ch6

ch6Student: ___________________________________________________________________________

1. The valuation of a company's stock based on a review of the firm's financial statements in conjunctionwith other financial and economic data is called _____ analysis.

A. technicalB. conceptualC. predictionD. fundamentalE. discounted

2. The valuation of a stock based on the present value of the future income to be received from that stock isreferred to as the _____ model.

A. fundamentalB. constantC. basicD. compound dividendE. dividend discount

3. A dividend growth rate that can be supported by the firm's earnings is referred to as a _____ growthrate.

A. tangibleB. sustainableC. retentionD. durableE. proportional

4. The net profit of a firm which is held within the firm to support future growth is called _____ earnings.

A. capitalB. sustainableC. tangibleD. retainedE. supportive

5. The percentage of a firm's net income which is distributed to shareholders is called the _____ ratio.

A. payoutB. distributionC. retentionD. capitalE. equity

6. The percentage of a firm's net income which is reinvested in the firm is called the _____ ratio.


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7. The model used to value a stock which has a short-term growth rate that varies from its long-termgrowth rate is called the _____ dividend growth model.

A. flexibleB. increasingC. two-stageD. stepped upE. 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-earningsB. price-earningsC. value-earningsD. earnings profitabilityE. 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 profitB. internal cash flowC. internal growthD. reinvested growthE. residual income

12. The accounting relationship where the change in book value per share is equal to earnings per shareminus dividends per share is called the _____ relationship.

A. clean surplusB. retained earningsC. payoutD. price-payoutE. price-retention

13. Stocks with high price-earnings ratios are commonly referred to as _____ stocks.

A. incomeB. valueC. growthD. geometricE. 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-equityB. price-valueC. value-equityD. price-bookE. book-value

17. Maria wishes to purchase a stock and has decided to conduct some fundamental analysis on thecompany. 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 onlyB. I and IV onlyC. II, III, and IV onlyD. I, II, and IV onlyE. I, II, III, and IV

18. Based on the dividend discount model, the current value of a stock will _____ as the discount rate isincreased.

A. increaseB. either remain constant or increaseC. remain constantD. either decrease or remain constantE. 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 growthrate?

A. [(1 + D0) + (1 + D1) × (1 + DN)]N + 1 - 1B. [(1 + D0) × (1 + D1) × (1 + DN)]N - 1 - 1C. [D(N) / D(0)]1 / N - 1D. [D(N) / D(0)]N - 1E. [D(N) / D(0)]N / 1 - 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 incomeB. increase in the dividend payout ratioC. increase in the total equity of the firmD. increase in the retention ratioE. 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 offto a constant 4 percent annual rate of growth. The firm has paid dividends for the past four years andexpects to continue doing so. Which one of the following models is best suited to computing the currentvalue of this firm's stock?

A. erratic dividend growthB. constant perpetual growthC. constant dividend growthD. two-stage dividend growthE. 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 dividendB. sensitive to the dividend growth rateC. growth rate must be less than the discount rateD. simple to computeE. 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. increaseB. either increase or not affectC. not affectD. either decrease or not affectE. 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 onlyB. III onlyC. II and IV onlyD. I and III onlyE. 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 growthB. residual incomeC. dividend growthD. supernormal growthE. perpetual dividend growth

35. Which one of the following does NOT have the same meaning as the term "economic value added"?

A. abnormal earningsB. residual incomeC. value created by a firm in period tD. EPSt - Bt-1 × kE. 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. Whichone of the following ratios should Thelma consult to determine this information?

A. price-earningsB. price-bookC. price-salesD. price-cash flowE. 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 onlyB. II and III onlyC. I, III, and IV onlyD. II, III, and IV onlyE. I, II, III, and IV

40. The stock price is _____ the required return.

A. unaffected byB. minimally affected byC. independent ofD. dependent uponE. directly correlated to

41. The stock price is _____ the dividend growth rate.

A. unaffected byB. inversely related toC. directly affected byD. independent ofE. 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, thecompany will close its doors permanently. What is the current value of this stock if the appropriatediscount rate is 13 percent?

A. $21.22B. $23.64C. $25.14D. $26.03E. $29.65

43. Windover Machines, Inc., just announced that they will pay an annual dividend of $2.50 a share at theend of each of the next 2 years. At the end of year 3, the company expects to pay a $35 a shareliquidating dividend. After that, the company will cease operations. The discount rate on this stock is 14percent. What is the current stock price per share?

A. $17.73B. $19.09C. $23.63D. $27.74E. $31.62

44. Aloe, Inc., is downsizing and plans on completely closing 4 years from now. The firm's liquidation plancalls for annual dividends of $5, $3, $3, and $20 over the next 4 years, respectively. What is the currentvalue of this stock given a discount rate of 13 percent?

