ch6Student: ___________________________________________________________________________

1.

The valuation of a company's stock based on a review of the firm's financial statements in conjunction with other financial and economic data is called _____ analysis. A. technical B. conceptual C. prediction D. fundamental E. discounted

2.

The valuation of a stock based on the present value of the future income to be received from that stock is referred to as the _____ model. A. fundamental B. constant C. basic D. compound dividend E. dividend discount

3.

A dividend growth rate that can be supported by the firm's earnings is referred to as a _____ growth rate. A. tangible B. sustainable C. retention D. durable E. proportional

4.

The net profit of a firm which is held within the firm to support future growth is called _____ earnings. A. capital B. sustainable C. tangible D. retained E. supportive

5.

The percentage of a firm's net income which is distributed to shareholders is called the _____ ratio. A. payout B. distribution C. retention D. capital E. equity

6.

The percentage of a firm's net income which is reinvested in the firm is called the _____ ratio. A. payout B. distribution C. retention D. capital E. equity

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7.

The model used to value a stock which has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model. A. flexible B. increasing C. two-stage D. stepped up E. geometric

8.

Beta is a measure of a stock's: A. rate of return. B. return relative to the overall market. C. dividend growth rate. D. dividend as a percentage of net income. E. risk relative to the overall market.

9.

The market value of a share of stock divided by the net income per share is called the _____ ratio. A. growth-earnings B. price-earnings C. value-earnings D. earnings profitability E. market profitability

10. The net income per share divided by the market price per share is called the: A. profit margin. B. profit yield. C. market yield. D. earnings yield. E. income ratio. 11. A method used to value the stock of a company which does not pay dividends is the _____ model. A. net profit B. internal cash flow C. internal growth D. reinvested growth E. residual income 12. The accounting relationship where the change in book value per share is equal to earnings per share minus dividends per share is called the _____ relationship. A. clean surplus B. retained earnings C. payout D. price-payout E. price-retention 13. Stocks with high price-earnings ratios are commonly referred to as _____ stocks. A. income B. value C. growth D. geometric E. low beta

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14. Value stocks are defined as stocks with: A. low prices. B. high dividends. C. high growth rates. D. low price-earnings ratios. E. low market-book ratios. 15. The term cash flow, as it is used in the price-cash flow ratio, is generally defined as: A. the total annual dividend amount. B. net income minus dividends paid. C. the total market value of the common stock. D. net income plus depreciation. E. net income plus depreciation minus dividends paid. 16. The market value per share of common stock divided by the firm's equity per share is called the _____ ratio. A. market-equity B. price-value C. value-equity D. price-book E. book-value 17. Maria wishes to purchase a stock and has decided to conduct some fundamental analysis on the company. Which of the following will she most likely review during her analysis? (I.) cost structure (II.) cash flows (III.) management quality (IV.) earnings per share A. I and II only B. I and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV 18. Based on the dividend discount model, the current value of a stock will _____ as the discount rate is increased. A. increase B. either remain constant or increase C. remain constant D. either decrease or remain constant E. decrease 19. The constant growth rate model assumes that: A. the dividend payout ratio will remain constant. B. the dividend growth rate is equal to the discount rate. C. dividends will be paid for a stated number of years. D. dividends will be paid in perpetuity. E. the dividend payout ratio increases at a constant rate.

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20. The constant perpetual growth model assumes that: A. dividends are paid for a stated number of years only. B. a firm pays all of its net income out as dividends. C. the growth rate is less than the discount rate. D. dividends are constant in amount and will be paid forever. E. the stock price is constant over time. 21. The constant perpetual growth model is applicable primarily to those firms which: A. are relatively new and faster growing. B. have relatively stable earnings and expect to increase the annual dividend for several years. C. have recently commenced paying dividends and expect to increase the dividend significantly in the short-term. D. have growth rates that are less than 0.5 percent. E. have a long history of constant dividends. 22. Which one of the following is a correct formula for computing a geometric average dividend growth rate?1 A. [(1 + D0) + (1 + D1) (1 + DN)]N +1 - 1 NB. [(1 + D0) (11+ N 1) (1 + DN)] D -1 C. [D(N) / D(0)]N/ - 1 D. [D(N) / D(0)]N /-11 E. [D(N) / D(0)] -1

23. The arithmetic average dividend growth rate is: A. the compounded rate of growth over a specified time period. B. easier to compute than the geometric average dividend growth rate. C. the summation of the annual dividend growth rates. D. generally preferred by most financial analysts as compared to the geometric average growth rate. E. the arithmetic average of the annual dividend growth rates. 24. The retention ratio is equal to: A. net income divided by total equity. B. the annual dividend amount divided by the net income. C. net income divided by the number of shares outstanding. D. 1 - dividend payout ratio. E. 1 + dividend payout ratio. 25. An increase in the retention ratio will: A. increase the dividends per share. B. decrease the firm's rate of growth. C. decrease the equity of a firm. D. increase the dividend growth rate. E. increase the value of the stock. 26. Which one of the following will increase the sustainable rate of growth? A. decrease in net income B. increase in the dividend payout ratio C. increase in the total equity of the firm D. increase in the retention ratio E. decrease in earnings per share

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27. The sustainable growth rate is equal to: A. ROE (1 - Payout ratio). B. ROA (1 - Payout ratio). C. ROE (1 - Retention ratio). D. ROA (1 - Retention ratio). E. ROE Payout ratio. 28. Future Tech Products, Inc., expects to grow at 15 percent a year for the next five years and then taper off to a constant 4 percent annual rate of growth. The firm has paid dividends for the past four years and expects to continue doing so. Which one of the following models is best suited to computing the current value of this firm's stock? A. erratic dividend growth B. constant perpetual growth C. constant dividend growth D. two-stage dividend growth E. dividend discount 29. The two-stage dividend growth model assumes the second-stage growth rate is: A. less than the discount rate. B. less than or equal to the discount rate. C. less than, greater than, or equal to the discount rate. D. less than the first-stage growth rate. E. greater than the first-stage growth rate. 30. Which one of the following statements concerning beta is correct? A. The beta assigned to the overall market is zero. B. A stock with a beta of 1.2 earns a lower risk premium than does the overall market. C. A stock with a beta of .5 has 50 percent more risk than the overall market. D. A stock with a beta of 1.1 has a risk premium that is greater than the market's risk premium. E. The higher the beta, the lower the degree of risk. 31. Which one of the following is NOT a disadvantage related to the constant perpetual growth model? A. requires firms to pay a dividend B. sensitive to the dividend growth rate C. growth rate must be less than the discount rate D. simple to compute E. discount rate difficult to predict 32. An increase in the dividend growth rate for a firm which is expected to pay dividends forever will _____ the price of that firm's stock. A. increase B. either increase or not affect C. not affect D. either decrease or not affect E. decrease

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33. Which one of the following will increase the price-earnings ratio, all else constant? (I.) a decrease in the number of shares outstanding (II.) an increase in net income (III.) a decrease in the earnings yield (IV.) decrease in the market price per share A. I only B. III only C. II and IV only D. I and III only E. I, III, and IV only 34. Which one of the following models can be used to value the stock of a non-dividend paying firm? A. two-stage growth B. residual income C. dividend growth D. supernormal growth E. perpetual dividend growth 35. Which one of the following does NOT have the same meaning as the term "economic value added"? A. abnormal earnings B. residual income C. value created by a firm in period t D. EPSt - Bt-1 k E. excess of required earnings over actual earnings 36. Which one of the following statements is correct concerning the net income and cash flow of a firm? A. The primary difference between the net income and the operating cash flow of a firm is taxes. B. Analysts rely on the net income of a firm and therefore ignore the cash flows. C. High quality earnings exist when the earnings per share is similar in value to the cash flow per share. D. The net income of a firm is unaffected by the depreciation method selected. E. The earnings per share will usually equal the net income per share for most firms. 37. The price-sales ratio helps measure the ability of a firm to generate: A. net profits. B. quality cash flows. C. higher earnings per share. D. higher cash flow per share. E. revenue growth. 38. Thelma would like to know the value of a firm's equity today in relation to the cost of that equity. Which one of the following ratios should Thelma consult to determine this information? A. price-earnings B. price-book C. price-sales D. price-cash flow E. price-assets

