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Exam 20: An Introduction to Security Valuation

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Question 41

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In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.

A) True
B) False

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Question 42

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If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.

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B) False

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Question 43

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The growth rate of dividends and profit margin are the main determinants of the P/E ratio.

The importance of an industry's performance on an individual stock's performance varies across industries.

A relative valuation technique is appropriate to consider when you have a good set of comparable entities.

Exhibit 20-7 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%. -Refer to Exhibit 20-7. What is the future price of the stock in year 3?

Exhibit 20-5 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4% annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7% for the next three years and the stock will then reach $25.00 per share. -Refer to Exhibit 20-5. How much should you be willing to pay for the stock if you feel that the 7% growth rate can be maintained indefinitely and you require a 16% return?

Growth rates of the (1) labour force, (2) average number of hours worked and (3) labour productivity are the main determinants of a foreign country's

The most difficult part of valuing a bond is determining the required rate of return on this investment.

Exhibit 20-8 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next two years. The corporation just paid a $2 dividend and the next dividend will be paid one year from now. After two years of rapid growth dividends are expected to grow at a constant rate of 9% forever. -Refer to Exhibit 20-8. If the required return is 14%, what is the value of Fast Grow Corporation common stock today?

Micro Corp. just paid dividends of $2 per share. Assume that over the next three years dividends will grow as follows, 5% next year, 15% in year two, and 25% in year 3. After that growth is expected to level off to a constant growth rate of 10% per year. The required rate of return is 15%. Calculate the intrinsic value using the multistage model.

According to the dividend growth model, if a company were to declare that it would never pay dividends, its value would be

Exhibit 20-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) A major retailer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 8 years remaining until maturity. The bonds were issued with a 6.5% coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 4.25%. -Refer to Exhibit 20-1. What is the current value of these securities?

Exhibit 20-7 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%. -Refer to Exhibit 20-7. What is the present value today of dividends for years 1 to 3?

Exhibit 20-6 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%. -Refer to Exhibit 20-6. What is the future price of the stock in year 5?

The general economic influences would include inflation, political upheavals, monetary policy, and fiscal policy initiatives.

Discounted cash flow techniques for equity valuation may use one of the following: 1) dividends, 2) Free cash flow or 3) coupons.

Which of the following statements regarding fundamental and relative valuation techniques is true?