A. $21.12B. $23.33C. $23.87D. $25.16E. $27.43

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45. Brentwood Industries announced today that they are going out of business. As of today, no more regulardividends 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 paidtwo years from now at an estimated $13 a share. What is the value of this stock to you today if you feelthe appropriate discount rate is 16 percent?

A. $21.14B. $24.52C. $26.90D. $28.45E. $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 adiscount rate of 9 percent?

A. $5.76B. $6.09C. $6.24D. $6.70E. $7.44

47. TL Tools has stated that they will continue paying annual dividends for 6 more years and thendiscontinue all dividends. The required return on this stock is 11 percent and the dividend growth rate is2.5 percent. The next dividend is expected to be $1.30. What is the current value of TL Tools stock?

A. $4.77B. $5.81C. $6.10D. $6.82E. $8.31

48. Blackwater Tours pays an annual dividend which increases by 4 percent each year. The next dividend isexpected to be $1.36 a share. Blackwater recently announced that they will be ceasing all dividends after3 more years as they are planning a major expansion project and will need to conserve cash. What is thecurrent value of this stock if the discount rate is 15 percent?

A. $3.22B. $3.37C. $3.41D. $3.55E. $3.59

49. Hand-Krafted Furniture plans to pay 3 more annual dividends and then discontinue all dividendsthereafter. The last dividend paid was $.80 a share and dividends increase by 2 percent annually. Thediscount rate is 9 percent. What is the current value of this stock?

A. $1.91B. $1.99C. $2.04D. $2.10E. $2.40

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50. Allegheny Woods is slowly losing its market share. As a result, the company is decreasing its annualdividend by 10 percent each year and will cease all dividends after 4 more payments. The next dividendis expected to be $.90 a share. What is the current value of this stock at a discount rate of 15 percent?

A. $1.97B. $2.13C. $2.25D. $2.34E. $2.46

51. The Whirlwind Co. just paid an annual dividend of $2.10 a share. The firm expects to pay dividendsforever and to increase the dividend by 2.5 percent annually. What is the current value of this stock if therequired return is 11 percent?

A. $19.09B. $19.57C. $24.70D. $25.32E. $25.95

52. Catch Up, Inc., is planning on paying an annual dividend of $1.80 per share next year. The company hasa policy of increasing the dividend by 3 percent annually. As far as they know, Catch Up will paydividends for the foreseeable future. What is the current value of this stock at a discount rate of 14percent?

A. $12.86B. $13.24C. $16.36D. $16.85E. $17.36

53. You own a firm which has relatively steady growth. As a result, you have adopted a policy of increasingthe annual dividend by 3.5 percent each year. Next year's dividend will be $1.40. The discount rate is 10percent. What is the present value of your stock?

A. $14.49B. $15.00C. $20.81D. $21.54E. $22.29

54. Margo Enterprises stock is valued at $17.65 a share. The firm pays annual dividends and increases thosedividends by 4 percent each year. Next year's dividend will be $1.50 per share. What is the requiredreturn on this stock?

A. 12.02 percentB. 12.50 percentC. 12.67 percentD. 12.82 percentE. 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 aconstant rate. The last dividend paid was $1.24. The required return is 14 percent. What is the dividendgrowth rate?


56. A stock sells for $12.95 a share and has a required return of 13.5 percent. Dividends are paid annuallyand increase at a constant 3 percent each year. What is the amount of the last dividend paid?

A. $1.22B. $1.28C. $1.32D. $1.36E. $1.40

57. Penny's Shoes pays annual dividends and increases those dividends by 3.5 percent each year. The stockis currently valued at $24.40 a share and has a required return of 13.5 percent. You own 300 shares ofthis stock. What is the total amount of dividend income you should expect to receive next year?

A. $707B. $732C. $741D. $758E. $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. Youown 600 shares of this stock. What was the total amount of the last dividend you received?

A. $853B. $859C. $864D. $870E. $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?


60. Your firm has paid annual dividends of $1.20, $1.34, $1.35, $1.40, $1.44, and $1.50 per share over thepast 6 years, respectively. What is the geometric average growth rate for these dividends?


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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?


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 5years, respectively. What is the geometric average dividend growth rate for this period?


63. Arthur's Manufactured Homes pays annual dividends. For the past six years, the firm has paid dividendsof $1.90, $1.95, $2.10, $2.15, $2.20, and $2.25, respectively. What is the geometric average dividendgrowth rate for this time period?


64. Over the past 4 years, your firm has paid annual dividends of $1.90, $2.10, $2.20, and $2.35. What is thearithmetic average dividend growth rate?


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?


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?


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67. J&L Pools has net income of $248,000. The firm has 500,000 shares of common stock outstanding. Thedividend that is being paid for this year is $.1984 per share. What is the retention ratio?