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39. Which of the following items are included in a Value Line Investment Survey report? (I.) recent stock price (II.) target price range (III.) recent quarterly earnings (IV.) analyst's comments A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV 40. The stock price is _____ the required return. A. unaffected by B. minimally affected by C. independent of D. dependent upon E. directly correlated to 41. The stock price is _____ the dividend growth rate. A. unaffected by B. inversely related to C. directly affected by D. independent of E. unrelated to 42. Michael's Enterprises plans to pay a $1.50 a share dividend at the end of each of the next three years. Also, at the end of year 3, Michael's will pay a final liquidating dividend of $29 a share.After that, the company will close its doors permanently. What is the current value of this stock if the appropriate discount rate is 13 percent? A. $21.22 B. $23.64 C. $25.14 D. $26.03 E. $29.65 43. Windover Machines, Inc., just announced that they will pay an annual dividend of $2.50 a share at the end of each of the next 2 years. At the end of year 3, the company expects to pay a $35 a share liquidating dividend. After that, the company will cease operations. The discount rate on this stock is 14 percent. What is the current stock price per share? A. $17.73 B. $19.09 C. $23.63 D. $27.74 E. $31.62 44. Aloe, Inc., is downsizing and plans on completely closing 4 years from now. The firm's liquidation plan calls for annual dividends of $5, $3, $3, and $20 over the next 4 years, respectively. What is the current value of this stock given a discount rate of 13 percent? A. $21.12 B. $23.33 C. $23.87 D. $25.16 E. $27.43

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45. Brentwood Industries announced today that they are going out of business. As of today, no more regular dividends will be paid. The intention of the firm is to pay two liquidating dividends. The first dividend, will be paid one year from now in the amount of $20 a share. The second and final dividend will be paid two years from now at an estimated $13 a share. What is the value of this stock to you today if you feel the appropriate discount rate is 16 percent? A. $21.14 B. $24.52 C. $26.90 D. $28.45 E. $31.21 46. East River Entertainment plans to pay annual dividends for five more years. The last dividend paid was $1.40 a share. Dividends are increased by 2 percent each year. What is the current value of this stock at a discount rate of 9 percent? A. $5.76 B. $6.09 C. $6.24 D. $6.70 E. $7.44 47. TL Tools has stated that they will continue paying annual dividends for 6 more years and then discontinue all dividends. The required return on this stock is 11 percent and the dividend growth rate is 2.5 percent. The next dividend is expected to be $1.30. What is the current value of TL Tools stock? A. $4.77 B. $5.81 C. $6.10 D. $6.82 E. $8.31 48. Blackwater Tours pays an annual dividend which increases by 4 percent each year. The next dividend is expected to be $1.36 a share. Blackwater recently announced that they will be ceasing all dividends after 3 more years as they are planning a major expansion project and will need to conserve cash. What is the current value of this stock if the discount rate is 15 percent? A. $3.22 B. $3.37 C. $3.41 D. $3.55 E. $3.59 49. Hand-Krafted Furniture plans to pay 3 more annual dividends and then discontinue all dividends thereafter. The last dividend paid was $.80 a share and dividends increase by 2 percent annually. The discount rate is 9 percent. What is the current value of this stock? A. $1.91 B. $1.99 C. $2.04 D. $2.10 E. $2.40

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50. Allegheny Woods is slowly losing its market share. As a result, the company is decreasing its annual dividend by 10 percent each year and will cease all dividends after 4 more payments. The next dividend is expected to be $.90 a share. What is the current value of this stock at a discount rate of 15 percent? A. $1.97 B. $2.13 C. $2.25 D. $2.34 E. $2.46 51. The Whirlwind Co. just paid an annual dividend of $2.10 a share. The firm expects to pay dividends forever and to increase the dividend by 2.5 percent annually. What is the current value of this stock if the required return is 11 percent? A. $19.09 B. $19.57 C. $24.70 D. $25.32 E. $25.95 52. Catch Up, Inc., is planning on paying an annual dividend of $1.80 per share next year. The company has a policy of increasing the dividend by 3 percent annually. As far as they know, Catch Up will pay dividends for the foreseeable future. What is the current value of this stock at a discount rate of 14 percent? A. $12.86 B. $13.24 C. $16.36 D. $16.85 E. $17.36 53. You own a firm which has relatively steady growth. As a result, you have adopted a policy of increasing the annual dividend by 3.5 percent each year. Next year's dividend will be $1.40. The discount rate is 10 percent. What is the present value of your stock? A. $14.49 B. $15.00 C. $20.81 D. $21.54 E. $22.29 54. Margo Enterprises stock is valued at $17.65 a share. The firm pays annual dividends and increases those dividends by 4 percent each year. Next year's dividend will be $1.50 per share. What is the required return on this stock? A. 12.02 percent B. 12.50 percent C. 12.67 percent D. 12.82 percent E. 13.00 percent

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55. Wilson's Meats common stock is valued at $11.05. The firm pays annual dividends which increase at a constant rate. The last dividend paid was $1.24. The required return is 14 percent. What is the dividend growth rate? A. 2.38 percent B. 2.44 percent C. 2.50 percent D. 2.56 percent E. 2.60 percent 56. A stock sells for $12.95 a share and has a required return of 13.5 percent. Dividends are paid annually and increase at a constant 3 percent each year. What is the amount of the last dividend paid? A. $1.22 B. $1.28 C. $1.32 D. $1.36 E. $1.40 57. Penny's Shoes pays annual dividends and increases those dividends by 3.5 percent each year. The stock is currently valued at $24.40 a share and has a required return of 13.5 percent. You own 300 shares of this stock. What is the total amount of dividend income you should expect to receive next year? A. $707 B. $732 C. $741 D. $758 E. $770 58. The common stock of Lester's Office Supply has a required return of 12 percent and a current value of $14.79. The company pays its dividend annually and increases the amount by 2 percent each year. You own 600 shares of this stock. What was the total amount of the last dividend you received? A. $853 B. $859 C. $864 D. $870 E. $887 59. Sam's Furniture has paid annual dividends of $1.60, $1.72, $1.78, $1.84, and $1.90 over the last 5 years, respectively. What is the geometric average dividend growth rate? A. 3.75 percent B. 4.01 percent C. 4.39 percent D. 4.55 percent E. 4.69 percent 60. Your firm has paid annual dividends of $1.20, $1.34, $1.35, $1.40, $1.44, and $1.50 per share over the past 6 years, respectively. What is the geometric average growth rate for these dividends? A. 3.89 percent B. 4.13 percent C. 4.14 percent D. 4.56 percent E. 5.00 percent

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61. Over the past 5 years, Wilson's Lumber has paid annual dividends of $1.60, $1.66, $1.70, $1.75, and $1.80 per share. What is the geometric average dividend growth rate for this period? A. 2.99 percent B. 3.13 percent C. 3.18 percent D. 3.27 percent E. 3.33 percent 62. Patty's Pools has paid annual dividends of $1.40, $1.55, $1.60, $1.70, and $1.75 per share over the past 5 years, respectively. What is the geometric average dividend growth rate for this period? A. 4.75 percent B. 4.93 percent C. 5.00 percent D. 5.49 percent E. 5.74 percent 63. Arthur's Manufactured Homes pays annual dividends. For the past six years, the firm has paid dividends of $1.90, $1.95, $2.10, $2.15, $2.20, and $2.25, respectively. What is the geometric average dividend growth rate for this time period? A. 3.01 percent B. 3.07 percent C. 3.39 percent D. 3.44 percent E. 3.68 percent 64. Over the past 4 years, your firm has paid annual dividends of $1.90, $2.10, $2.20, and $2.35. What is the arithmetic average dividend growth rate? A. 7.30 percent B. 7.34 percent C. 7.37 percent D. 8.01 percent E. 8.05 percent 65. Lester's Farms has paid annual dividends of $1.50, $1.75, $1.77, $1.87, and $2.00 over the past 5 years, respectively. What is the arithmetic average growth rate for these dividends? A. 7.37 percent B. 7.40 percent C. 7.46 percent D. 7.54 percent E. 7.60 percent 66. Bernice's Yarn Shop started paying dividends 4 years ago. The annual dividends were $.50, $.57, $.60, and $.63, respectively. What is the arithmetic average dividend growth rate? A. 7.97 percent B. 8.01 percent C. 8.04 percent D. 8.09 percent E. 8.13 percent

