Stock Valuation and Risk
Chapter 11
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Stock Valuation and Risk
1. The common price-earnings valuation method applied the ______ price-earnings ratio to ________ earnings per share in order to value the firm’s stock. A) firm’s; industry B) firm’s; firm’s C) average industry; industry D) average industry; firm’s
ANSWER: D
2. A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm’s shares based on the price-earnings (PE) method is A) $2.22. B) $6.76. C) $33.30. D) none of the above
ANSWER: C
3. The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm’s future earnings or in choosing the industry composite used to derive the PE ratio. A) True B) False
ANSWER: A
4. Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork’s dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $_______ per share. A) 33.33 B) 166.67 C) 41.67 D) 60.00
ANSWER: C
5. Protsky Inc. just paid a dividend of $2.20 per share. The dividend growth rate for Protsky’s dividends is 3 percent per year. If the required rate of return on Protsky stock is 12 percent, the stock should be valued at $_______ per share according to the dividend discount model. A) 24.44 B) 25.18 C) 18.88 D) 75.53
ANSWER: B
6. The limitations of the dividend discount mode are more pronounced when valuing stocks A) that pay most of their earnings as dividends. B) that retain most of their earnings. C) that have a long history of dividends. D) that have constant
___________________________
Stock Valuation and Risk
1. The common price-earnings valuation method applied the ______ price-earnings ratio to ________ earnings per share in order to value the firm’s stock. A) firm’s; industry B) firm’s; firm’s C) average industry; industry D) average industry; firm’s
ANSWER: D
2. A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm’s shares based on the price-earnings (PE) method is A) $2.22. B) $6.76. C) $33.30. D) none of the above
ANSWER: C
3. The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm’s future earnings or in choosing the industry composite used to derive the PE ratio. A) True B) False
ANSWER: A
4. Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork’s dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $_______ per share. A) 33.33 B) 166.67 C) 41.67 D) 60.00
ANSWER: C
5. Protsky Inc. just paid a dividend of $2.20 per share. The dividend growth rate for Protsky’s dividends is 3 percent per year. If the required rate of return on Protsky stock is 12 percent, the stock should be valued at $_______ per share according to the dividend discount model. A) 24.44 B) 25.18 C) 18.88 D) 75.53
ANSWER: B
6. The limitations of the dividend discount mode are more pronounced when valuing stocks A) that pay most of their earnings as dividends. B) that retain most of their earnings. C) that have a long history of dividends. D) that have constant