A. .50B. .55C. .60D. .65E. .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. .54B. .55C. .67D. .70E. .77

69. Modern Designs has net income of $310,000. The firm has decided to pay $180,000 of that income outto the shareholders. What is the firm's retention ratio?

A. .40B. .42C. .45D. .47E. .50

70. Plastic Toys, Inc., has a net income of $236,000. The firm has $1.4 million in assets and $300,000 inliabilities. What is the return on equity?


71. Dead Wood Planners has earnings per share of $1.36. The firm has $980,000 in equity and 125,000shares of stock outstanding. What is the return on equity?


72. The West Wind Company has earnings per share of $2.20 and dividends per share of $1.21. The totalequity of the firm is $970,000. There are 70,000 shares of stock outstanding. What is the sustainable rateof growth?


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73. Naples Vacation Rentals has 60,000 shares of stock outstanding at a market price of $29.28 per shareand 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?


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?


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?


76. Dover Mills just paid an annual dividend of $.40 a share. Management estimates the dividend willincrease by 15 percent a year for the next three years. After that, the dividend growth rate is estimated at3.5 percent. The required rate of return is 12 percent. What is the value of this stock today?

A. $6.54B. $7.03C. $7.78D. $8.03E. $8.54

77. The common stock of Red Rover Feed Mills has a required return of 12 percent. The latest press releasestated that last year's dividend was $1.20 per share and that future dividends will increase by 10 percentfor the following 3 years. After that, the dividend growth rate will be 2.5 percent indefinitely. What isone share of this stock worth to you today?

A. $13.42B. $14.14C. $15.26D. $15.74E. $16.03

78. Hill's Country Fresh Eggs is a relatively young firm which just paid their first annual dividend of $.40 ashare. Management projects dividend increases of 15 percent per year for five years followed by aconstant growth rate of 3 percent annually. What is this stock worth today if the applicable discount rateis 11 percent?

A. $8.37B. $9.08C. $9.42D. $11.76E. $12.45

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79. The last dividend paid by Lynwood Properties was an annual dividend of $1.20 a share. Dividends forthe following 4 years will be increased at an annual rate of 12 percent. After that, dividends are expectedto increase by 2 percent each year. The discount rate is 14 percent. What is the current value of thisstock?

A. $10.40B. $12.78C. $13.33D. $14.10E. $15.55

80. Sallie Mae Clothing is in the process of selling its peripheral businesses and returning to a pure clothingstore. In conjunction with this reorganization, the dividend will be decreased by 20 percent in each of thenext 2 years. After that, the dividend will resume its historical pattern of 3 percent annual increases. Therequired return on this stock is 10 percent and the last dividend paid was $3 a share. What is one share ofthis stock worth today?

A. $25.08B. $27.12C. $28.16D. $28.68E. $29.72

81. Precision Machining's last annual dividend was $.80 a share. The firm will increase the dividend by 8percent for the next 2 years and thereafter increase the dividend by 3 percent annually. What is this stockworth today if the required return is 9 percent?

A. $14.52B. $15.06C. $15.30D. $16.97E. $17.08

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

A. 16.21B. 17.37C. 19.09D. 20.48E. 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'sprice-earnings ratio?

A. 14.72B. 15.11C. 16.48D. 17.65E. 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. Giventhis information, what should be the current stock price?

A. $12.75B. $15.68C. $18.85D. $19.19E. $22.07

85. Ameth Growers has historically had a P/E ratio of 21.4. This ratio is considered a good estimate of thefuture ratio. The firm currently has EPS of $2.34. These earnings are expected to increase by 3.4 percentnext year. What is the expected price of this stock one year from now?

A. $45.54B. $48.43C. $50.25D. $51.78E. $53.79

86. Historically, JT Enterprises has a P/E ratio of 18.4. The firm has current net income of $83,500 with150,000 shares of stock outstanding. The EPS growth rate is 12.6 percent. What is the expected price ofthis stock one year from now?

A. $11.53B. $13.14C. $13.82D. $15.38E. $15.62

87. Wayne's Water Works has an historical P/CF ratio of 20.3. The current CFPS is $1.65 and the projectedCFPS growth rate is 8.6 percent. The current EPS is $.58. What is the expected price of this stock oneyear from now?

A. $34.79B. $36.38C. $37.91D. $39.27E. $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 thisstock one year from now?

A. $39.33B. $42.91C. $47.69D. $50.04E. $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 oneyear from now?

A. $30.89B. $40.15C. $48.62D. $51.18E. $62.09

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90. Currently, Major Industries of Ohio has sales of $3.4 million, net profit of $268 thousand, and 400thousand shares of stock outstanding. The sales and net profit are each expected to grow by 7.5 percentannually. The historical P/S ratio is 8.5. What is the expected price of this stock one year from now?