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67. J&L Pools has net income of $248,000. The firm has 500,000 shares of common stock outstanding. The dividend that is being paid for this year is $.1984 per share. What is the retention ratio? A. .50 B. .55 C. .60 D. .65 E. .70 68. Down River Stores has a dividend payout ratio of 30 percent and annual dividends of $1.80 per share. What is the retention ratio? A. .54 B. .55 C. .67 D. .70 E. .77 69. Modern Designs has net income of $310,000. The firm has decided to pay $180,000 of that income out to the shareholders. What is the firm's retention ratio? A. .40 B. .42 C. .45 D. .47 E. .50 70. Plastic Toys, Inc., has a net income of $236,000. The firm has $1.4 million in assets and $300,000 in liabilities. What is the return on equity? A. 5.62 percent B. 7.87 percent C. 12.40 percent D. 16.86 percent E. 21.45 percent 71. Dead Wood Planners has earnings per share of $1.36. The firm has $980,000 in equity and 125,000 shares of stock outstanding. What is the return on equity? A. 14.92 percent B. 16.08 percent C. 17.35 percent D. 18.47 percent E. 19.36 percent 72. The West Wind Company has earnings per share of $2.20 and dividends per share of $1.21. The total equity of the firm is $970,000. There are 70,000 shares of stock outstanding. What is the sustainable rate of growth? A. 7.14 percent B. 7.31 percent C. 7.90 percent D. 8.44 percent E. 8.73 percent

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73. Naples Vacation Rentals has 60,000 shares of stock outstanding at a market price of $29.28 per share and a book value of $17.27 a share. The firm has earnings per share of $2.44, a dividend payout ratio of .35, and a P/E ratio of 12. What is the firm's sustainable rate of growth? A. 8.88 percent B. 9.18 percent C. 11.11 percent D. 12.57 percent E. 14.13 percent 74. Donaldson and Heirs has a net income of $238,000, total assets of $1,784,000, and total liabilities of $437,000. The company paid $66,640 in dividends. What is the firm's sustainable rate of growth? A. 3.74 percent B. 4.95 percent C. 9.61 percent D. 11.93 percent E. 12.72 percent 75. John Wilde Industries has a retention ratio of .75, dividends of $46,000, and total equity of $2.9 million. What is the firm's sustainable rate of growth? A. 1.19 percent B. 2.73 percent C. 4.76 percent D. 5.38 percent E. 6.34 percent 76. Dover Mills just paid an annual dividend of $.40 a share. Management estimates the dividend will increase by 15 percent a year for the next three years. After that, the dividend growth rate is estimated at 3.5 percent. The required rate of return is 12 percent. What is the value of this stock today? A. $6.54 B. $7.03 C. $7.78 D. $8.03 E. $8.54 77. The common stock of Red Rover Feed Mills has a required return of 12 percent. The latest press release stated that last year's dividend was $1.20 per share and that future dividends will increase by 10 percent for the following 3 years. After that, the dividend growth rate will be 2.5 percent indefinitely. What is one share of this stock worth to you today? A. $13.42 B. $14.14 C. $15.26 D. $15.74 E. $16.03 78. Hill's Country Fresh Eggs is a relatively young firm which just paid their first annual dividend of $.40 a share. Management projects dividend increases of 15 percent per year for five years followed by a constant growth rate of 3 percent annually. What is this stock worth today if the applicable discount rate is 11 percent? A. $8.37 B. $9.08 C. $9.42 D. $11.76 E. $12.45

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79. The last dividend paid by Lynwood Properties was an annual dividend of $1.20 a share. Dividends for the following 4 years will be increased at an annual rate of 12 percent. After that, dividends are expected to increase by 2 percent each year. The discount rate is 14 percent. What is the current value of this stock? A. $10.40 B. $12.78 C. $13.33 D. $14.10 E. $15.55 80. Sallie Mae Clothing is in the process of selling its peripheral businesses and returning to a pure clothing store. In conjunction with this reorganization, the dividend will be decreased by 20 percent in each of the next 2 years. After that, the dividend will resume its historical pattern of 3 percent annual increases. The required return on this stock is 10 percent and the last dividend paid was $3 a share. What is one share of this stock worth today? A. $25.08 B. $27.12 C. $28.16 D. $28.68 E. $29.72 81. Precision Machining's last annual dividend was $.80 a share. The firm will increase the dividend by 8 percent for the next 2 years and thereafter increase the dividend by 3 percent annually. What is this stock worth today if the required return is 9 percent? A. $14.52 B. $15.06 C. $15.30 D. $16.97 E. $17.08 82. Wilson's Leather Goods has net income of $41,600 and total equity of $381,000. The firm was 60,000 shares of stock outstanding at a price per share of $14.20. What is the firm's P/E ratio? A. 16.21 B. 17.37 C. 19.09 D. 20.48 E. 21.94 83. Jedstone Home Decors has net income of $26,000, total assets of $143,000, total liabilities of $54,000, and a price-book ratio of 4.3. There are 50,000 shares of stock outstanding. What is the firm's price-earnings ratio? A. 14.72 B. 15.11 C. 16.48 D. 17.65 E. 19.46

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84. Magnolia Farms has 125,000 shares of stock outstanding, sales of $1.2 million, and net income of $152,000. Financial analysts have stated that the price-earnings ratio for this firm should be 15.5. Given this information, what should be the current stock price? A. $12.75 B. $15.68 C. $18.85 D. $19.19 E. $22.07 85. Ameth Growers has historically had a P/E ratio of 21.4. This ratio is considered a good estimate of the future ratio. The firm currently has EPS of $2.34. These earnings are expected to increase by 3.4 percent next year. What is the expected price of this stock one year from now? A. $45.54 B. $48.43 C. $50.25 D. $51.78 E. $53.79 86. Historically, JT Enterprises has a P/E ratio of 18.4. The firm has current net income of $83,500 with 150,000 shares of stock outstanding. The EPS growth rate is 12.6 percent. What is the expected price of this stock one year from now? A. $11.53 B. $13.14 C. $13.82 D. $15.38 E. $15.62 87. Wayne's Water Works has an historical P/CF ratio of 20.3. The current CFPS is $1.65 and the projected CFPS growth rate is 8.6 percent. The current EPS is $.58. What is the expected price of this stock one year from now? A. $34.79 B. $36.38 C. $37.91 D. $39.27 E. $40.42 88. Mark's Men's Wear has current SPS of $6.18. SPS are expected to increase at an annual rate of 9 percent. The historical P/E ratio is 12.1 and the historical P/S ratio is 7.08. What is the expected price of this stock one year from now? A. $39.33 B. $42.91 C. $47.69 D. $50.04 E. $52.68 89. Southern Growers has current EPS of $1.42 and a projected EPS growth rate of 14 percent. Historically, the company's P/E ratio has been 24.8 with SPS of $7.20. What is the expected price of this stock one year from now? A. $30.89 B. $40.15 C. $48.62 D. $51.18 E. $62.09

