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fundamentals investments valuation

Questions and Answers of Fundamentals Investments Valuation

14. Price Ratios (LO4, CFA5) Two similar companies acquire substantial new production facilities, which they both will depreciate over a 10-year period. However, Company A uses accelerated
13. Free Cash Flow (LO3, CFA7) A firm had a free cash f low (FCF) in the prior year of$125 million.The FCF is expected to grow at 3 percent per year into perpetuity. The appropriate discount rate is
12. Free Cash Flow (LO3, CFA7) A firm has EBIT of $275 million, which is net of $52 million in depreciation. In addition, the firm had $81 million in capital expenditures and an increase in net
11. Dividend Discount Model (LO1, CFA6) A share of stock will pay a dividend of $1.00 one year from now, with dividend growth of 5 percent thereafter. In the context of a dividend discount model, the
10. Dividend Discount Model (LO1, CFA4) Assume that at the end of the next year, Company A will pay a $2.00 dividend per share, an increase from the current dividend of $1.50 per share.After that,
9. Dividend Discount Model (LO2, CFA4) A stock will not pay dividends until three years from now. The dividend then will be $2.00 per share, the dividend payout ratio will be 40 percent, and return
8. Dividend Discount Model (LO1, CFA6) Which of the following assumptions does the constant growth dividend discount model require?I. Dividends grow at a constant rate.II. The dividend growth rate
7. Dividend Discount Model (LO1, CFA6) A stock has a required return of 15 percent, a constant growth rate of 10 percent, and a dividend payout ratio of 50 percent. What should the stock’s PE ratio
6. Dividend Discount Model (LO1, CFA4) The constant growth dividend discount model would typically be most appropriate for valuing the stock of which of the following?a. A new venture expected to
5. Dividend Discount Model (LO1, CFA4) In applying the constant growth dividend discount model, a stock’s intrinsic value will do which of the following when the required rate of return is
4. Dividend Discount Model (LO1, CFA4) The constant growth dividend discount model will not produce a finite value if the dividend growth rate is which of the following?a. Above its historical
3. Dividend Discount Model (LO1, CFA4) A common stock pays an annual dividend per share of $2.10. The risk-free rate is 7 percent and the risk premium for this stock is 4 percent. If the annual
2. Sustainable Growth (LO1, CFA6) If the return on equity for a firm is 15 percent and the retention ratio is 40 percent, the sustainable growth rate of earnings and dividends is which of the
1. Sustainable Growth (LO1, CFA6) A company has a return on equity (ROE) of 20 percent, and from earnings per share of $5 it pays a $2 dividend. What is the company’s sustainable growth rate?a. 8
●4. The value of beta for Country Point is:a. 1.09b. 1.27c. 1.00
● 3. Given Ms. Nguyen’s estimate of Country Point’s terminal value in 2023, what is the growth assumption she must have used for free cash flow after 2023?a. 7 percentb. 9 percentc. 3 percent
● 2. What is the cost of capital that Ms. Nguyen used for her valuation of Country Point?a. 18 percentb. 17 percentc. 15 percent
● What is the estimate of Country Point’s free cash flow (FCF) in 2021?a. 25b. 16c. 11
● 4. Price Ratio Analysis (LO4, CFA4) The table below contains some information about the Jordan Air Co. Provide expected share prices using each of the three price ratio approaches we have
● 3. Residual Income Model (LO3, CFA9) Suppose Al’s Infrared Sandwich Company has a current book value of $10.85 per share. The most recent earnings per share (EPS) was $2.96, and earnings are
● 2. The Two-Stage Growth Model (LO2, CFA6) Suppose the Titanic Ice Cube Co.’s dividend grows at a 20 percent rate for the next three years. Thereafter, it grows at a 12 percent rate. What value
● The Perpetual Growth Model (LO1, CFA6) Suppose dividends for Layton’s Pizza Company are projected to grow at 6 percent forever. If the discount rate is 16 percent and the current dividend is
● 6.6b Why might an analyst prefer a price-cash flow ratio to a price-earnings ratio?
● Table 6.2 contains information about The Walt Disney Company. Calculate expected share prices using each of the three price ratio approaches we have discussed
● Why are high-PE stocks sometimes called growth stocks?
● 6.5b Why is a firm’s equity beta different from its asset beta? When would these two measures of risk be the same?
● Landon Air is a new airline that flies only a circular route from Indianapolis to Lexington to Starkville to Indianapolis. It has EBIT of $45 million, interest expense of $6.54 million, no change
● How is it possible for a company to have negative earnings but still have positive free cash flow?
● 6.4b What is the critical assumption that makes the residual income model mathematically equal to the perpetual constant growth model?