A. $72.25B. $73.14C. $75.55D. $77.01E. $77.67

91. The current book value per share of Trenton Motors is $11.90 and the required return on the stock is 15percent. The firm expects earnings per share of $1.40 next year with annual earnings growth of 4percent. What is the current value of this stock?

A. $8.40B. $8.91C. $16.07D. $18.18E. $20.30

92. Marquis Jewelers has current earnings per share of $2.80 and an expected earnings growth rate of 4.5percent. 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. $29.07B. $34.11C. $36.05D. $42.31E. $49.00

93. Amore Gifts has a book value per share of $6.42 and current earnings per share of $1.31. The requiredreturn on Amore stock is 16 percent and the expected earnings growth rate is 7 percent. What is oneshare of this stock worth today?

A. $8.18B. $9.15C. $9.56D. $10.02E. $10.58

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ch6 Key

1. The valuation of a company's stock based on a review of the firm's financial statements inconjunction with other financial and economic data is called _____ analysis.

A. technicalB. conceptualC. predictionD. fundamentalE. discounted

Jordan - Chapter 06 #1Topic: FUNDAMENTAL ANALYSIS

Type: DEFINITIONS

2. The valuation of a stock based on the present value of the future income to be received from thatstock is referred to as the _____ model.

A. fundamentalB. constantC. basicD. compound dividendE. dividend discount

Jordan - Chapter 06 #2Topic: DIVIDEND DISCOUNT MODEL

Type: DEFINITIONS

3. A dividend growth rate that can be supported by the firm's earnings is referred to as a _____ growthrate.

A. tangibleB. sustainableC. retentionD. durableE. proportional

Jordan - Chapter 06 #3Topic: 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. capitalB. sustainableC. tangibleD. retainedE. supportive

Jordan - Chapter 06 #4Topic: RETAINED EARNINGS

Type: DEFINITIONS

1

5. The percentage of a firm's net income which is distributed to shareholders is called the _____ ratio.


Jordan - Chapter 06 #5Topic: PAYOUT RATIO

Type: DEFINITIONS

6. The percentage of a firm's net income which is reinvested in the firm is called the _____ ratio.


Jordan - Chapter 06 #6Topic: RETENTION RATIO

Type: DEFINITIONS

7. The model used to value a stock which has a short-term growth rate that varies from its long-termgrowth rate is called the _____ dividend growth model.

A. flexibleB. increasingC. two-stageD. stepped upE. geometric

Jordan - Chapter 06 #7Topic: TWO-STAGE DIVIDEND GROWTH MODEL

Type: DEFINITIONS

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.

Jordan - Chapter 06 #8Topic: BETA

Type: DEFINITIONS

9. The market value of a share of stock divided by the net income per share is called the _____ ratio.

A. growth-earningsB. price-earningsC. value-earningsD. earnings profitabilityE. market profitability

Jordan - Chapter 06 #9Topic: 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. profit margin.B. profit yield.C. market yield.D. earnings yield.E. income ratio.

Jordan - Chapter 06 #10Topic: EARNINGS YIELD

Type: DEFINITIONS

11. A method used to value the stock of a company which does not pay dividends is the _____ model.

A. net profitB. internal cash flowC. internal growthD. reinvested growthE. residual income

Jordan - Chapter 06 #11Topic: RESIDUAL INCOME MODEL

Type: DEFINITIONS

12. The accounting relationship where the change in book value per share is equal to earnings per shareminus dividends per share is called the _____ relationship.

A. clean surplusB. retained earningsC. payoutD. price-payoutE. price-retention

Jordan - Chapter 06 #12Topic: CLEAN SURPLUS RELATIONSHIP

Type: DEFINITIONS

13. Stocks with high price-earnings ratios are commonly referred to as _____ stocks.

A. incomeB. valueC. growthD. geometricE. low beta

Jordan - Chapter 06 #13Topic: GROWTH STOCKS

Type: DEFINITIONS

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.

Jordan - Chapter 06 #14Topic: 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. 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.

Jordan - Chapter 06 #15Topic: CASH FLOWType: DEFINITIONS

16. The market value per share of common stock divided by the firm's equity per share is called the_____ ratio.

A. market-equityB. price-valueC. value-equityD. price-bookE. book-value

Jordan - Chapter 06 #16Topic: PRICE-BOOK RATIO

Type: DEFINITIONS

17. Maria wishes to purchase a stock and has decided to conduct some fundamental analysis on thecompany. 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 onlyB. I and IV onlyC. II, III, and IV onlyD. I, II, and IV onlyE. I, II, III, and IV

Jordan - Chapter 06 #17Topic: FUNDAMENTAL ANALYSIS

Type: CONCEPTS

18. Based on the dividend discount model, the current value of a stock will _____ as the discount rate isincreased.

A. increaseB. either remain constant or increaseC. remain constantD. either decrease or remain constantE. decrease

Jordan - Chapter 06 #18Topic: DIVIDEND DISCOUNT MODEL

Type: CONCEPTS

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.

