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Exam 9: The Valuation of Common Stock

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Question 21

Multiple Choice

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If the ratio of price to book exceeds 1.0,

A) the stock is overvalued
B) the firm's assets are understated
C) the price of the stock is greater than the accounting value of the firm
D) the accounting value of the firm is greater than the market value of the firm

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Question 22

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According to the dividend-growth model,the valuation of common stock depends on 1) the firm's dividends 2) investors' required rate of return 3) the prior year's dividends

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

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Question 23

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The efficient market suggests that,over a period of time,the investor should earn a return that is consistent with the amount of risk the investor bears.

Corporate retained earnings are taxed on the individual investor's federal income form.

The strong form of the efficient market hypothesis suggests 1) inside information will not lead to superior investment results 2) inside information will lead to superior investment results 3) studying financial statements will not lead to superior investment results 4) studying financial statements will lead to superior investment results

Higher required returns

Investors may use P/E ratios and price/sales ratios to value stocks.If this analysis is used,which of the following is desirable?

You know the following concerning a common stock: If you want to earn 10 percent,should you buy this stock? What is the maximum price you should be willing to pay for the stock?

The price to sales ratio is useful even if a firm is operating at a loss,since the P/E ratio cannot be computed.

As an investor you have a required rate of return of 14 percent for investments in risky stocks.You have analyzed three risky firms and must decide which (if any)to purchase.Your information is a.What is the maximum price? Which (if any)should you buy? b.If you bought Stock A,what is your implied rate of return? c.If your required rate of return were 10 percent,what should be the price necessary to induce you to buy Stock A?

Two stocks each pay a $1 dividend that is growing annually at 8 percent.Stock A has a beta of 1.3; stock B's beta is 0.8. a.Which stock is more volatile? b.If treasury bills yield 6 percent and you expect the market to rise by 12 percent,what is your risk-adjusted required rate of return? c.Using the dividend-growth model,what is the maximum amount you would be willing to pay for each stock? d.Why are your valuations different?

The relationship between a firm and its state of incorporation is specified in the bylaws.

Most stockholders have cumulative voting rights.

The weak form of the efficient market hypothesis implies

Your broker recommends that you purchase XYZ Inc.at $60.The stock pays a $2.40 dividend which (like its per share earnings)is expected to grow annually at 8 percent.If you want to earn 12 percent on your funds,is this a good buy?

Cumulative voting gives more power to minority stockholders.

Past dividend payments have little,if any,impact on a stock's current price.

The use of P/E ratios to select stocks suggests that

If securities markets were inefficient,prices would tend to adjust more slowly.

Stockholders generally have which of the following rights? 1) right to vote 2) right to share in the firm's earnings 3) right to sell the stock