate.
D. always equal the present value of the terminal price.

Difficulty: 1 Easy
7-41
37. Common stock can be valued using the perpetuity valuation formula if the:
A. discount rate is expected to remain constant.
B. dividends are not expected to grow.
C. growth rate in dividends is not constant.
D. investor does not intend to sell the stock.

Difficulty: 1 Easy
38. What should be the price for a common stock paying $3.50 annually in dividends if the
growth rate is zero and the discount rate is 8%?
A. $22.86
B. $28.00
C. $42.00
D. $43.75

Blooms: Application
7-42
39. If next year's dividend is forecast to be $5.00, the constant-growth rate is 4%, and the
discount rate is 16%, then the current stock price should be:
A. $31.25
B. $40.00
C. $41.67
D. $43.33

Blooms: Application
7-43
40. What price would you expect to pay for a stock with 13% required rate of return, 4% rate
of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?
A. $27.78
B. $30.28
C. $31.10
D. $31.39

Blooms: Application
Difficulty: 3 Hard
7-44
41. What constant-growth rate in dividends is expected for a stock valued at $32.00 if next
year's dividend is forecast at $2.00 and the appropriate discount rate is 13%?
A. 5.00%
B. 6.25%
C. 6.75%
D. 15.38%

Blooms: Application
7-45
42. ABC common stock is expected to have extraordinary growth of 20% per year for 2 years,
at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the
most recent dividend was $2.50, what should be the approximate current share price?
A. $31.16
B. $33.23
C. $37.42
D. $47.77

Blooms: Application
Difficulty: 3 Hard
43. A payout ratio of 35% for a company indicates that:

A. 35% of dividends are plowed back for growth.
B. 65% of dividends are plowed back for growth.
C. 65% of earnings are paid out as dividends.
D. 35% of earnings are paid out as dividends.

Difficulty: 1 Easy
7-46
44. What would be the approximate expected price of a stock when dividends are expected to
grow at a 25% rate for 3 years, then grow at a constant rate of 5%, if the stock's required
return is 13% and next year's dividend will be $4.00?
A. $61.60
B. $62.08
C. $68.62
D. $79.44

Blooms: Application
Difficulty: 3 Hard
7-47
45. What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out
$4.00 per share as dividends?
A. 25.00%
B. 33.33%
C. 66.67%
D. 75.00%

Blooms: Application
46. What happens to a firm that reinvests its earnings at a rate equal to the firm's required
return?
A. Its stock price will remain constant.
B. Its stock price will increase by the sustainable growth rate.
C. Its stock price will decline unless dividend payout ratio is zero.
D. Its stock price will decline unless plowback rate exceeds required return.

7-48
47. What can be expected to happen when stocks having the same expected risk do not have
the same expected return?
A. At least one of the stocks becomes temporarily mispriced.
B. This is a common occurrence indicating that one stock has more PVGO.
C. This cannot happen if the shares are traded in an auction market.
D. The expected risk levels will change until the expected returns are equal.

48. Dividends that are expected to be paid far into the future have:
A. great impact on current stock price due to their expected size.
B. equal impact on current stock price as near-term dividends.
C. lesser impact on current stock price due to discounting.
D. no impact on current stock price because they are uncertain.

49. Which of the following is more likely to be responsible for a firm having low PVGO?
A. ROE exceeds required return.
B. Plowback is very high.
C. Payout is very high.
D. Book value of equity is low.

7-49
50. What is the most likely value of the PVGO for a stock with current price of $50, expected
earnings of $6 per share, and a required return of 20%?
A. $10
B. $20
C. $25
D. $30
With 100% payout ratio, the stock would be valued at $30 ($6/.2 = $30). Thus, the $20 of
additional price must represent PVGO.

Blooms: Application
51. What is the expected constant-growth rate of dividends for a stock with current price of
$100, expected dividend payment of $10 per share, and a required return of 16%?
A. 6.00%
B. 6.25%
C. 8.00%
D. 10.00%
If the $10 dividend were divided by .10, it would equal the $100 price. Thus, 6% is the only
growth rate that will allow the denominator to equal .10.

Blooms: Application
7-50
52. Which of the following is least assured for firms that plowback a portion of earnings into
the firm?
A. Growth in earnings per share
B. Growth in dividends per share
C. Growth in book value of equity
D. Growth in stock price

Difficulty: 3 Hard
53. What should be the price of a stock that offers a $4 annual dividend with no prospects of
growth, and has a required return of 12.5%?
A. $8.50
B. $25.00
C. $32.00
D. $50.00
P = $4/.125
P = $32

Blooms: Application
Difficulty: 1 Easy
7-51
54. What should be the stock value one year from today for a stock that currently sells for
$35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend
growth rate of 7%?
A. $37.45
B. $37.80
C. $40.25
D. $43.05
$35  1.07 = $37.45, since dividends, price, and book value grow at 7%