Jordan - Chapter 06 #19Topic: CONSTANT GROWTH RATE MODEL

Type: CONCEPTS

4

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.

Jordan - Chapter 06 #20Topic: 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.


Type: CONCEPTS

22. Which one of the following is a correct formula for computing a geometric average dividend growthrate?

A. [(1 + D0) + (1 + D1) × (1 + DN)]N + 1 - 1B. [(1 + D0) × (1 + D1) × (1 + DN)]N - 1 - 1C. [D(N) / D(0)]1 / N - 1D. [D(N) / D(0)]N - 1E. [D(N) / D(0)]N / 1 - 1

Jordan - Chapter 06 #22Topic: GEOMETRIC AVERAGE GROWTH RATE

Type: CONCEPTS

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.

Jordan - Chapter 06 #23Topic: ARITHMETIC AVERAGE GROWTH RATE

Type: CONCEPTS

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.


Type: CONCEPTS

5

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.


Type: CONCEPTS

26. Which one of the following will increase the sustainable rate of growth?

A. decrease in net incomeB. increase in the dividend payout ratioC. increase in the total equity of the firmD. increase in the retention ratioE. decrease in earnings per share


Type: CONCEPTS

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.


Type: CONCEPTS

28. Future Tech Products, Inc., expects to grow at 15 percent a year for the next five years and then taperoff to a constant 4 percent annual rate of growth. The firm has paid dividends for the past four yearsand expects to continue doing so. Which one of the following models is best suited to computing thecurrent value of this firm's stock?

A. erratic dividend growthB. constant perpetual growthC. constant dividend growthD. two-stage dividend growthE. dividend discount


Type: CONCEPTS

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.


Type: CONCEPTS

6

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.

Jordan - Chapter 06 #30Topic: BETA

Type: CONCEPTS

31. Which one of the following is NOT a disadvantage related to the constant perpetual growth model?

A. requires firms to pay a dividendB. sensitive to the dividend growth rateC. growth rate must be less than the discount rateD. simple to computeE. discount rate difficult to predict

Jordan - Chapter 06 #31Topic: 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. increaseB. either increase or not affectC. not affectD. either decrease or not affectE. decrease

Jordan - Chapter 06 #32Topic: 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. I onlyB. III onlyC. II and IV onlyD. I and III onlyE. I, III, and IV only


Type: CONCEPTS

34. Which one of the following models can be used to value the stock of a non-dividend paying firm?

A. two-stage growthB. residual incomeC. dividend growthD. supernormal growthE. perpetual dividend growth


Type: CONCEPTS

7

35. Which one of the following does NOT have the same meaning as the term "economic value added"?

A. abnormal earningsB. residual incomeC. value created by a firm in period tD. EPSt - Bt-1 × kE. excess of required earnings over actual earnings

Jordan - Chapter 06 #35Topic: ECONOMIC VALUE ADDED

Type: CONCEPTS

36. Which one of the following statements is correct concerning the net income and cash flow of afirm?

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 #36Topic: NET INCOME AND CASH FLOW

Type: CONCEPTS

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.

Jordan - Chapter 06 #37Topic: 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. price-earningsB. price-bookC. price-salesD. price-cash flowE. price-assets

Jordan - Chapter 06 #38Topic: 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. I and IV onlyB. II and III onlyC. I, III, and IV onlyD. II, III, and IV onlyE. I, II, III, and IV

Jordan - Chapter 06 #39Topic: VALUE LINE

Type: CONCEPTS

8

40. The stock price is _____ the required return.

A. unaffected byB. minimally affected byC. independent ofD. dependent uponE. directly correlated to

Jordan - Chapter 06 #40Topic: PRICE AND REQUIRED RETURN

Type: CONCEPTS

41. The stock price is _____ the dividend growth rate.

A. unaffected byB. inversely related toC. directly affected byD. independent ofE. unrelated to

Jordan - Chapter 06 #41Topic: 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, thecompany will close its doors permanently. What is the current value of this stock if the appropriatediscount rate is 13 percent?

A. $21.22B. $23.64C. $25.14D. $26.03E. $29.65

Jordan - Chapter 06 #42Topic: LIQUIDATING DIVIDEND VALUATION

Type: PROBLEMS

43. Windover Machines, Inc., just announced that they will pay an annual dividend of $2.50 a share atthe end of each of the next 2 years. At the end of year 3, the company expects to pay a $35 a shareliquidating dividend. After that, the company will cease operations. The discount rate on this stock is14 percent. What is the current stock price per share?