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90. Currently, Major Industries of Ohio has sales of $3.4 million, net profit of $268 thousand, and 400 thousand shares of stock outstanding. The sales and net profit are each expected to grow by 7.5 percent annually. The historical P/S ratio is 8.5. What is the expected price of this stock one year from now? A. $72.25 B. $73.14 C. $75.55 D. $77.01 E. $77.67 91. The current book value per share of Trenton Motors is $11.90 and the required return on the stock is 15 percent. The firm expects earnings per share of $1.40 next year with annual earnings growth of 4 percent. What is the current value of this stock? A. $8.40 B. $8.91 C. $16.07 D. $18.18 E. $20.30 92. Marquis Jewelers has current earnings per share of $2.80 and an expected earnings growth rate of 4.5 percent. The required return on the stock is 11 percent and the current book value per share is $12.95. What is the current value of this stock? A. $29.07 B. $34.11 C. $36.05 D. $42.31 E. $49.00 93. Amore Gifts has a book value per share of $6.42 and current earnings per share of $1.31. The required return on Amore stock is 16 percent and the expected earnings growth rate is 7 percent. What is one share of this stock worth today? A. $8.18 B. $9.15 C. $9.56 D. $10.02 E. $10.58

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ch6 Key1. The valuation of a company's stock based on a review of the firm's financial statements in conjunction with other financial and economic data is called _____ analysis. A. B. C. D. E. technical conceptual prediction fundamental discountedJordan - Chapter 06 #1 Topic: FUNDAMENTAL ANALYSIS Type: DEFINITIONS

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The valuation of a stock based on the present value of the future income to be received from that stock is referred to as the _____ model. A. B. C. D. E. fundamental constant basic compound dividend dividend discountJordan - Chapter 06 #2 Topic: DIVIDEND DISCOUNT MODEL Type: DEFINITIONS

3.

A dividend growth rate that can be supported by the firm's earnings is referred to as a _____ growth rate. A. B. C. D. E. tangible sustainable retention durable proportionalJordan - Chapter 06 #3 Topic: SUSTAINABLE GROWTH RATE Type: DEFINITIONS

4.

The net profit of a firm which is held within the firm to support future growth is called _____ earnings. A. B. C. D. E. capital sustainable tangible retained supportiveJordan - Chapter 06 #4 Topic: RETAINED EARNINGS Type: DEFINITIONS

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5.

The percentage of a firm's net income which is distributed to shareholders is called the _____ ratio. A. B. C. D. E. payout distribution retention capital equityJordan - Chapter 06 #5 Topic: PAYOUT RATIO Type: DEFINITIONS

6.

The percentage of a firm's net income which is reinvested in the firm is called the _____ ratio. A. B. C. D. E. payout distribution retention capital equityJordan - Chapter 06 #6 Topic: RETENTION RATIO Type: DEFINITIONS

7.

The model used to value a stock which has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model. A. B. C. D. E. flexible increasing two-stage stepped up geometricJordan - Chapter 06 #7 Topic: TWO-STAGE DIVIDEND GROWTH MODEL Type: DEFINITIONS

8.

Beta is a measure of a stock's: A. B. C. D. E. rate of return. return relative to the overall market. dividend growth rate. dividend as a percentage of net income. risk relative to the overall market.Jordan - Chapter 06 #8 Topic: BETA Type: DEFINITIONS

9.

The market value of a share of stock divided by the net income per share is called the _____ ratio. A. B. C. D. E. growth-earnings price-earnings value-earnings earnings profitability market profitabilityJordan - Chapter 06 #9 Topic: PRICE-EARNINGS RATIO Type: DEFINITIONS

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10.

The net income per share divided by the market price per share is called the: A. B. C. D. E. profit margin. profit yield. market yield. earnings yield. income ratio.Jordan - Chapter 06 #10 Topic: EARNINGS YIELD Type: DEFINITIONS

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A method used to value the stock of a company which does not pay dividends is the _____ model. A. B. C. D. E. net profit internal cash flow internal growth reinvested growth residual incomeJordan - Chapter 06 #11 Topic: RESIDUAL INCOME MODEL Type: DEFINITIONS

12.

The accounting relationship where the change in book value per share is equal to earnings per share minus dividends per share is called the _____ relationship. A. B. C. D. E. clean surplus retained earnings payout price-payout price-retentionJordan - Chapter 06 #12 Topic: CLEAN SURPLUS RELATIONSHIP Type: DEFINITIONS

13.

Stocks with high price-earnings ratios are commonly referred to as _____ stocks. A. B. C. D. E. income value growth geometric low betaJordan - Chapter 06 #13 Topic: GROWTH STOCKS Type: DEFINITIONS

14.

Value stocks are defined as stocks with: A. B. C. D. E. low prices. high dividends. high growth rates. low price-earnings ratios. low market-book ratios.Jordan - Chapter 06 #14 Topic: VALUE STOCKS Type: DEFINITIONS

3

15.

The term cash flow, as it is used in the price-cash flow ratio, is generally defined as: A. B. C. D. E. the total annual dividend amount. net income minus dividends paid. the total market value of the common stock. net income plus depreciation. net income plus depreciation minus dividends paid.Jordan - Chapter 06 #15 Topic: CASH FLOW Type: DEFINITIONS

16.

The market value per share of common stock divided by the firm's equity per share is called the _____ ratio. A. B. C. D. E. market-equity price-value value-equity price-book book-valueJordan - Chapter 06 #16 Topic: PRICE-BOOK RATIO Type: DEFINITIONS

17.

Maria wishes to purchase a stock and has decided to conduct some fundamental analysis on the company. Which of the following will she most likely review during her analysis? (I.) cost structure (II.) cash flows (III.) management quality (IV.) earnings per share A. B. C. D. E. I and II only I and IV only II, III, and IV only I, II, and IV only I, II, III, and IVJordan - Chapter 06 #17 Topic: FUNDAMENTAL ANALYSIS Type: CONCEPTS

18.

Based on the dividend discount model, the current value of a stock will _____ as the discount rate is increased. A. B. C. D. E. increase either remain constant or increase remain constant either decrease or remain constant decreaseJordan - Chapter 06 #18 Topic: DIVIDEND DISCOUNT MODEL Type: CONCEPTS

19.

The constant growth rate model assumes that: A. B. C. D. E. the dividend payout ratio will remain constant. the dividend growth rate is equal to the discount rate. dividends will be paid for a stated number of years. dividends will be paid in perpetuity. the dividend payout ratio increases at a constant rate.Jordan - Chapter 06 #19 Topic: CONSTANT GROWTH RATE MODEL Type: CONCEPTS

4

20.

The constant perpetual growth model assumes that: A. B. C. D. E. dividends are paid for a stated number of years only. a firm pays all of its net income out as dividends. the growth rate is less than the discount rate. dividends are constant in amount and will be paid forever. the stock price is constant over time.Jordan - Chapter 06 #20 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: CONCEPTS

21.

The constant perpetual growth model is applicable primarily to those firms which: A. are relatively new and faster growing. B. have relatively stable earnings and expect to increase the annual dividend for several years. C. have recently commenced paying dividends and expect to increase the dividend significantly in the short-term. D. have growth rates that are less than 0.5 percent. E. have a long history of constant dividends.Jordan - Chapter 06 #21 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: CONCEPTS

22.

Which one of the following is a correct formula for computing a geometric average dividend growth rate? A. B. C. D. E.1 [(1 + D0) + (1 + D1) (1 + DN)]N +1 - 1 N[(1 + D0) (11+ N 1) (1 + DN)] D -1 [D(N) / D(0)]N/ - 1 [D(N) / D(0)]N /- 1 1 [D(N) / D(0)] -1Jordan - Chapter 06 #22 Topic: GEOMETRIC AVERAGE GROWTH RATE Type: CONCEPTS

23.

The arithmetic average dividend growth rate is: A. B. C. D. E. the compounded rate of growth over a specified time period. easier to compute than the geometric average dividend growth rate. the summation of the annual dividend growth rates. generally preferred by most financial analysts as compared to the geometric average growth rate. the arithmetic average of the annual dividend growth rates.Jordan - Chapter 06 #23 Topic: ARITHMETIC AVERAGE GROWTH RATE Type: CONCEPTS

24.

The retention ratio is equal to: A. B. C. D. E. net income divided by total equity. the annual dividend amount divided by the net income. net income divided by the number of shares outstanding. 1 - dividend payout ratio. 1 + dividend payout ratio.Jordan - Chapter 06 #24 Topic: RETENTION RATIO Type: CONCEPTS

5

25.