Blooms: Application
55. What should be the current price of a share of stock if a $5 dividend was just paid, the
stock has a required return of 20%, and a constant dividend growth rate of 6%?
A. $19.23
B. $25.00
C. $35.71
D. $37.86
P = $5(1.06)/(.20 - .06)
P = $5.30/.14
P = $37.86

Blooms: Application
7-52
56. What should be the current price of a stock if the expected dividend is $5, the stock has a
required return of 20%, and a constant dividend growth rate of 6%?
A. $19.23
B. $25.00
C. $35.71
D. $37.86
P = $5.00/(.20 - .06)
P = $5.00/.14
P = $35.71

Blooms: Application
57. Reinvesting earnings into a firm will not increase the stock price unless:
A. the new paradigm of stock pricing is maintained.
B. true depreciation is less than reported depreciation.
C. the firm's dividends are growing also.
D. the ROE of new investments exceeds the firm's required return.

7-53
58. How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share,
has an expected dividend of $2.50, and a required return of 20%?
A. $0
B. $6.00
C. $8.00
D. $10.00
P = $4/.2 if all earnings paid as dividends

P = $20; therefore, stock price is $10 per share above "no growth" value.

Blooms: Application
Difficulty: 3 Hard
59. In a valuation of a nonconstant dividend growth stock, the terminal value represents the:
A. point at which the present value of future dividends equals zero.
B. maturity date of the stock.
C. present value of future dividends from that point on.
D. highest value that the stock will attain.

60. What stock price reaction would you expect from a firm that unexpectedly raises its
dividend permanently and by a substantial amount?
A. Price should rise, given dividend discount models.
B. Price should decline, given discounted cash flow analysis.
C. Price will remain constant, due to market efficiency.
D. Price will remain constant, due to random-walk behavior.

7-54
61. In the calculation of rates of return on common stock, dividends are _______ and capital
gains are _____.
A. guaranteed; not guaranteed
B. guaranteed; guaranteed
C. not guaranteed; not guaranteed
D. not guaranteed; guaranteed

62. Which of the following values treats the firm as a going concern?
A. Market value
B. Book value
C. Liquidation value
D. None of these

Difficulty: 1 Easy
63. The book value of a firm's equity is determined by:

A. multiplying share price by shares outstanding.
B. multiplying share price at issue by shares outstanding.
C. the difference between book values of assets and liabilities.
D. the difference between market values of assets and liabilities.

7-55
64. If the liquidation value of a firm is negative, then:

A. the firm's debt exceeds the market value of assets.
B. the firm's debt exceeds the book value of equity.
C. the book value of assets exceeds the firm's debt.
D. the market value of assets exceeds the firm's debt.

65. A firm's liquidation value is the amount:

A. necessary to repurchase all shares of common stock.
B. realized from selling all assets and paying off its creditors.
C. a purchaser would pay for the firm in bankruptcy.
D. equal to the book value of equity.

Difficulty: 1 Easy
66. Which of the following is least likely to account for an excess of market value over book
value of equity?
A. Inaccurate depreciation methods
B. High rate of return on assets
C. The presence of growth opportunities
D. Valuable off-balance sheet assets

7-56
67. Firms with valuable intangible assets are more likely to show a(n):
A. excess of book value over market value of equity.
B. high going-concern value.
C. low liquidation value.
D. low P/E ratio.

68. Which of the following is inconsistent with a firm that sells for very near book value?
A. Low current earning power
B. No intangible assets
C. High future earning power
D. Low, unstable dividend payment

Difficulty: 1 Easy
69. The main purpose of a market-value balance sheet is to:

A. show an inflated value of the firm.
B. avoid the recording of certain liabilities.
C. value assets and liabilities without GAAP restrictions.
D. improve the credit rating of the firm.

Difficulty: 1 Easy
7-57
70. A stock paying $5 in annual dividends sells now for $80 and has an expected return of
14%. What might investors expect to pay for the stock 1 year from now?
A. $82.20
B. $86.20
C. $87.20
D. $91.20

Blooms: Application
71. Which of the following statements is correct about a stock currently selling for $50 per
share that has a 16% expected return and a 10% expected capital appreciation?
A. Its expected dividend exceeds the actual dividend.
B. Its expected return will exceed the actual return.
C. It is expected to pay $3 in annual dividends.
D. It is expected to pay $8 in annual dividends.
Expected return = expected dividend yield + expected capital appreciation

16% = expected dividend yield + 10%
6% = expected dividend yield
$50 share price  6% = $3 expected dividend payment

Blooms: Application
7-58
72. The expected return on a common stock is composed of:

A. dividend yield.
B. capital appreciation.
C. both dividend yield and capital appreciation.
D. capital appreciation minus the dividend yield.

Difficulty: 1 Easy
73. Firms having a higher expected return have a higher:

A. level of expected risk.
B. dividend yield.
C. market value of equity.
D. degree of certainty concerning their returns.