A. $17.73B. $19.09C. $23.63D. $27.74E. $31.62


Type: PROBLEMS

9

44. Aloe, Inc., is downsizing and plans on completely closing 4 years from now. The firm's liquidationplan calls for annual dividends of $5, $3, $3, and $20 over the next 4 years, respectively. What is thecurrent value of this stock given a discount rate of 13 percent?

A. $21.12B. $23.33C. $23.87D. $25.16E. $27.43


Type: PROBLEMS

45. Brentwood Industries announced today that they are going out of business. As of today, no moreregular dividends will be paid. The intention of the firm is to pay two liquidating dividends. The firstdividend, will be paid one year from now in the amount of $20 a share. The second and finaldividend will be paid two years from now at an estimated $13 a share. What is the value of this stockto you today if you feel the appropriate discount rate is 16 percent?

A. $21.14B. $24.52C. $26.90D. $28.45E. $31.21


Type: PROBLEMS

46. East River Entertainment plans to pay annual dividends for five more years. The last dividend paidwas $1.40 a share. Dividends are increased by 2 percent each year. What is the current value of thisstock at a discount rate of 9 percent?

A. $5.76B. $6.09C. $6.24D. $6.70E. $7.44

Jordan - Chapter 06 #46Topic: CONSTANT DIVIDEND GROWTH RATE MODEL

47. TL Tools has stated that they will continue paying annual dividends for 6 more years and thendiscontinue all dividends. The required return on this stock is 11 percent and the dividend growth rateis 2.5 percent. The next dividend is expected to be $1.30. What is the current value of TL Toolsstock?

A. $4.77B. $5.81C. $6.10D. $6.82E. $8.31


Type: PROBLEMS

10

48. Blackwater Tours pays an annual dividend which increases by 4 percent each year. The next dividendis expected to be $1.36 a share. Blackwater recently announced that they will be ceasing all dividendsafter 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. $3.22B. $3.37C. $3.41D. $3.55E. $3.59


Type: PROBLEMS

49. Hand-Krafted Furniture plans to pay 3 more annual dividends and then discontinue all dividendsthereafter. The last dividend paid was $.80 a share and dividends increase by 2 percent annually. Thediscount rate is 9 percent. What is the current value of this stock?

A. $1.91B. $1.99C. $2.04D. $2.10E. $2.40


Type: PROBLEMS

50. Allegheny Woods is slowly losing its market share. As a result, the company is decreasing its annualdividend by 10 percent each year and will cease all dividends after 4 more payments. The nextdividend is expected to be $.90 a share. What is the current value of this stock at a discount rate of 15percent?

A. $1.97B. $2.13C. $2.25D. $2.34E. $2.46


Type: PROBLEMS

51. The Whirlwind Co. just paid an annual dividend of $2.10 a share. The firm expects to pay dividendsforever and to increase the dividend by 2.5 percent annually. What is the current value of this stock ifthe required return is 11 percent?

A. $19.09B. $19.57C. $24.70D. $25.32E. $25.95


Type: PROBLEMS

11

52. Catch Up, Inc., is planning on paying an annual dividend of $1.80 per share next year. The companyhas a policy of increasing the dividend by 3 percent annually. As far as they know, Catch Up will paydividends for the foreseeable future. What is the current value of this stock at a discount rate of 14percent?

A. $12.86B. $13.24C. $16.36D. $16.85E. $17.36


Type: PROBLEMS

53. You own a firm which has relatively steady growth. As a result, you have adopted a policy ofincreasing the annual dividend by 3.5 percent each year. Next year's dividend will be $1.40. Thediscount rate is 10 percent. What is the present value of your stock?

A. $14.49B. $15.00C. $20.81D. $21.54E. $22.29


Type: PROBLEMS

54. Margo Enterprises stock is valued at $17.65 a share. The firm pays annual dividends and increasesthose dividends by 4 percent each year. Next year's dividend will be $1.50 per share. What is therequired return on this stock?



Type: PROBLEMS

55. Wilson's Meats common stock is valued at $11.05. The firm pays annual dividends which increase ata constant rate. The last dividend paid was $1.24. The required return is 14 percent. What is thedividend growth rate?



Type: PROBLEMS

12

56. A stock sells for $12.95 a share and has a required return of 13.5 percent. Dividends are paidannually and increase at a constant 3 percent each year. What is the amount of the last dividendpaid?

A. $1.22B. $1.28C. $1.32D. $1.36E. $1.40


Type: PROBLEMS

57. Penny's Shoes pays annual dividends and increases those dividends by 3.5 percent each year. Thestock is currently valued at $24.40 a share and has a required return of 13.5 percent. You own 300shares of this stock. What is the total amount of dividend income you should expect to receive nextyear?