● Suppose we are evaluating Quackenbush, Inc. (or DUCK for short). In our analysis, we find that DUCK pays no dividends, so we conclude that we cannot use a dividend discount model. Thus, we decide
● Using the relevant data in Example 6.13 and the residual income model, what growth rate g results in a price of $10.94?
● What does the residual income model do that the perpetual constant growth model cannot do?
● 6.3b Under what circumstances is a two-stage dividend discount model appropriate?
● Pepsi shares trade on the NASDAQ under the ticker symbol PEP. In 2019, Pepsi was paying a dividend of $3.71 and analysts forecasted a five-year growth rate of 6.95 percent for Pepsi and a 6
● What are the three parts of a CAPM-determined discount rate?
● American Express trades on the New York Stock Exchange under the ticker symbol AXP. In 2019, AXP was paying a dividend of $1.56 and analysts forecasted five-year growth rates of 10.2 percent for
● What are the components of ROE?
● What is a sustainable growth rate? How is it calculated?
● What is a geometric average growth rate? How is it calculated?
● Compare the dividend discount model, the constant growth model, and the constant perpetual growth model. How are they alike? How do they differ?
● In 2019, American Electric Power (AEP) had a return on equity (ROE) of 10.5 percent, had earnings per share (EPS) of $3.97, and paid dividends of D0 = $2.68. What was AEP’s retention rate? Its
● Using AEP’s sustainable growth rate of 3.41 percent (see Example 6.6) as an estimate of perpetual dividend growth and its current dividend of $2.68, what is the value of AEP’s stock assuming
● In 2019, DTE had an ROE of 11.7 percent, EPS of $6.73, and a per-share dividend of D0 = $3.78. Assuming a 5 percent discount rate, what is the value of DTE’s stock?
● In 2019, the utility company DTE Energy (DTE) paid a $3.78 dividend. Using D0 = $3.78, k = 5 percent, and an industry average growth rate of g = 2 percent, calculate a present value estimate for
● To illustrate how the geometric average and the arithmetic average of historical dividend growth can differ, consider the following dividends paid by the Joltin’ Joe Company:2019: $2.20 2016:
● Why does valuing a stock necessarily involve predicting the future?
● What is a “rich” stock? What is a “cheap” stock?
● What is fundamental analysis?
● 3. S&P 500 To find out the most recent changes in the S&P 500, go to standardandpoors.com.Once at the website, find the 10 most recent additions and deletions to the stocks in the index.
● 2. DJIA You want to find the current divisor for the DJIA. Go to the market data center at wsj.com and look up the current divisor.
● 4. Nikkei 225 The Nikkei 225 Index is a highly followed index that measures the performance of the Japanese stock market. Go to indexes.nikkei.co.jp/en/nkave and find out if the Nikkei 225 is a
● DJIA As you have seen, in a price-weighted index, a stock with a higher price has a higher weight in the index return. To find out the weight of the stocks in the DJIA, go to
● Assume that when Mr. White and Ms. Plain entered their buy order for GHT, the price of the stock increased to $25.45. This is the price at which the trade was executed. Given this impact, the
● In the example given by Ms. Plain, what was the spread for the GHT stock just prior to execution?a. $.06b. $.02c. $.04
23. Price-Weighted vs. Value-Weighted Indexes (LO4, CFA2) Suppose the following four stocks are to be combined into a stock index in January 2019 (perhaps a portfolio manager believes these stocks
22. Interpreting Index Values (LO4, CFA2) Suppose you want to replicate the performance of several stock indexes, some of which are price weighted, others value weighted, and still others equally
21. Geometric Indexes (LO4) Another type of index is the geometric index. The calculation of a geometric index is similar to the calculation of a geometric return:1 +  R G  =  [(1 +  R 1
20. Equal-Weighted versus Value-Weighted Indexes (LO4, CFA2) Historically there have been periods where a value-weighted index has a higher return than an equally weighted index and other periods
19. Dutch Auctions (LO1, CFA1) Escambia Beach Systems is offering 1,000 shares in a Dutch auction IPO. The following bids have been received:Bidder Quantity Price A 400 $20 B 400 19 C 300 18 D 200 17
18. Equal-Weighted Indexes (LO4, CFA2) In addition to price-weighted and value-weighted indexes, an equally weighted index is one in which the index value is computed from the average rate of return
17. Value-Weighted Indexes (LO4, CFA2) In Problem 16, will your answers change if the Douglas McDonnell stock splits? Why or why not?