Difficulty: 1 Easy
74. What is the expected dividend to be paid in 3 years if yesterday's dividend was $6.00,
dividends are expected to grow at a constant 6% annual rate, and the firm has a 10% expected
return?
A. $6.75
B. $7.15
C. $7.80
D. $9.37
DIV3 = DIVo  (1 + g)3

= $6.00(1.06)3
= $7.15

Blooms: Application
7-59
75. Dividing a stock's earnings per share by the expected rate of return will value the share
correctly if no new shares are issued and the dividend yield:
A. exceeds the required return.
B. equals the required return.
C. is zero.
D. is constant.

Difficulty: 3 Hard
76. What rate of return is expected from a stock that sells for $30 per share, pays $1.50
annually in dividends, and is expected to sell for $33 per share in one year?
A. 5.00%
B. 10.00%
C. 14.09%
D. 15.00%

Blooms: Application
7-60
77. A company with a return on equity of 15% and a plowback ratio of 60% would expect a
constant-growth rate of:
A. 4%.
B. 9%.
C. 21%.
D. 25%.
g = .15  .60
= .09 = 9%

Blooms: Application
78. What is the return on equity for a firm that has a constant dividend growth rate of 7% and
a dividend payout ratio of 60%?
A. 2.80%
B. 4.20%
C. 11.67%
D. 17.50%
7% = ROE  plowback ratio

= ROE  (1 - .6)
= ROE  .4
17.5% = ROE

Blooms: Application
7-61
79. A positive value for PVGO suggests that the firm has:
A. a positive return on equity.
B. a positive plowback ratio.
C. investment opportunities with superior returns.
D. a high rate of constant growth.

Difficulty: 1 Easy
80. Which of the following situations accurately describes a growth stock, assuming that each
firm has a required return of 12%?
A. A firm with PVGO = $0.
B. A firm with investment opportunities yielding 10%.
C. A firm with investment opportunities yielding 15%.
D. All of these firms represent growth stocks.

81. Other things equal, a firm's sustainable growth rate could increase as a result of:
A. increasing the plowback ratio.
B. increasing the payout ratio.
C. decreasing the return on equity.
D. increasing total assets.

7-62
82. Which of the following is least likely to contribute to going concern value?
A. High liquidation value
B. Extra earning power
C. Future investment opportunities
D. Intangible assets

83. The terminal value of a share of stock:

A. is similar to the maturity value of a bond.
B. refers to the share value at the end of the investor's holding period.
C. is the value received by investors upon liquidation of the firm.
D. is the price for shares traded through a dealers' market.

Blooms: Knowledge
84. Which of the following is true for a firm having a stock price of $42, an expected dividend
of $3, and a sustainable growth rate of 8%?
A. It has a required return of 15.14%.
B. It has a dividend payout ratio of 37.5%.
C. It has an ROE of 7.14%.
D. It has a plowback rate of 7.14%.
$42 = $3/(r - .08)

r = 15.14%

Blooms: Application
7-63
85. What is the value of the expected dividend per share for a stock that has a required return
of 16%, a price of $45, and a constant-growth rate of 12%?
A. $1.80
B. $3.60
C. $4.50
D. $7.20
$45 = DIV1/(.16 - .12)

$45  .04 = DIV1
$1.80 = DIV1

Blooms: Application
86. What is the required return for a stock that has a 6% constant-growth rate, a price of $25,
an expected dividend of $2, and a P/E ratio of 10?
A. 5%
B. 10%
C. 14%
D. 22%
$25 = 2/(r - .06)

r = 14%
(P/E ratio is a red herring)

Blooms: Application
7-64
87. What is the minimum amount that shareholders should expect to receive in the event of a
complete corporate liquidation?
A. Market value of equity.
B. Book value of equity.
C. Zero.
D. Shareholders may be required to pay to be liquidated.

88. The required return on an equity security is comprised of a:

A. dividend yield and ROE.
B. current yield and a terminal value.
C. sustainable growth rate and a plowback yield.
D. dividend yield and a capital gains yield.

Difficulty: 1 Easy
89. What proportion of earnings is being plowed back into the firm if the sustainable growth
rate is 8% and the firm's ROE is 20%?
A. 8%
B. 12%
C. 20%
D. 40%
8% = 20%  plowback
40% = plowback

Blooms: Application
7-65
90. What is the expected constant-growth rate of dividends for a stock currently priced at $50,
that just paid a dividend of $4, and has a required return of 18%?
A. 3.41%
B. 5.50%
C. 9.26%
D. 12.5%
$50 = $4(1 + g)/(.18 - g)

g = .0926

Blooms: Application
Difficulty: 3 Hard
91. If the liquidation value of a corporation exceeds the market value of the equity, then the:
A. firm has no value as a going concern.
B. firm's stock will sell for book value.
C. firm is not taking advantage of available growth opportunities.
D. dividend payout ratio has been too high.

92. An investor is faced with the decision of whether to invest in a stock with an expected
return of 14% or a stock in the same industry with an expected 20% return. Which of the
following seems most likely?
A. The 20% stock is a better investment.
B. The 14% stock is overpriced.
C. Both stocks will have approximately the same return.
D. Both stocks are priced correctly given their perceived risk.

