Chaminade Univ MBA 754 (Investment Mgmt) Week 8 – Ch. 08 Quiz (Graded)

Grading
SummaryQuestion Type: # Of Questions: Multiple Choice 22

Grade
Details – All QuestionsQuestion 1. Question : Which of the following will most
directly influence a company’s market value?
Student
Answer: The state of the economy.
The
book value of its assets.
The
use of financial leverage.
Its
future cash flows.

Question
2. Question : An investor should purchase a stock when
Student
Answer: the market price exceeds the intrinsic value.
the
expected rate of return equals or exceeds the required return.
the
capital gains rate is less than the required return and no dividends are paid.
the
market price is greater than the justified price.

Question
3. Question : The estimated price of a stock in the future is important because
it includes the projected capital gain on the stock.
Student
Answer: True
False

Question
4. Question : The primary reason an investor should look at the past
performance of a company is to gain insight into the future direction and
profitability of the firm.
Student
Answer: True
False

Question
5. Question : The P/E approach is too complicated to be widely used in practice.
Student
Answer: True
False

Question
6. Question : The single most important issue in the stock valuation process is
a company’s
Student
Answer: past earnings record.
historic
dividend growth rate.
expected
future returns.
capital
structure.

Question
7. Question : In general, the higher the retention ratio
Student
Answer: the higher the future growth rate of the company.
the
higher the dividends per share of common stock.
the
higher the future debt-equity ratio.
the
lower the future book value per share.

Question
8. Question : The dividend valuation model (DVM) is very sensitive to the
growth rate (g) being used, because it affects both the model’s numerator and
its denominator.
Student
Answer: True
False

Question
9. Question : The risk-free rate of return is 4.2 percent, the expected market
return is 9 percent, and the beta for Lea, Inc. is 1.12. What is Lea’s required
rate of return?
Student
Answer: 9.58%
10.08%
13.70%
14.28%

Question
10. Question : In the price/earnings approach to stock valuation,
Student
Answer: historical stock prices are utilized.
forecasted
EPS are typically used.
the
P/E ratio is computed by multiplying the stock price by the earnings per share.
the
market P/E ratio, adjusted by beta, is used to value individual stocks.

Question
11. Question : The constant growth dividend valuation model works best for
mature companies with a long record of paying dividends.
Student
Answer: True
False

Question
12. Question : If the annual dividend on a stock never changes, its price will
never change.
Student
Answer: True
False

Question
13. Question : Sam is the type of stock market investor who focuses on factors
such as a company’s book value, debt load, return on equity, and cash flow. In
searching for stock investments, he looks at a company’s historical performance
and attempts to find undervalued stocks. This information indicates that Sam is
the type of investor known as
Student
Answer: a growth investor.
a
premium investor.
an
earnings investor.
a
value investor.

Question
14. Question : The variable-growth dividend valuation model
Student
Answer: develops the value of a stock using the future value of dividends minus
a rate of capital gain growth. is valuable because it accounts for the general
growth patterns of most companies.
is
invalid if at any point in time the growth rate exceeds the required rate of
return.
assumes
the rate of dividend growth will vary indefinitely.

Question
15. Question : An internal rate of return (IRR) is the discount rate that
Student
Answer: represents the minimal rate required to create a positive net present
value.
is the
minimal rate of return an investor will accept.
provides
an investor with their required return.
produces
a present value of future benefits equal to the market price of a stock.

Question
16. Question : The rate of dividend growth can be estimated by multiplying the
return on equity rate by the dividend payout ratio.
Student
Answer: True
False

Question
17. Question : If net income rises, but the number of shares outstanding
remains the same, EPS will rise.
Student
Answer: True
False

Question
18. Question : The intrinsic value of a zero-growth stock is simply the
capitalized value of its annual dividends.
Student
Answer: True
False

Question
19. Question : The key to the future behavior of a company lies in the sales
growth and the net profit margin.
Student
Answer: True
False

Question
20. Question : Martin’s Inc. is expected to pay annual dividends of $2.50 a
share for the next three years. After that, dividends are expected to increase
by 3% annually. What is the current value of this stock to you if you require a
9% rate of return on this investment?
Student
Answer: $39.47
$40.11
$41.81
$42.92

Question
21. Question : The common-size income statement expresses every item on the
income statement as a percentage of sales.
Student
Answer: True
False

Question
22. Question : According to the price/earnings approach to stock valuation, if
the dividend growth rate is expected to drop or if the required return goes up,
the net effect is a
Student
Answer: higher P/E ratio.
lower
P/E ratio.
higher
stock price.
higher
retention rate.