A. $707B. $732C. $741D. $758E. $770


Type: PROBLEMS

58. The common stock of Lester's Office Supply has a required return of 12 percent and a current valueof $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. $853B. $859C. $864D. $870E. $887


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 5years, respectively. What is the geometric average dividend growth rate?


Jordan - Chapter 06 #59Topic: 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 overthe past 6 years, respectively. What is the geometric average growth rate for these dividends?



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?



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 thepast 5 years, respectively. What is the geometric average dividend growth rate for this period?



Type: PROBLEMS

63. Arthur's Manufactured Homes pays annual dividends. For the past six years, the firm has paiddividends of $1.90, $1.95, $2.10, $2.15, $2.20, and $2.25, respectively. What is the geometricaverage dividend growth rate for this time period?



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 isthe arithmetic average dividend growth rate?


Annual growth rate year 1 to 2: ($2.10 - $1.90) / $1.90 = .105263

Jordan - Chapter 06 #64Topic: 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 5years, respectively. What is the arithmetic average growth rate for these dividends?


Annual growth rate year 1 to 2: ($1.75 - $1.50) / $1.50 = .166667


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?


Annual growth rate year 1 to 2: ($.57 - $.50) / $.50 = .14000


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. .50B. .55C. .60D. .65E. .70


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. .54B. .55C. .67D. .70E. .77

Retention ratio = 1 - .30 = .70


Type: PROBLEMS

69. Modern Designs has net income of $310,000. The firm has decided to pay $180,000 of that incomeout to the shareholders. What is the firm's retention ratio?

A. .40B. .42C. .45D. .47E. .50

Retention ratio = ($310,000 - $180,000) / $310,000 = .419 = .42


Type: PROBLEMS

70. Plastic Toys, Inc., has a net income of $236,000. The firm has $1.4 million in assets and $300,000 inliabilities. What is the return on equity?


Return on equity = $236,000 / ($1,400,000 - $300,000) = .214545 = 21.45 percent

Jordan - Chapter 06 #70Topic: 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 125,000shares of stock outstanding. What is the return on equity?


Return on equity = ($1.36 × 125,000) / $980,000 = .17347 = 17.35 percent

Jordan - Chapter 06 #71Topic: 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 totalequity of the firm is $970,000. There are 70,000 shares of stock outstanding. What is the sustainablerate of growth?


Sustainable growth rate = [($2.20 × 70,000) / $970,000] × (1 - ($1.21 / $2.20) = .158763 × .45 =.07144 = 7.14 percent


Type: PROBLEMS

73. Naples Vacation Rentals has 60,000 shares of stock outstanding at a market price of $29.28 per shareand a book value of $17.27 a share. The firm has earnings per share of $2.44, a dividend payout ratioof .35, and a P/E ratio of 12. What is the firm's sustainable rate of growth?


Sustainable growth rate = [(60,000 × $2.44) / (60,000 × $17.27)] × (1 - .35) = [$146,400 /$1,036,200] × .65 = .09184 = 9.18 percent


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?



Type: PROBLEMS

75. John Wilde Industries has a retention ratio of .75, dividends of $46,000, and total equity of $2.9million. What is the firm's sustainable rate of growth?


Sustainable growth rate = {[($46,000 / (1 - .75)] / $2,900,000} × .75 = .047586 = 4.76 percent


Type: PROBLEMS

76. Dover Mills just paid an annual dividend of $.40 a share. Management estimates the dividend willincrease by 15 percent a year for the next three years. After that, the dividend growth rate is estimatedat 3.5 percent. The required rate of return is 12 percent. What is the value of this stock today?

A. $6.54B. $7.03C. $7.78D. $8.03E. $8.54


Type: PROBLEMS

77. The common stock of Red Rover Feed Mills has a required return of 12 percent. The latest pressrelease stated that last year's dividend was $1.20 per share and that future dividends will increase by10 percent for the following 3 years. After that, the dividend growth rate will be 2.5 percentindefinitely. What is one share of this stock worth to you today?

A. $13.42B. $14.14C. $15.26D. $15.74E. $16.03


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 followedby a constant growth rate of 3 percent annually. What is this stock worth today if the applicablediscount rate is 11 percent?

A. $8.37B. $9.08C. $9.42D. $11.76E. $12.45


Type: PROBLEMS

79. The last dividend paid by Lynwood Properties was an annual dividend of $1.20 a share. Dividendsfor the following 4 years will be increased at an annual rate of 12 percent. After that, dividends areexpected to increase by 2 percent each year. The discount rate is 14 percent. What is the current valueof this stock?