7-66
93. If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's
current price?
A. $4.50
B. $18.00
C. $22.22
D. $40.50
P/E = 13.5x
Then P = 13.5  $3
Price = $40.50

Blooms: Application
Difficulty: 1 Easy
Learning Objective: 07-04 Interpret price-earnings ratios.
94. What is the current price of a share of stock for a firm with $5 million in balance-sheet
equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4?
A. $2.50
B. $10.00
C. $20.00
D. $40.00
Book value per share = $5,000,000/500,000 = $10

If price/book value = 4
Then price = $10  4 = $40

Blooms: Application
7-67
95. Assuming all of the following firms have a required return of 14%, which would you
expect to have a positive present value of growth opportunities?
A. A firm with a P/E ratio of 9.
B. A firm with a P/E ratio of 6.
C. A firm with an E/P ratio of 20%.
D. None of these firms are expected to have positive PVGO.
Required return > E/P ratio if PVGO > 0

.14 > .1111

96. Investors are willing to purchase stocks having high P/E ratios because:
A. they expect these shares to sell for a lower price.
B. they expect these shares to offer higher dividend payments.
C. these shares are accompanied by guaranteed earnings.
D. they expect these shares to have greater growth opportunities.

Difficulty: 1 Easy
97. BestFirm has a 50-year history of solid growth and ever-increasing profits. It is widely
regarded as the leading firm of its industry. Hence, BestFirm's stock:
A. should be a good buy.
B. cannot be a good buy.
C. should be a safe buy.
D. cannot be a safe buy.

Blooms: Application
7-68
98. LookGood, Inc. has just announced the bad news that its earnings have dropped by 30%.
In fact, its investors had anticipated even worse results (a decrease of 40%). As a result,
LookGood's stock price:
A. increases.
B. remains the same.
C. decreases.
D. follows a random walk as usual.

Blooms: Application
Difficulty: 3 Hard
99. What is the difference between a fundamental analyst and a technical analyst?
A. Only a fundamental analyst believes markets are inefficient.
B. A technical analyst focuses on financial statement analysis.
C. Only a technical analyst helps keep the market efficient.
D. A fundamental analyst analyzes such information as earnings and asset values.

Blooms: Knowledge
100. Which of the following observations provides evidence against strong-form market
efficiency?
A. Some mutual funds outperformed the market in 1997.
B. Managers trading in their own stock obtain superior returns.
C. You cannot make superior profits by trading stocks after earnings reports are issued.
D. Stock prices follow a random walk.

7-69
101. According to the semistrong form of market efficiency, when new information becomes
available in the market:
A. stock prices will remain unchanged because they already reflect this information.
B. stock prices will accurately and rapidly adjust to reflect this new information.
C. stock prices will adjust to accurately reflect this new information over the course of the
next few days.
D. stock prices will most likely increase because all new information has a positive effect on
stock prices.

102. With respect to the notion that stock prices follow a random walk, several researchers
have concluded that:
A. stock prices reflect a majority of available information about the firm.
B. successive price changes are predictable.
C. past stock price changes provide little useful information about current stock prices.
D. stock prices always rise excessively in January.

103. A company reports significantly higher earnings on a Monday. You purchase the stock on
Tuesday and earn superior returns in the absence of other new information. The market
appears to be:
A. weak-form efficient at best.
B. weak-form efficient at the least.
C. semistrong-form efficient at best.
D. strong-form efficient at the least.

Blooms: Application
7-70
104. Under which of the following forms of market efficiency would stock prices always
reflect fair value?
A. Weak-form efficiency.
B. Semistrong-form efficiency.
C. Strong-form efficiency.
D. All of these are correct due to capital market efficiency.

Difficulty: 1 Easy
105. Technical analysts are most likely to be successful in a market that is considered:
A. semistrong-form efficient.
B. not to be strong-form efficient.
C. not to be weak-form efficient.
D. to follow a random walk.

106. If the correlation of prices between two stocks is 0.35, then the price of one stock would
be expected to:
A. rise when the other stock price falls.
B. rise by 35% when the other stock price is unchanged.
C. fall when the other stock price falls.
D. fall by 35% when the other stock price is unchanged.

Difficulty: 3 Hard
7-71
107. If the price of a stock falls on 4 consecutive days of trading, then stock prices:
A. cannot be following a random walk.
B. can still be following a random walk.
C. are almost certain to increase today.
D. are almost certain to decrease today.

108. According to random-walk theory, what are the odds that a stock will increase in price
after having increased on 2 consecutive days of trading?
A. 0.0%
B. 12.5%
C. 50.0%
D. 100.0%

Difficulty: 1 Easy
7-72
109. What is the maximum gain after two coin tosses for a person who starts with $1 if the
occurrence of a head produces a 50% gain while the occurrence of a tail produces a 50%
loss?
A. $1.00
B. $1.25
C. $1.75
D. $2.25
Ending wealth - beginning wealth = gain

$1.00(1.5)2 -$1.00 = gain
$2.25 - $1.00 = gain
$1.25 = gain

Blooms: Application
110. Which of the following situations is most likely to occur today for a stock that went
down in price yesterday?
A. The stock will increase in price.
B. The stock will decrease in price.
C. The stock has a 30% chance of decreasing in price.
D. The stock has no predictable price-change pattern.

