Chapter 006 - Valuing Stocks

7-1

9
FALSE
13. If the market is efficient, stock prices should only be expected to react to new information
that is released.
TRUE
14. The intent of technical analysis is to discover patterns in past stock prices.
TRUE
15. Technical analysts have no effect upon the efficiency of the stock market.
FALSE
16. Technical analysts would be more likely than other investors to index their portfolios.
FALSE

17. Market efficiency implies that security prices impound new information quickly.
TRUE
18. One of the quickest ways to profit in the stock market is to own stocks that split.
FALSE
19. If security prices follow a random walk, then on any particular day, the odds are that an
increase or decrease in price is equally likely.
TRUE
20. Fundamental analysts attempt to get rich by identifying patterns in stock prices.
FALSE

21. Strong-form market efficiency implies that one could earn above average returns by
examining the history of a firm's stock price.
FALSE
22. Market price is not the same as book value or liquidation value.
TRUE
23. Market value, unlike book value and liquidation value, treats the firm as a going concern.
TRUE
Chapter 006 - Valuing Stocks
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24. The dividend yield of a stock is much like the current yield of a bond. Both ignore
prospective capital gains or losses.
TRUE

25. At each point in time all securities of the same risk are priced to offer the same expected rate
of return.
TRUE
26. The dividend discount model states that today's stock price equals the present value of all
expected future dividends.
TRUE


AACSB: Communication Abilities
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 07-02 Calculate the present value of a stock given forecasts of future dividends and future stock price.
27. The dividend discount model indicate that the value of a stock is the present value of the
dividends it will pay over the investor's horizon plus the present value of the expected stock
price at the end of that horizon.
TRUE
Chapter 006 - Valuing Stocks
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28.
33. If stock prices follow a random walk, which of the following statement(s) is(are) correct?
A. Successive stock price changes are not related.
B. The history of
A. 2.5%
B. 4.0%
C. 10.0%
D
37. If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's
current price?
A. $4.50
B. $18.00
C. $22.22
D. $40.50
P/E = 13.5X
Then P = 13.5 x $3
Price = $40.50
38. How many round lots were traded in a specific stock on a day in which 467,800 shares
changed hands?
A. 467.8 round lots
B. 4,678 round lots
C. 467,800 round lots
D. Price must be known to determine round lots.
39. The book value of a firm's equity is determined by:
A. multiplying share price by shares outstanding.
B. multiplying share price at issue by shares outstanding.
C. the difference between book values of assets and liabilities.
D. the difference between market values of assets and liabilities.
Chapter 006 - Valuing Stocks
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40. What is the current price of a share of stock for a firm with $5 million in balance-sheet
equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4?
A. $2.50
B. $10.00
C. $20.00
D. Valuable off-balance sheet assets.
44. Firms with valuable intangible assets are more likely to show a(n):
A. excess of book value over market value of equity.
B
46. The main purpose of a market-value balance sheet is to:
A. show an inflated value of the firm.
B.
Expected return =

Expected return = expected dividend yield + expected capital appreciation.
16% = expected dividend yield + 10%
6% = expected dividend yield
$50 share price x 6% = $3 expected dividend payment
49. The expected return on a common stock is composed of:
A. dividend yield.
B. capital appreciation.
C. both dividend yield and capital appreciation.
D. capital appreciation minus the dividend yield.
50. Firms having a higher expected return have a higher:
A. level of expected risk.
B. dividend yield.
C. market value of equity.
D. degree of certainty concerning their returns.
51. How much should you pay for a share of stock that offers a constant growth rate of 10%,
requires a 16% rate of return, and is expected to sell for $50 one year from now?
A. $42.00
B. $45.00
C. $45.45
D. $47.00
Chapter 006 - Valuing Stocks
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The easiest way to solve this problem is to realize:
Expected return = expected dividend yield
+ expected capital appreciation
Then:
.16 = .06 + expected capital appreciation
.10 = expected capital appreciation
And
P
1
= 110% of P
o
$50.00 = 1.1P
o
$45.45 = P
o
52. According to the dividend discount model, the current value of a stock is equal to the:
A. present value of all expected future dividends.
B. sum of all future expected dividends.
C. next expected dividend, discounted to the present.
D. discounted value of all dividends growing at a constant rate.
53. How is it possible to ignore cash dividends that occur far into the future when using a
dividend discount model? Those dividends:
A. will be paid to a different investor.
B. will not be paid by the firm.
C. have an insignificant present value.
D. ignore the tax consequences of future dividends.

then, D
4
= 1.25 x (1.06)
3
= $1.49