An increase in the retention ratio will: A. B. C. D. E. increase the dividends per share. decrease the firm's rate of growth. decrease the equity of a firm. increase the dividend growth rate. increase the value of the stock.Jordan - Chapter 06 #25 Topic: RETENTION RATIO Type: CONCEPTS

26.

Which one of the following will increase the sustainable rate of growth? A. B. C. D. E. decrease in net income increase in the dividend payout ratio increase in the total equity of the firm increase in the retention ratio decrease in earnings per shareJordan - Chapter 06 #26 Topic: SUSTAINABLE GROWTH RATE Type: CONCEPTS

27.

The sustainable growth rate is equal to: A. B. C. D. E. ROE (1 - Payout ratio). ROA (1 - Payout ratio). ROE (1 - Retention ratio). ROA (1 - Retention ratio). ROE Payout ratio.Jordan - Chapter 06 #27 Topic: SUSTAINABLE GROWTH RATE Type: CONCEPTS

28.

Future Tech Products, Inc., expects to grow at 15 percent a year for the next five years and then taper off to a constant 4 percent annual rate of growth. The firm has paid dividends for the past four years and expects to continue doing so. Which one of the following models is best suited to computing the current value of this firm's stock? A. B. C. D. E. erratic dividend growth constant perpetual growth constant dividend growth two-stage dividend growth dividend discountJordan - Chapter 06 #28 Topic: TWO-STAGE DIVIDEND GROWTH MODEL Type: CONCEPTS

29.

The two-stage dividend growth model assumes the second-stage growth rate is: A. B. C. D. E. less than the discount rate. less than or equal to the discount rate. less than, greater than, or equal to the discount rate. less than the first-stage growth rate. greater than the first-stage growth rate.Jordan - Chapter 06 #29 Topic: TWO-STAGE DIVIDEND GROWTH MODEL Type: CONCEPTS

6

30.

Which one of the following statements concerning beta is correct? A. B. C. D. E. The beta assigned to the overall market is zero. A stock with a beta of 1.2 earns a lower risk premium than does the overall market. A stock with a beta of .5 has 50 percent more risk than the overall market. A stock with a beta of 1.1 has a risk premium that is greater than the market's risk premium. The higher the beta, the lower the degree of risk.Jordan - Chapter 06 #30 Topic: BETA Type: CONCEPTS

31.

Which one of the following is NOT a disadvantage related to the constant perpetual growth model? A. B. C. D. E. requires firms to pay a dividend sensitive to the dividend growth rate growth rate must be less than the discount rate simple to compute discount rate difficult to predictJordan - Chapter 06 #31 Topic: CONSTANT PERPETUAL GROWTH Type: CONCEPTS

32.

An increase in the dividend growth rate for a firm which is expected to pay dividends forever will _____ the price of that firm's stock. A. B. C. D. E. increase either increase or not affect not affect either decrease or not affect decreaseJordan - Chapter 06 #32 Topic: CONSTANT PERPETUAL GROWTH Type: CONCEPTS

33.

Which one of the following will increase the price-earnings ratio, all else constant? (I.) a decrease in the number of shares outstanding (II.) an increase in net income (III.) a decrease in the earnings yield (IV.) decrease in the market price per share A. B. C. D. E. I only III only II and IV only I and III only I, III, and IV onlyJordan - Chapter 06 #33 Topic: PRICE-EARNINGS RATIO Type: CONCEPTS

34.

Which one of the following models can be used to value the stock of a non-dividend paying firm? A. B. C. D. E. two-stage growth residual income dividend growth supernormal growth perpetual dividend growthJordan - Chapter 06 #34 Topic: RESIDUAL INCOME MODEL Type: CONCEPTS

7

35.

Which one of the following does NOT have the same meaning as the term "economic value added"? A. B. C. D. E. abnormal earnings residual income value created by a firm in period t EPSt - Bt-1 k excess of required earnings over actual earningsJordan - Chapter 06 #35 Topic: ECONOMIC VALUE ADDED Type: CONCEPTS

36.

Which one of the following statements is correct concerning the net income and cash flow of a firm? A. The primary difference between the net income and the operating cash flow of a firm is taxes. B. Analysts rely on the net income of a firm and therefore ignore the cash flows. C. High quality earnings exist when the earnings per share is similar in value to the cash flow per share. D. The net income of a firm is unaffected by the depreciation method selected. E. The earnings per share will usually equal the net income per share for most firms.Jordan - Chapter 06 #36 Topic: NET INCOME AND CASH FLOW Type: CONCEPTS

37.

The price-sales ratio helps measure the ability of a firm to generate: A. B. C. D. E. net profits. quality cash flows. higher earnings per share. higher cash flow per share. revenue growth.Jordan - Chapter 06 #37 Topic: PRICE-SALES RATIO Type: CONCEPTS

38.

Thelma would like to know the value of a firm's equity today in relation to the cost of that equity. Which one of the following ratios should Thelma consult to determine this information? A. B. C. D. E. price-earnings price-book price-sales price-cash flow price-assetsJordan - Chapter 06 #38 Topic: PRICE-BOOK RATIO Type: CONCEPTS

39.

Which of the following items are included in a Value Line Investment Survey report? (I.) recent stock price (II.) target price range (III.) recent quarterly earnings (IV.) analyst's comments A. B. C. D. E. I and IV only II and III only I, III, and IV only II, III, and IV only I, II, III, and IVJordan - Chapter 06 #39 Topic: VALUE LINE Type: CONCEPTS

8

40.

The stock price is _____ the required return. A. B. C. D. E. unaffected by minimally affected by independent of dependent upon directly correlated toJordan - Chapter 06 #40 Topic: PRICE AND REQUIRED RETURN Type: CONCEPTS

41.

The stock price is _____ the dividend growth rate. A. B. C. D. E. unaffected by inversely related to directly affected by independent of unrelated toJordan - Chapter 06 #41 Topic: PRICE AND DIVIDEND GROWTH RATE Type: CONCEPTS

42.

Michael's Enterprises plans to pay a $1.50 a share dividend at the end of each of the next three years. Also, at the end of year 3, Michael's will pay a final liquidating dividend of $29 a share.After that, the company will close its doors permanently. What is the current value of this stock if the appropriate discount rate is 13 percent? A. B. C. D. E. $21.22 $23.64 $25.14 $26.03 $29.65Jordan - Chapter 06 #42 Topic: LIQUIDATING DIVIDEND VALUATION Type: PROBLEMS

43.

Windover Machines, Inc., just announced that they will pay an annual dividend of $2.50 a share at the end of each of the next 2 years. At the end of year 3, the company expects to pay a $35 a share liquidating dividend. After that, the company will cease operations. The discount rate on this stock is 14 percent. What is the current stock price per share? A. B. C. D. E. $17.73 $19.09 $23.63 $27.74 $31.62Jordan - Chapter 06 #43 Topic: LIQUIDATING DIVIDEND VALUATION Type: PROBLEMS

9

44.

Aloe, Inc., is downsizing and plans on completely closing 4 years from now. The firm's liquidation plan calls for annual dividends of $5, $3, $3, and $20 over the next 4 years, respectively. What is the current value of this stock given a discount rate of 13 percent? A. B. C. D. E. $21.12 $23.33 $23.87 $25.16 $27.43Jordan - Chapter 06 #44 Topic: LIQUIDATING DIVIDEND VALUATION Type: PROBLEMS

45.

Brentwood Industries announced today that they are going out of business. As of today, no more regular dividends will be paid. The intention of the firm is to pay two liquidating dividends. The first dividend, will be paid one year from now in the amount of $20 a share. The second and final dividend will be paid two years from now at an estimated $13 a share. What is the value of this stock to you today if you feel the appropriate discount rate is 16 percent? A. B. C. D. E. $21.14 $24.52 $26.90 $28.45 $31.21Jordan - Chapter 06 #45 Topic: LIQUIDATING DIVIDEND VALUATION Type: PROBLEMS

46.