7-73
111. If a stock's price decreased during the past week, what is the most likely prediction about
this week's price change?
A. Price will reverse last week's loss and go up.
B. Price will continue last week's decline.
C. Price will stand still until new information is released.
D. Either direction of price change is equally likely.

112. Research indicates that the correlation coefficient between successive days' stock price
changes is:
A. quite close to +1.
B. quite close to -1.
C. quite close to zero.
D. directly related to the stock's beta.

113. An analyst who relies on past cycles of stock pricing to make investment decisions is:
A. performing fundamental analysis.
B. relying on strong-form market efficiency.
C. assuming that the market is not weak-form efficient.
D. relying on the random walk of stock prices.

7-74
114. If it proves possible to make abnormal profits based on information regarding past stock
prices, then the market:
A. is weak-form efficient.
B. is not weak-form efficient.
C. is semistrong-form efficient.
D. is strong-form efficient.

Difficulty: 1 Easy
115. The study of published financial information on a company in order to make investment
decisions is known as:
A. technical analysis.
B. fundamental analysis.
C. efficiency analysis.
D. random pricing analysis.

Blooms: Knowledge
Difficulty: 1 Easy
116. A fundamental analyst:

A. relies on the same information as the technical analyst, but believes in the random walk.
B. studies a firm's financial statements to determine pricing inefficiencies.
C. believes that the market is strong-form efficient.
D. performs an unnecessary function, since markets are efficient.

7-75
117. If investors can consistently profit from thorough reading of published financial
information, then the market can, at best, be characterized as:
D. all of these.

Blooms: Knowledge
118. If no price change occurs in a stock on the day that it announces its next dividend, it can
be assumed that:
A. the stock market is inefficient.
B. the dividend was reduced.
C. the market was expecting this information.
D. technical analysts are not following this stock.

Difficulty: 1 Easy
119. When investors are not capable of making superior investment decisions on a continual
basis based on past prices or public or private information, the market is said to be:
D. fundamentally efficient.

Blooms: Knowledge
7-76
120. Which group of investors is capable of earning consistent, superior profits if financial
markets are strong-form efficient?
A. Only technical analysts will be able to profit.
B. Only fundamental analysts will be able to profit.
C. Only inside traders will be able to profit.
D. No one will be capable of sustained, superior profits.

Difficulty: 1 Easy
121. Given that markets are efficient, what is the most logical explanation of the fact that a
portfolio manager can outperform the S&P 500 by 5% annually?
A. The manager is an expert stock selector.
B. The manager has relied on insider information.
C. Stocks do not follow a random-walk pattern.
D. The manager's results have not been adjusted for the riskiness of the portfolio.

122. When new information becomes available in the market, evidence suggests that:
A. insiders will be the only investors to gain.
B. it takes at least 10 trading days for stock prices to adjust.
C. stock prices will adjust to the information rapidly.
D. transaction costs will erase any benefit of trading on the information.

Difficulty: 1 Easy
7-77
123. An example that specifically contradicts strong-form market efficiency in U.S. stock
markets is that:
A. excess profits are observed in cases of insider trading.
B. stock prices follow predictable patterns in each month.
C. random-walk behavior is reliable.
D. fundamental analysts outperform the S&P 500.

124. Your broker suggests that you can make consistent, excess profits by purchasing stocks
on the 20th of the month and selling them on the last day of the month. If this is true, then:
A. the market is only semistrong-form efficient.
B. the market violates even weak-form efficiency.
C. insiders will be the only investors to profit.
D. prices follow a random walk.

125. The statement that there are no free lunches on Wall Street suggests that:
A. the market is strong-form efficient.
B. there is no return to technical or fundamental analysis.
C. security prices reflect all available information.
D. food purveyors are capitalists.

7-78
Essay Questions
126. How can you reconcile the fact that whether an investor favors dividends or capital
gains, the investor should accept the dividend discount model as a determination of share
value?
The first fact to be recognized is that equally risky firms should offer the same expected rate
of return. Next, recognize that the return to a common stock investor can come from either
dividends or capital gains. Then it becomes easier to envision that, for example, a firm with a
high payout may offer good current income, but that it will not be as likely to increase this
income in the future due to the lower plowback now. On the other hand, a firm with low or
zero current payout doesn't offer much in a justification of value from current income, but is
supposedly investing in growth opportunities that will someday offer enhanced payout
potential. In reconciling these cases, common stock may offer a different time pattern of
dividends. That will of course have an effect on present value, but as long as investors with
different preferences can agree on a stock's fundamentals, they should place the same value on
the stock: the present value of all expected future dividends.
AACSB: Analytical Skills