A. $10.40B. $12.78C. $13.33D. $14.10E. $15.55


Type: PROBLEMS

80. Sallie Mae Clothing is in the process of selling its peripheral businesses and returning to a pureclothing store. In conjunction with this reorganization, the dividend will be decreased by 20 percentin each of the next 2 years. After that, the dividend will resume its historical pattern of 3 percentannual increases. The required return on this stock is 10 percent and the last dividend paid was $3 ashare. What is one share of this stock worth today?

A. $25.08B. $27.12C. $28.16D. $28.68E. $29.72


Type: PROBLEMS

81. Precision Machining's last annual dividend was $.80 a share. The firm will increase the dividend by 8percent for the next 2 years and thereafter increase the dividend by 3 percent annually. What is thisstock worth today if the required return is 9 percent?

A. $14.52B. $15.06C. $15.30D. $16.97E. $17.08


Type: PROBLEMS

19

82. Wilson's Leather Goods has net income of $41,600 and total equity of $381,000. The firm was60,000 shares of stock outstanding at a price per share of $14.20. What is the firm's P/E ratio?

A. 16.21B. 17.37C. 19.09D. 20.48E. 21.94

P/E = $14.20 / ($41,600 / 60,000) = 20.48


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 thefirm's price-earnings ratio?

A. 14.72B. 15.11C. 16.48D. 17.65E. 19.46

P/E = {[($143,000 - $54,000) / 50,000] × 4.3} / ($26,000 / 50,000) = $7.654 / $.52 = 14.72


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. $12.75B. $15.68C. $18.85D. $19.19E. $22.07

V(0) = ($152,000 / 125,000) × 15.5 = $18.848 = $18.85


Type: PROBLEMS

20

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

A. $45.54B. $48.43C. $50.25D. $51.78E. $53.79

Expected price = $2.34 × (1 + .034) × 21.4 = $51.778 = $51.78

Jordan - Chapter 06 #85Topic: 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 with150,000 shares of stock outstanding. The EPS growth rate is 12.6 percent. What is the expected priceof this stock one year from now?

A. $11.53B. $13.14C. $13.82D. $15.38E. $15.62

Expected price = ($83,500 / 150,000 × (1 + .126) × 18.4 = $11.533 = $11.53


Type: PROBLEMS

87. Wayne's Water Works has an historical P/CF ratio of 20.3. The current CFPS is $1.65 and theprojected CFPS growth rate is 8.6 percent. The current EPS is $.58. What is the expected price of thisstock one year from now?

A. $34.79B. $36.38C. $37.91D. $39.27E. $40.42

Expected price = $1.65 × (1 + .086) × 20.3 = $36.376 = $36.38


Type: PROBLEMS

21

88. Mark's Men's Wear has current SPS of $6.18. SPS are expected to increase at an annual rate of 9percent. The historical P/E ratio is 12.1 and the historical P/S ratio is 7.08. What is the expected priceof this stock one year from now?

A. $39.33B. $42.91C. $47.69D. $50.04E. $52.68

Expected price = $6.18 × (1 + .09) × 7.08 = $47.692 = $47.69


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 ofthis stock one year from now?

A. $30.89B. $40.15C. $48.62D. $51.18E. $62.09

Expected price = $1.42 × (1 + .14) × 24.8 = $40.146 = $40.15


Type: PROBLEMS

90. Currently, Major Industries of Ohio has sales of $3.4 million, net profit of $268 thousand, and 400thousand shares of stock outstanding. The sales and net profit are each expected to grow by 7.5percent annually. The historical P/S ratio is 8.5. What is the expected price of this stock one yearfrom now?

A. $72.25B. $73.14C. $75.55D. $77.01E. $77.67

Expected price = ($3,400,000 / 400,0000 × (1 + .075) × 8.5 = $77.669 = $77.67


Type: PROBLEMS

22

91. The current book value per share of Trenton Motors is $11.90 and the required return on the stock is15 percent. The firm expects earnings per share of $1.40 next year with annual earnings growth of 4percent. What is the current value of this stock?

A. $8.40B. $8.91C. $16.07D. $18.18E. $20.30


Type: PROBLEMS

92. Marquis Jewelers has current earnings per share of $2.80 and an expected earnings growth rate of 4.5percent. 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. $29.07B. $34.11C. $36.05D. $42.31E. $49.00


Type: PROBLEMS

93. Amore Gifts has a book value per share of $6.42 and current earnings per share of $1.31. Therequired 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. $8.18B. $9.15C. $9.56D. $10.02E. $10.58


Type: PROBLEMS

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ch6 Summary

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

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dividend growth model

constant growth rate

constant rate

shortterm growth rate

longterm growth rate

internal growth

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reinvested growth