East River Entertainment plans to pay annual dividends for five more years. The last dividend paid was $1.40 a share. Dividends are increased by 2 percent each year. What is the current value of this stock at a discount rate of 9 percent? A. B. C. D. E. $5.76 $6.09 $6.24 $6.70 $7.44Jordan - Chapter 06 #46 Topic: CONSTANT DIVIDEND GROWTH RATE MODEL

47.

TL Tools has stated that they will continue paying annual dividends for 6 more years and then discontinue all dividends. The required return on this stock is 11 percent and the dividend growth rate is 2.5 percent. The next dividend is expected to be $1.30. What is the current value of TL Tools stock? A. B. C. D. E. $4.77 $5.81 $6.10 $6.82 $8.31Jordan - Chapter 06 #47 Topic: CONSTANT DIVIDEND GROWTH RATE MODEL Type: PROBLEMS

10

48.

Blackwater Tours pays an annual dividend which increases by 4 percent each year. The next dividend is expected to be $1.36 a share. Blackwater recently announced that they will be ceasing all dividends after 3 more years as they are planning a major expansion project and will need to conserve cash. What is the current value of this stock if the discount rate is 15 percent? A. B. C. D. E. $3.22 $3.37 $3.41 $3.55 $3.59Jordan - Chapter 06 #48 Topic: CONSTANT DIVIDEND GROWTH RATE MODEL Type: PROBLEMS

49.

Hand-Krafted Furniture plans to pay 3 more annual dividends and then discontinue all dividends thereafter. The last dividend paid was $.80 a share and dividends increase by 2 percent annually. The discount rate is 9 percent. What is the current value of this stock? A. B. C. D. E. $1.91 $1.99 $2.04 $2.10 $2.40Jordan - Chapter 06 #49 Topic: CONSTANT DIVIDEND GROWTH RATE MODEL Type: PROBLEMS

50.

Allegheny Woods is slowly losing its market share. As a result, the company is decreasing its annual dividend by 10 percent each year and will cease all dividends after 4 more payments. The next dividend is expected to be $.90 a share. What is the current value of this stock at a discount rate of 15 percent? A. B. C. D. E. $1.97 $2.13 $2.25 $2.34 $2.46Jordan - Chapter 06 #50 Topic: CONSTANT DIVIDEND GROWTH RATE MODEL Type: PROBLEMS

51.

The Whirlwind Co. just paid an annual dividend of $2.10 a share. The firm expects to pay dividends forever and to increase the dividend by 2.5 percent annually. What is the current value of this stock if the required return is 11 percent? A. B. C. D. E. $19.09 $19.57 $24.70 $25.32 $25.95Jordan - Chapter 06 #51 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: PROBLEMS

11

52.

Catch Up, Inc., is planning on paying an annual dividend of $1.80 per share next year. The company has a policy of increasing the dividend by 3 percent annually. As far as they know, Catch Up will pay dividends for the foreseeable future. What is the current value of this stock at a discount rate of 14 percent? A. B. C. D. E. $12.86 $13.24 $16.36 $16.85 $17.36Jordan - Chapter 06 #52 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: PROBLEMS

53.

You own a firm which has relatively steady growth. As a result, you have adopted a policy of increasing the annual dividend by 3.5 percent each year. Next year's dividend will be $1.40. The discount rate is 10 percent. What is the present value of your stock? A. B. C. D. E. $14.49 $15.00 $20.81 $21.54 $22.29Jordan - Chapter 06 #53 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: PROBLEMS

54.

Margo Enterprises stock is valued at $17.65 a share. The firm pays annual dividends and increases those dividends by 4 percent each year. Next year's dividend will be $1.50 per share. What is the required return on this stock? A. B. C. D. E. 12.02 percent 12.50 percent 12.67 percent 12.82 percent 13.00 percentJordan - Chapter 06 #54 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: PROBLEMS

55.

Wilson's Meats common stock is valued at $11.05. The firm pays annual dividends which increase at a constant rate. The last dividend paid was $1.24. The required return is 14 percent. What is the dividend growth rate? A. B. C. D. E. 2.38 percent 2.44 percent 2.50 percent 2.56 percent 2.60 percentJordan - Chapter 06 #55 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: PROBLEMS

12

56.

A stock sells for $12.95 a share and has a required return of 13.5 percent. Dividends are paid annually and increase at a constant 3 percent each year. What is the amount of the last dividend paid? A. B. C. D. E. $1.22 $1.28 $1.32 $1.36 $1.40Jordan - Chapter 06 #56 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: PROBLEMS

57.

Penny's Shoes pays annual dividends and increases those dividends by 3.5 percent each year. The stock is currently valued at $24.40 a share and has a required return of 13.5 percent. You own 300 shares of this stock. What is the total amount of dividend income you should expect to receive next year? A. B. C. D. E. $707 $732 $741 $758 $770Jordan - Chapter 06 #57 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: PROBLEMS

58.

The common stock of Lester's Office Supply has a required return of 12 percent and a current value of $14.79. The company pays its dividend annually and increases the amount by 2 percent each year. You own 600 shares of this stock. What was the total amount of the last dividend you received? A. B. C. D. E. $853 $859 $864 $870 $887Jordan - Chapter 06 #58 Topic: CONSTANT PERPETUAL GROWTH MODEL Type: PROBLEMS

59.

Sam's Furniture has paid annual dividends of $1.60, $1.72, $1.78, $1.84, and $1.90 over the last 5 years, respectively. What is the geometric average dividend growth rate? A. B. C. D. E. 3.75 percent 4.01 percent 4.39 percent 4.55 percent 4.69 percentJordan - Chapter 06 #59 Topic: GEOMETRIC AVERAGE DIVIDEND GROWTH RATE Type: PROBLEMS

13

60.

Your firm has paid annual dividends of $1.20, $1.34, $1.35, $1.40, $1.44, and $1.50 per share over the past 6 years, respectively. What is the geometric average growth rate for these dividends? A. B. C. D. E. 3.89 percent 4.13 percent 4.14 percent 4.56 percent 5.00 percentJordan - Chapter 06 #60 Topic: GEOMETRIC AVERAGE DIVIDEND GROWTH RATE Type: PROBLEMS

61.

Over the past 5 years, Wilson's Lumber has paid annual dividends of $1.60, $1.66, $1.70, $1.75, and $1.80 per share. What is the geometric average dividend growth rate for this period? A. B. C. D. E. 2.99 percent 3.13 percent 3.18 percent 3.27 percent 3.33 percentJordan - Chapter 06 #61 Topic: GEOMETRIC AVERAGE DIVIDEND GROWTH RATE Type: PROBLEMS

62.

Patty's Pools has paid annual dividends of $1.40, $1.55, $1.60, $1.70, and $1.75 per share over the past 5 years, respectively. What is the geometric average dividend growth rate for this period? A. B. C. D. E. 4.75 percent 4.93 percent 5.00 percent 5.49 percent 5.74 percentJordan - Chapter 06 #62 Topic: GEOMETRIC AVERAGE DIVIDEND GROWTH RATE Type: PROBLEMS

63.

Arthur's Manufactured Homes pays annual dividends. For the past six years, the firm has paid dividends of $1.90, $1.95, $2.10, $2.15, $2.20, and $2.25, respectively. What is the geometric average dividend growth rate for this time period? A. B. C. D. E. 3.01 percent 3.07 percent 3.39 percent 3.44 percent 3.68 percentJordan - Chapter 06 #63 Topic: GEOMETRIC AVERAGE DIVIDEND GROWTH RATE Type: PROBLEMS

14

64.

Over the past 4 years, your firm has paid annual dividends of $1.90, $2.10, $2.20, and $2.35. What is the arithmetic average dividend growth rate? A. B. C. D. E. 7.30 percent 7.34 percent 7.37 percent 8.01 percent 8.05 percent

Annual growth rate year 1 to 2: ($2.10 - $1.90) / $1.90 = .105263Jordan - Chapter 06 #64 Topic: ARITHMETIC AVERAGE DIVIDEND GROWTH RATE Type: PROBLEMS

65.