Blooms: Analysis
Difficulty: 3 Hard
7-79
127. A stock offers an expected dividend of $3.50, has a required return of 14%, and has
historically exhibited a growth rate of 6%. Its current price is $35.00 and shows no tendency
to change. How can you explain this price based on the constant growth dividend discount
model?
The constant-growth dividend discount model would indicate that this stock should currently
sell for $43.75, based on the following formula:
Although stocks can temporarily be out of equilibrium price, the fact that this stock price
shows no tendency to change suggests that investors do not expect the past growth rate of 6%
to continue into the future. Since there is no indication that the required rate of return has
changed, it appears that the company many anticipate fewer positive growth opportunities
than in the past. Therefore, the dividend yield has likely increased to its current 10% level,
and the overall market seems to expect a growth rate of 4% rather than the historical 6%. At a
growth rate of 4%, the stock would be correctly priced at $35.00.

Blooms: Analysis
7-80
128. Develop a current stock value for a firm that is expected to have extraordinary growth of
25% for 4 years, after which it will face more competition and slip into a constant-growth rate
of 5%. Its required return is 14% and next year's dividend is expected to be $5.00.

Blooms: Evaluation
Difficulty: 3 Hard
7-81
129. Show numerically that investment horizon has no bearing on current stock price. For
your illustration assume investment horizons of 3 versus 5 years and the following facts: The
stock is correctly priced at $40.00, has a required return of 17%, a growth rate of 7%, and has
just paid a $3.74 dividend.
Note that the variation between $40.01 and $39.98 is, of course, a rounding error.

Blooms: Evaluation
7-82
130. For a firm that expects earnings next year of $10.00 per share, has a plowback ratio of
35%, a return on equity of 20%, and a required return of 15%, show the current stock value
and next year's expected stock value, assuming that growth is to be constant.
Thus, both the dividend discount model and the current stock price increase by g% indicate
that next year's value should be $86.94. This can be confirmed by multiplying the expected
plowback of $3.50 times the return on equity of 20% to see that earnings should be 70 cents
higher in 2 years. This 70 cents will be subject to a 65% payout, which will increase dividends
by 45.5 cents. Finally, 45.5 cents translates into a price increase of $5.68 when plugged into a
dividend discount model, as can be seen by:

Blooms: Evaluation
7-83
131. Show the breakdown of stock price between a firm's assets that are already in place and
its present value of growth opportunities, assuming: next year's expected earnings equal
$5.00, 13% required rate of return, 17% return on equity, and 45% plowback ratio.

Blooms: Evaluation
Difficulty: 3 Hard
132. How can an analyst feel comfortable in stating that the value of a stock is equal to the
discounted value of all future dividends when a company may pay dividends indefinitely and
it is virtually impossible to predict dividends beyond some reasonable horizon?
At most reasonable discount rates for common stock, say between 10% and 20%, the present
value of dividends to be received beyond some reasonable horizon, say 10 years, is quite low
in relation to the present value of dividends received to that point. For example, for a stock
expecting to pay a dividend of $2.00 with a growth rate of 5% and a required return of 15%,
approximately 60% of the present value of an infinite dividend stream is realized from the
first 10 years of dividends. By 15 years, approximately 75% of future value has been
received. These percentages can easily be proven by use of the constant growth dividend.
discount model.

Blooms: Analysis
7-84
133. Geothermal Corp. just announced good news: Its earnings have increased by 20%. Most
investors had anticipated an increase of 25%. Will Geothermal's stock price increase or
decrease when the announcement is made?
The stock price will decrease. The original price reflects an anticipation of a 25% increase in
earnings. The actual increase is a disappointment compared to original expectations.

Blooms: Application
134. Discuss (with formula) the general dividend discount model and its three major
submodels as introduced in the chapter.
The dividend discount model, or discounted cash-flow model, states that share value equals
the present value of all expected future dividends. With a specific investment time period or
horizon, H, the intrinsic share value (value determined by the evidence) is:
The stock price at the horizon date, PH, is the present value of cash dividends received beyond
the horizon date. As the horizon date changes, the present value of the stock will remain the
same as dividends are expected to grow at the rate of r. At extreme horizon dates the present
value of PH becomes insignificant; thus the dividend discount model share value equals the
present value of future, expected dividends.
The Dividend Discount Model with No Growth

When all earnings are paid as cash dividends, no growth is possible (reinvestment =
depreciation to maintain the current stock of capital). The stock value of a no-growth firm is
the expected dividend capitalized (perpetuity) at the required rate of return or:
Assuming all earnings are paid as dividends,
7-85
where EPS1 represents next year's earnings per share.
The Constant-Growth Dividend Discount Model

The constant-growth discount model is an arithmetic expression calculating the present value
of a perpetual stream of cash flows, DIV, growing at a constant rate of growth, g, and
discounted at a required rate of return, r:
With a sustained positive growth rate in the economy and business activity, the Gordon model
and its assumptions are reasonable:
DIV1 represents the dividend received at the end of period one.
The constant-growth formula is valid only when g is less than r.
P0 is directly related to DIV1 and g, and inversely related to r.
The Nonconstant-Growth Dividend Discount Model

The no-growth and constant-growth dividend discount models assume two patterns of cash
flows while reality presents the analyst with many variations. The dividend discount model is
easily adapted.
Changing future dividend patterns from nongrowth to constant-growth to variable-growth
rates over a given horizon requires that the analyst estimate the stock price by forecasting the
cash-flow patterns and discounting the cash flows at the market-required rate of return.
The terminal value, PH, represents the present value of the cash flows beyond the horizon.

