When an investor multiplies future estimated earnings per

Question

Question 1: If the market multiple is 23.0 and the P/E ratio of a company is 27.4, then the stock's relative P/E is

• 0.84.
• 1.19.
• 3.21.
• 4.40.

Question 2: When an investor multiplies future estimated earnings per share by a price/earnings ratio to compute the value of a stock that investor is using the price/earnings approach to valuation.

• True
• False

Question 3.3. A relative P/E ratio greater than 1 indicates that a company may be undervalued.

• True
• False

Question 4: Markhem Enterprises is expected to earn $1.34 per share this year. The company has a dividend payout ratio of 40% and a P/E ratio of 18. What should one share of common stock in Markhem Enterprises be selling for in the market?

• $9.65
• $14.47
• $24.12
• $33.77

Question 5: Lindell, Inc. has 8% , $100 par value preferred stock outstanding. To earn 12% on an investment in this stock, you need to purchase the shares at a per share price of

• $9.60.
• $66.67.
• $96.00.
• $150.00.

Question 6: Which of the following contributes to high P/E ratios

• High dividend payout ratios
• High rate of earnings growth
• Periods of high inflation
• High debt ratios

Question 7: Which one of the following is a correct equation to calculate earnings per share?

• (ROA)(book value per share)
• (profit margin)(total asset turnover)(equity multiplier)(book value per share)
• (profit margin)(equity multiplier)(book value per share)
• (profit margin)(book value per share)

Question 8: A company has an annual dividend growth rate of 5% and a retention rate of 40%. The company's dividend payout ratio is

• 35%.
• 40%.
• 45%.
• 60%.

Question 9: The common stock of Jennifer's Furniture Outlet is currently selling at $32.60 a share. The company adheres to a 60% dividend payout ratio and has a P/E ratio of 19. There are 21,000 shares of stock outstanding. What is the amount of the annual net income for the firm?

• $21,619
• $36,032
• $48,327
• $60,053

Question 10: Which one of the following is is most likely to increase the price of a stock?

• rapid growth in sales.
• rapid growth in dividends.
• rapid growth in earnings.
• rapid increases in bond interest rates.

Question 11: Over the last year, a firm's earnings per share increased from $1.20 to $1.40, its dividends per share increased from $0.50 to $0.60, and its share price increased from $21 to $24. The firm maintained a relative P/E of 1.10 over the entire time period. Given this information, it follows that the

• stock experienced an increase in its P/E ratio.
• company had a decrease in its dividend payout ratio.
• current P/E of the overall market is 26.4.
• overall market P/E is declining.

Question 12: The rate of growth can exceed the required return during the variable-growth period without invalidating the variable growth dividend valuation model.

• True
• False

Question 13: Generally speaking, the higher the Price-to-Sales ratio, the better.

• True
• False

Question 14: The intrinsic value of a zero-growth stock is simply the capitalized value of its annual dividends.

• True
• False

Question 15: The price of a stock with a low relative P/E will tend to be more volatile than the price of a stock with a high relative P/E.

• True
• False

Question 16: Michelak's Maritime Industries has relatively stable earnings and pays an annual dividend of $2.50 per share. This dividend has remained constant over the past few years and is expected to remain constant for some time to come. If you want to earn 12% on an investment in the common stock of Michelak's, how much should you pay to purchase each share of stock?

• $12.50
• $18.88
• $20.83
• $25.00

Question 17: Generally speaking, the higher the Price-to-Sales ratio, the better.

• True
• False

Question 18: P/E ratios could rise even as earnings fall if

• earnings fall at a faster rate than stock prices.
• earnings fall at a slower rate than stock prices.
• investors expect lower stock prices to be permanent.
• investors expect lower earnings to be permanent.

Question 19: Most stocks trade at five to seven times their book values.

• True
• False

Question 20: In general, the higher the retention ratio

• 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 21: The intrinsic value of an asset equals the present value of all future cash flows at a given discount rate.

• True
• False

Question 22: As a company's beta rises, the required return on the stock should fall, all other things being equal.

• True
• False

Question 23: One of the easiest aspects of the dividend valuation model (DVM) is specifying the appropriate growth rate for a firm's dividends over time.

• True
• False

Question 24: The required rate of return denotes the minimum rate of return an investor should expect.

• True
• False

Question 25: James is willing to settle for a 10% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock. Which of the following will happen?

• James will be have to pay more for the stock than he was willing to pay.
• Investors with different required rates of return will pay different prices for the stock.
• James will not be able to buy the stock unless the price changes.
• James will be happy to buy the stock for less than he was willing to pay.

Question 26: The major forces behind earnings per share are

• return on assets and book value.
• return on assets and total asset turnover.
• return on equity and the equity multiplier.
• return on equity and book value.

 

Question 27: GLOO stock's P/E ratio is 45 at a time when the market's P/E ratio is 15. GLOO's realtive P/E ratio is

• 30.
• -30.
• 3.
• .33.

 

Question 28: Which of the following statements concerning the constant-growth dividend valuation model is (are) correct?

• I and IV only
• II and III only
• I, II, and IV only
• I, II and III only

Question 29: The constant growth dividend valuation model works best for mature companies with a long record of paying dividends.

• True
• False

 

Question 30: Which of the following contributes to high P/E ratios

• High dividend payout ratios
• High rate of earnings growth
• Periods of high inflation
• High debt ratios