Lester's Farms has paid annual dividends of $1.50, $1.75, $1.77, $1.87, and $2.00 over the past 5 years, respectively. What is the arithmetic average growth rate for these dividends? A. B. C. D. E. 7.37 percent 7.40 percent 7.46 percent 7.54 percent 7.60 percent

Annual growth rate year 1 to 2: ($1.75 - $1.50) / $1.50 = .166667Jordan - Chapter 06 #65 Topic: ARITHMETIC AVERAGE DIVIDEND GROWTH RATE Type: PROBLEMS

66.

Bernice's Yarn Shop started paying dividends 4 years ago. The annual dividends were $.50, $.57, $.60, and $.63, respectively. What is the arithmetic average dividend growth rate? A. B. C. D. E. 7.97 percent 8.01 percent 8.04 percent 8.09 percent 8.13 percent

Annual growth rate year 1 to 2: ($.57 - $.50) / $.50 = .14000Jordan - Chapter 06 #66 Topic: ARITHMETIC AVERAGE DIVIDEND GROWTH RATE Type: PROBLEMS

67.

J&L Pools has net income of $248,000. The firm has 500,000 shares of common stock outstanding. The dividend that is being paid for this year is $.1984 per share. What is the retention ratio? A. B. C. D. E. .50 .55 .60 .65 .70Jordan - Chapter 06 #67 Topic: RETENTION RATIO Type: PROBLEMS

15

68.

Down River Stores has a dividend payout ratio of 30 percent and annual dividends of $1.80 per share. What is the retention ratio? A. B. C. D. E. .54 .55 .67 .70 .77

Retention ratio = 1 - .30 = .70Jordan - Chapter 06 #68 Topic: RETENTION RATIO Type: PROBLEMS

69.

Modern Designs has net income of $310,000. The firm has decided to pay $180,000 of that income out to the shareholders. What is the firm's retention ratio? A. B. C. D. E. .40 .42 .45 .47 .50

Retention ratio = ($310,000 - $180,000) / $310,000 = .419 = .42Jordan - Chapter 06 #69 Topic: RETENTION RATIO Type: PROBLEMS

70.

Plastic Toys, Inc., has a net income of $236,000. The firm has $1.4 million in assets and $300,000 in liabilities. What is the return on equity? A. B. C. D. E. 5.62 percent 7.87 percent 12.40 percent 16.86 percent 21.45 percent

Return on equity = $236,000 / ($1,400,000 - $300,000) = .214545 = 21.45 percentJordan - Chapter 06 #70 Topic: RETURN ON EQUITY Type: PROBLEMS

16

71.

Dead Wood Planners has earnings per share of $1.36. The firm has $980,000 in equity and 125,000 shares of stock outstanding. What is the return on equity? A. B. C. D. E. 14.92 percent 16.08 percent 17.35 percent 18.47 percent 19.36 percent

Return on equity = ($1.36 125,000) / $980,000 = .17347 = 17.35 percentJordan - Chapter 06 #71 Topic: RETURN ON EQUITY Type: PROBLEMS

72.

The West Wind Company has earnings per share of $2.20 and dividends per share of $1.21. The total equity of the firm is $970,000. There are 70,000 shares of stock outstanding. What is the sustainable rate of growth? A. B. C. D. E. 7.14 percent 7.31 percent 7.90 percent 8.44 percent 8.73 percent

Sustainable growth rate = [($2.20 70,000) / $970,000] (1 - ($1.21 / $2.20) = .158763 .45 = .07144 = 7.14 percentJordan - Chapter 06 #72 Topic: SUSTAINABLE GROWTH RATE Type: PROBLEMS

73.

Naples Vacation Rentals has 60,000 shares of stock outstanding at a market price of $29.28 per share and a book value of $17.27 a share. The firm has earnings per share of $2.44, a dividend payout ratio of .35, and a P/E ratio of 12. What is the firm's sustainable rate of growth? A. B. C. D. E. 8.88 percent 9.18 percent 11.11 percent 12.57 percent 14.13 percent

Sustainable growth rate = [(60,000 $2.44) / (60,000 $17.27)] (1 - .35) = [$146,400 / $1,036,200] .65 = .09184 = 9.18 percentJordan - Chapter 06 #73 Topic: SUSTAINABLE GROWTH RATE Type: PROBLEMS

17

74.

Donaldson and Heirs has a net income of $238,000, total assets of $1,784,000, and total liabilities of $437,000. The company paid $66,640 in dividends. What is the firm's sustainable rate of growth? A. B. C. D. E. 3.74 percent 4.95 percent 9.61 percent 11.93 percent 12.72 percentJordan - Chapter 06 #74 Topic: SUSTAINABLE GROWTH RATE Type: PROBLEMS

75.

John Wilde Industries has a retention ratio of .75, dividends of $46,000, and total equity of $2.9 million. What is the firm's sustainable rate of growth? A. B. C. D. E. 1.19 percent 2.73 percent 4.76 percent 5.38 percent 6.34 percent

Sustainable growth rate = {[($46,000 / (1 - .75)] / $2,900,000} .75 = .047586 = 4.76 percentJordan - Chapter 06 #75 Topic: SUSTAINABLE GROWTH RATE Type: PROBLEMS

76.

Dover Mills just paid an annual dividend of $.40 a share. Management estimates the dividend will increase by 15 percent a year for the next three years. After that, the dividend growth rate is estimated at 3.5 percent. The required rate of return is 12 percent. What is the value of this stock today? A. B. C. D. E. $6.54 $7.03 $7.78 $8.03 $8.54Jordan - Chapter 06 #76 Topic: TWO-STAGE DIVIDEND GROWTH MODEL Type: PROBLEMS

77.

The common stock of Red Rover Feed Mills has a required return of 12 percent. The latest press release stated that last year's dividend was $1.20 per share and that future dividends will increase by 10 percent for the following 3 years. After that, the dividend growth rate will be 2.5 percent indefinitely. What is one share of this stock worth to you today? A. B. C. D. E. $13.42 $14.14 $15.26 $15.74 $16.03Jordan - Chapter 06 #77 Topic: TWO-STAGE DIVIDEND GROWTH MODEL Type: PROBLEMS

18

78.

Hill's Country Fresh Eggs is a relatively young firm which just paid their first annual dividend of $.40 a share. Management projects dividend increases of 15 percent per year for five years followed by a constant growth rate of 3 percent annually. What is this stock worth today if the applicable discount rate is 11 percent? A. B. C. D. E. $8.37 $9.08 $9.42 $11.76 $12.45Jordan - Chapter 06 #78 Topic: TWO-STAGE DIVIDEND GROWTH MODEL Type: PROBLEMS

79.

The last dividend paid by Lynwood Properties was an annual dividend of $1.20 a share. Dividends for the following 4 years will be increased at an annual rate of 12 percent. After that, dividends are expected to increase by 2 percent each year. The discount rate is 14 percent. What is the current value of this stock? A. B. C. D. E. $10.40 $12.78 $13.33 $14.10 $15.55Jordan - Chapter 06 #79 Topic: TWO-STAGE DIVIDEND GROWTH MODEL Type: PROBLEMS

80.

Sallie Mae Clothing is in the process of selling its peripheral businesses and returning to a pure clothing store. In conjunction with this reorganization, the dividend will be decreased by 20 percent in each of the next 2 years. After that, the dividend will resume its historical pattern of 3 percent annual increases. The required return on this stock is 10 percent and the last dividend paid was $3 a share. What is one share of this stock worth today? A. B. C. D. E. $25.08 $27.12 $28.16 $28.68 $29.72Jordan - Chapter 06 #80 Topic: TWO-STAGE DIVIDEND GROWTH MODEL Type: PROBLEMS

81.