Blooms: Knowledge
7-86
135. Moonshine Industries has produced a barrel per week for the past 20 years but cannot
grow because of certain legal hazards. It earns $25 per share per year and pays it all out to
stockholders. The stockholders have alternative, equivalent-risk ventures yielding 20% per
year on average. How much is one share of Moonshine worth? Assume the company can keep
going indefinitely.
Knowing that all earnings are paid as dividends, we have
where EPS1 represents next year's earnings per share.

Blooms: Application
7-87
136. What are some common errors investors make in assessing the probability of uncertain
outcomes? How did such errors reinforce the dot-com boom?
Psychologists have found that when judging possible future outcomes, individuals commonly
look back to what has happened in recent periods and then assume that this is representative
of what may occur in the future. The temptation is to project recent experience into the future
and to forget the lessons learned from the more distant past. For example, an investor who
places too much weight on recent events may judge that glamorous growth companies are
very likely to continue to grow rapidly, even though very high rates of growth cannot persist
indefinitely.
A second common bias is that of overconfidence. Most of us believe that we are better-than-
average drivers, and most investors think that they are better-than-average stockpickers. We
know that two speculators who trade with one another cannot both make money from the
deal; for every winner there must be a loser. But presumably investors are prepared to
continue trading because each is confident that it is the other one who is the patsy.
You can see how such behavior may have reinforced the dot-com boom. As the bull market
developed, it generated increased optimism about the future and stimulated demand for
shares. The more that investors racked up profits on their stocks, the more confident they
became in their views and the more willing they became to bear the risk that the next month
might not be so good.

Blooms: Analysis
7-88
137. Explain why the market value of common stock often differs from its liquidation value
or its book value.
A firm's liquidation value represents the excess valuation of its assets over its liabilities if the
firm ceased operations and all assets and liabilities were to be sold. Obviously, then, the
liquidation value will depend on the supply and demand for secondhand assets of this nature.
A firm's book value of equity equals all of the initial funds that were supplied by investors as
well as earnings that have been plowed back into the firm over time. Notice that this makes no
statement as to how profitably those earnings were reinvested. When comparing either of
these values to a firm's market value of equity, it is not surprising to find differences. If a firm
has been properly organized and serves customer needs, it will likely have value as a going
concern, which may easily boost market value higher than that of liquidation or book values.
Going-concern value can be the result of extra earning power over that of equally risky
companies, or intangible assets that offer unrecorded value, or the value of future investment
opportunities.

Blooms: Analysis
7-89
138. How do you estimate expected rates of return in the constant-growth dividend discount
model?
In constant-growth business situations, if g is capitalized in the market in higher stock prices,

r may be a proxy for the market expected rate of return on similar risk situations.
The expected rate of return is a combination of the dividend yield, DIV1/P0, and capital
appreciation rate, g, or:
The required rate of return, r, is a market-determined rate related to the risk-free rate adjusted
upward for risk, given expectations of DIV1 and g. The stock price, P0, adjusts to equate the
market-expected rate with the required rate of return.

Blooms: Knowledge
139. Explain the relationships among the earnings-price (E/P) ratio, required rate of return,
and present value of growth opportunities.
The inverse of the price-earnings (P/E) ratio is the earnings-price (E/P) ratio. If the E/P ratio is
greater than the required return for the stock, the difference is typically attributed to the firm's
positive value of PVGO. If, on the other hand, the firm's E/P ratio is equal to its required rate
of return, the firm does not have growth opportunities that are expected to yield more than the
required rate of return given the risk of the stock. It is possible that the firm has a lower E/P
ratio than the required rate of return, in which case the firm is not even earning the rate of
return that is required for its risk level. This is numerically equivalent to the firm having
negative growth opportunities, and suggests that the firm either reorganize or liquidate.

7-90
140. How does competition among investors lead to efficient markets?
The search for information and insightful analysis makes investor assessments of stock values
as reliable as possible. Since the rewards accrue to the investors who uncover relevant
information before it is reflected in stock prices, competition among these investors means
that there is always an active search for mispriced stocks.
Competition between investors will tend to produce an efficient market—that is, a market in
which prices rapidly reflect new information, and investors have difficulty making
consistently superior returns. Of course, we all hope to beat the market, but if the market is
efficient, all we can rationally expect is a return that is sufficient on average to compensate for
the time value of money and for the risks we bear.
The efficient market theory comes in three flavors. The weak form states that prices reflect all
the information contained in the past series of stock prices. In this case it is impossible to earn
superior profits simply by looking for past patterns in stock prices. The semistrong form of
the theory states that prices reflect all published information, so that it is impossible to make
consistently superior returns just by reading the newspaper, looking at the company's annual
accounts, and so on. The strong form states that stock prices effectively impound all available
information. This form tells us that private information is hard to come by, because in
pursuing it you are in competition with thousands—perhaps millions—of active and
intelligent investors. The best you can do in this case is to assume that securities are fairly
priced.
The evidence for market efficiency is voluminous and there is little doubt that skilled
professional investors find it difficult to win consistently. Nevertheless, there remain some
puzzling instances where markets do not seem to be efficient. Some financial economists
attribute these apparent anomalies to behavioral foibles.

7-91
141. What are index funds and exchange-traded funds? Why are many investors simply
choosing to buy and hold index funds or exchange-traded portfolios (ETFs) that track the
entire stock market?
Index funds invest in all the stocks in the popular market indexes. For example, the Vanguard
Index 500 fund holds the stocks in the Standard & Poor's Composite stock market index. (The
"S&P 500" tracks the performance of the largest U.S. stocks. It is the index most used by
professional investors.) If you buy this fund, you are insulated from the company-specific
risks of the 500 companies in the index. These risks are averaged out by diversification. Of
course you are still left with the risk that the level of the stock market as a whole will fall.
Index mutual funds are one way to invest in widely diversified portfolios at low cost. Another
route is provided by ETFs, which are portfolios of stocks that can be bought or sold in a single
trade. These include Standard & Poor's Depository Receipts (SPDRs, or "spiders"), which are
portfolios matching S&P's stock market indexes. The total amount invested in the spider
tracking the benchmark S&P 500 index was about $75 billion by the end of 2007. You can
also buy DIAMONDS, which track the Dow Jones Industrial Average; QUBES or QQQQs,
which track the NASDAQ 100 index; and Vanguard ETFs, which track the Vanguard Total
Stock Market index, a basket of almost all the stocks traded in the United States. You can also
buy ETFs that track foreign stock markets, bonds, or commodities.
ETFs are in some ways more efficient than mutual funds. To buy or sell an ETF, you simply
make a trade, just as if you bought or sold shares of stock. To invest in an open-ended mutual
fund, you have to send money to the fund in exchange for newly issued shares. If you want to
withdraw the investment, you have to notify the fund, which redeems your shares and sends
you a check or credits your account with the fund. Also, many of the larger ETFs charge
lower fees than mutual funds. Vanguard's fee for managing its Total Stock Market ETF is .
07% per year. For a $100,000 investment, the fee is only .0007  100,000 = $70.
Many investors have given up the search for superior investment returns. Instead, they simply
buy and hold index funds or ETFs that track the entire stock market and provide maximum
diversification, with very low management fees. Why pay higher fees to managers who
attempt to "beat the market" but can't do so consistently? Corporate pension funds now invest
over one-quarter of their U.S. equity holdings in index funds.

7-92
142. Is there a tall order when there are many talented and competitive fundamental analysts?
Fundamental analysts are paid to uncover stocks for which price does not equal intrinsic
value. If intrinsic value exceeds price, for example, the stock is a bargain and will offer a
superior expected return. But what happens if there are many talented and competitive
fundamental analysts? If one of them uncovers a stock that appears to be a bargain, it stands to
reason that others will as well, and there will be a wave of buying that pushes up the price. In
the end, their actions will eliminate the original bargain opportunity. To profit, your insights
must be different from those of your competitors, and you must act faster than they do. This is
a tall order.

7-93

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Chapter 07 - Valuing Stocks

True / False Questions

Multiple Choice Questions

29. Which of the following describes a seasoned offering?

35. The value of common stock will likely decrease if:

43. A payout ratio of 35% for a company indicates that:

63. The book value of a firm's equity is determined by:

64. If the liquidation value of a firm is negative, then:

65. A firm's liquidation value is the amount:

69. The main purpose of a market-value balance sheet is to:

72. The expected return on a common stock is composed of:

73. Firms having a higher expected return have a higher:

83. The terminal value of a share of stock:

88. The required return on an equity security is comprised of a:

116. A fundamental analyst:

140. How does competition among investors lead to efficient markets?

Chapter 07 Valuing Stocks Answer Key

True / False Questions

AACSB: Communication Abilities

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Communication Abilities

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Communication Abilities

AACSB: Communication Abilities

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Communication Abilities

AACSB: Communication Abilities

Multiple Choice Questions

AACSB: Reflective Thinking Skills

$1 dividend per quarter = $4 annually

AACSB: Reflective Thinking Skills

29. Which of the following describes a seasoned offering?

AACSB: Communication Abilities

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

The easiest way to solve this problem is to realize:

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

.05  $25 = $1.25 = DIV1

AACSB: Reflective Thinking Skills

35. The value of common stock will likely decrease if:

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills

AACSB: Reflective Thinking Skills