Precision Machining's last annual dividend was $.80 a share. The firm will increase the dividend by 8 percent for the next 2 years and thereafter increase the dividend by 3 percent annually. What is this stock worth today if the required return is 9 percent? A. B. C. D. E. $14.52 $15.06 $15.30 $16.97 $17.08Jordan - Chapter 06 #81 Topic: TWO-STAGE DIVIDEND GROWTH MODEL Type: PROBLEMS

19

82.

Wilson's Leather Goods has net income of $41,600 and total equity of $381,000. The firm was 60,000 shares of stock outstanding at a price per share of $14.20. What is the firm's P/E ratio? A. B. C. D. E. 16.21 17.37 19.09 20.48 21.94

P/E = $14.20 / ($41,600 / 60,000) = 20.48Jordan - Chapter 06 #82 Topic: PRICE-EARNINGS RATIO Type: PROBLEMS

83.

Jedstone Home Decors has net income of $26,000, total assets of $143,000, total liabilities of $54,000, and a price-book ratio of 4.3. There are 50,000 shares of stock outstanding. What is the firm's price-earnings ratio? A. B. C. D. E. 14.72 15.11 16.48 17.65 19.46

P/E = {[($143,000 - $54,000) / 50,000] 4.3} / ($26,000 / 50,000) = $7.654 / $.52 = 14.72Jordan - Chapter 06 #83 Topic: PRICE-EARNINGS RATIO Type: PROBLEMS

84.

Magnolia Farms has 125,000 shares of stock outstanding, sales of $1.2 million, and net income of $152,000. Financial analysts have stated that the price-earnings ratio for this firm should be 15.5. Given this information, what should be the current stock price? A. B. C. D. E. $12.75 $15.68 $18.85 $19.19 $22.07

V(0) = ($152,000 / 125,000) 15.5 = $18.848 = $18.85Jordan - Chapter 06 #84 Topic: PRICE-EARNINGS RATIO Type: PROBLEMS

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85.

Ameth Growers has historically had a P/E ratio of 21.4. This ratio is considered a good estimate of the future ratio. The firm currently has EPS of $2.34. These earnings are expected to increase by 3.4 percent next year. What is the expected price of this stock one year from now? A. B. C. D. E. $45.54 $48.43 $50.25 $51.78 $53.79

Expected price = $2.34 (1 + .034) 21.4 = $51.778 = $51.78Jordan - Chapter 06 #85 Topic: EXPECTED PRICE Type: PROBLEMS

86.

Historically, JT Enterprises has a P/E ratio of 18.4. The firm has current net income of $83,500 with 150,000 shares of stock outstanding. The EPS growth rate is 12.6 percent. What is the expected price of this stock one year from now? A. B. C. D. E. $11.53 $13.14 $13.82 $15.38 $15.62

Expected price = ($83,500 / 150,000 (1 + .126) 18.4 = $11.533 = $11.53Jordan - Chapter 06 #86 Topic: EXPECTED PRICE Type: PROBLEMS

87.

Wayne's Water Works has an historical P/CF ratio of 20.3. The current CFPS is $1.65 and the projected CFPS growth rate is 8.6 percent. The current EPS is $.58. What is the expected price of this stock one year from now? A. B. C. D. E. $34.79 $36.38 $37.91 $39.27 $40.42

Expected price = $1.65 (1 + .086) 20.3 = $36.376 = $36.38Jordan - Chapter 06 #87 Topic: EXPECTED PRICE Type: PROBLEMS

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88.

Mark's Men's Wear has current SPS of $6.18. SPS are expected to increase at an annual rate of 9 percent. The historical P/E ratio is 12.1 and the historical P/S ratio is 7.08. What is the expected price of this stock one year from now? A. B. C. D. E. $39.33 $42.91 $47.69 $50.04 $52.68

Expected price = $6.18 (1 + .09) 7.08 = $47.692 = $47.69Jordan - Chapter 06 #88 Topic: EXPECTED PRICE Type: PROBLEMS

89.

Southern Growers has current EPS of $1.42 and a projected EPS growth rate of 14 percent. Historically, the company's P/E ratio has been 24.8 with SPS of $7.20. What is the expected price of this stock one year from now? A. B. C. D. E. $30.89 $40.15 $48.62 $51.18 $62.09

Expected price = $1.42 (1 + .14) 24.8 = $40.146 = $40.15Jordan - Chapter 06 #89 Topic: EXPECTED PRICE Type: PROBLEMS

90.

Currently, Major Industries of Ohio has sales of $3.4 million, net profit of $268 thousand, and 400 thousand shares of stock outstanding. The sales and net profit are each expected to grow by 7.5 percent annually. The historical P/S ratio is 8.5. What is the expected price of this stock one year from now? A. B. C. D. E. $72.25 $73.14 $75.55 $77.01 $77.67

Expected price = ($3,400,000 / 400,0000 (1 + .075) 8.5 = $77.669 = $77.67Jordan - Chapter 06 #90 Topic: EXPECTED PRICE Type: PROBLEMS

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91.

The current book value per share of Trenton Motors is $11.90 and the required return on the stock is 15 percent. The firm expects earnings per share of $1.40 next year with annual earnings growth of 4 percent. What is the current value of this stock? A. B. C. D. E. $8.40 $8.91 $16.07 $18.18 $20.30Jordan - Chapter 06 #91 Topic: RESIDUAL INCOME MODEL Type: PROBLEMS

92.

Marquis Jewelers has current earnings per share of $2.80 and an expected earnings growth rate of 4.5 percent. The required return on the stock is 11 percent and the current book value per share is $12.95. What is the current value of this stock? A. B. C. D. E. $29.07 $34.11 $36.05 $42.31 $49.00Jordan - Chapter 06 #92 Topic: RESIDUAL INCOME MODEL Type: PROBLEMS

93.

Amore Gifts has a book value per share of $6.42 and current earnings per share of $1.31. The required return on Amore stock is 16 percent and the expected earnings growth rate is 7 percent. What is one share of this stock worth today? A. B. C. D. E. $8.18 $9.15 $9.56 $10.02 $10.58Jordan - Chapter 06 #93 Topic: RESIDUAL INCOME MODEL Type: PROBLEMS

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ch6 SummaryCategory # of Questions Jordan - Chapter 06 93 Topic: ARITHMETIC AVERAGE DIVIDEND GROWTH RATE 3 Topic: ARITHMETIC AVERAGE GROWTH RATE 1 Topic: BETA 2 Topic: CASH FLOW 1 Topic: CLEAN SURPLUS RELATIONSHIP 1 Topic: CONSTANT DIVIDEND GROWTH RATE MODEL 5 Topic: CONSTANT GROWTH RATE MODEL 1 Topic: CONSTANT PERPETUAL GROWTH 2 Topic: CONSTANT PERPETUAL GROWTH MODEL 10 Topic: DIVIDEND DISCOUNT MODEL 2 Topic: EARNINGS YIELD 1 Topic: ECONOMIC VALUE ADDED 1 Topic: EXPECTED PRICE 6 Topic: FUNDAMENTAL ANALYSIS 2 Topic: GEOMETRIC AVERAGE DIVIDEND GROWTH RATE 5 Topic: GEOMETRIC AVERAGE GROWTH RATE 1 Topic: GROWTH STOCKS 1 Topic: LIQUIDATING DIVIDEND VALUATION 4 Topic: NET INCOME AND CASH FLOW 1 Topic: PAYOUT RATIO 1 Topic: PRICE AND DIVIDEND GROWTH RATE 1 Topic: PRICE AND REQUIRED RETURN 1 Topic: PRICE-BOOK RATIO 2 Topic: PRICE-EARNINGS RATIO 5 Topic: PRICE-SALES RATIO 1 Topic: RESIDUAL INCOME MODEL 5 Topic: RETAINED EARNINGS 1 Topic: RETENTION RATIO 6 Topic: RETURN ON EQUITY 2 Topic: SUSTAINABLE GROWTH RATE 7 Topic: TWO-STAGE DIVIDEND GROWTH MODEL 9 Topic: VALUE LINE 1 Topic: VALUE STOCKS 1 Type: CONCEPTS 25 Type: DEFINITIONS 16 Type: PROBLEMS 51

1