16. Value-Weighted Indexes (LO4, CFA2) Repeat Problem 14 if a value-weighted index is used.Assume the index is scaled by a factor of 10 million; that is, if the average firm’s market value is$5
15. Price-Weighted Indexes (LO4, CFA2) In Problem 14, suppose that Douglas McDonnell shareholders approve a 3-for-1 stock split on January 1, 2020. What is the new divisor for the index?Calculate the
14. Price-Weighted Indexes (LO4, CFA2) Suppose the following three defense stocks are to be combined into a stock index in January 2019 (perhaps a portfolio manager believes these stocks are an
13. Price-Weighted Divisor (LO4, CFA2) You construct a price-weighted index of 40 stocks. At the beginning of the day, the index is 8,465.52. During the day, 39 stock prices remain the same, and 1
12. DJIA (LO4, CFA2) Looking back at Problems 10 and 11, what would the new index level be if all stocks on the DJIA increased by $1.00 per share on the next day?
11. DJIA (LO4, CFA2) In January 2019, Boeing was the highest-priced stock in the DJIA and Cisco was the lowest. The closing price for Boeing on January 3, 2019, was $310.90, and the closing price for
10. DJIA (LO4, CFA2) On January 4, 2019, the DJIA opened at 22,686.22. The divisor at that time was .1474807199. Suppose on this day the prices for 29 of the stocks remained unchanged and 1 stock
9. Price-Weighted Divisor (LO4, CFA2) Look back at Problem 1. Assume that Able undergoes a 1-for-2 reverse stock split. What is the new divisor?
8. Reindexing (LO4, CFA2) Suppose you calculated the total market value of the stocks in an index over a five-year period:Year 1: $4,387 million Year 2: $4,671 million Year 3: $5,032 million Year 4:
7. Index Level (LO4, CFA2) In Problem 5, assume the value-weighted index level was 408.16 at the beginning of the year. What is the index level at the end of the year?
6. Reindexing (LO4, CFA2) In Problem 5, assume that you want to reindex with the index value at the beginning of the year equal to 100. What is the index level at the end of the year?
5. Value-Weighted Index (LO4, CFA2) Calculate the index return for the information in the previous problem using a value-weighted index.
4. Price-Weighted Index (LO4, CFA2) You are given the following information concerning two stocks that make up an index. What is the price-weighted return for the index?Price per Share Shares
3. Order Books (LO2, CFA1) You find the following order book on a particular stock. The last trade on the stock was at $70.54.Buy Orders Sell Orders Shares Price Shares Price 250 $70.53 100 $70.56
2. Price-Weighted Divisor (LO4, CFA2) In Problem 1, assume that Baker undergoes a 4-for-1 stock split. What is the new divisor now?
1. Price-Weighted Divisor (LO4, CFA2) Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for $93, $312, and $78, respectively. If Baker undergoes a 2-for-1 stock split,
10. Private Equity (LO1, CFA5) Why would venture capitalists provide financing in stages?
9. Index Composition (LO4, CFA2) Is it necessarily true that, all else the same, an index with more stocks is better? What is the issue here?
8. Index Composition (LO4, CFA2) There are basically four factors that differentiate stock market indexes. What are they? Comment on each.
7. NASDAQ Quotes (LO3, CFA1) With regard to the NASDAQ, what are inside quotes?
6. Order Types (LO2, CFA6) Suppose Tesla is currently trading at $300. You think that if it reaches $310, it will continue to climb, so you want to buy it if and when it gets there. Should you submit
5. Order Types (LO2, CFA6) Suppose Intel is currently trading at $50. You want to sell it if it reaches $55. What type of order should you submit?
4. Stop That! (LO2, CFA6) What is a stop-loss order? Why might it be used? Is it sure to stop a loss?
3. Market and Limit Orders (LO1, CFA6) What is the difference between a market order and a limit order? What is the potential downside to each type of order?
2. Brokers (LO1, CFA1) Why would floor brokers be willing to pay $40,000 per year just for the right to trade on the NYSE?
1. Primary and Secondary Markets (LO1, CFA5) At your local Chevrolet retailer, both a primary and a secondary market are in action. Explain. Is the Chevy retailer a dealer or a broker?
15. Stock Indexes (LO4, CFA2) Which one of the following statements regarding the Dow Jones Industrial Average is false?a. The DJIA contains 30 well-known large-company stocks.b. The DJIA is affected
14. Private Equity (LO1, CFA4) Private equity funds will often use convertible preferred stock or bonds with attached call options. These types of securities are used because they:a. Increase the
13. Private Equity (LO1, CFA4) The compensation constraint that requires private equity fund managers to meet a particular return target before performance fees can be taken is a(n) _____
12. Private Equity (LO1, CFA5) Private equity funds that concentrate in smaller, family-owned companies with established cash flows are typically referred to as:a. Venture capital.b. Middle market.c.
11. Stock Indexes (LO4, CFA2) Which of the following indexes includes the largest number of actively traded stocks?a. The NASDAQ Composite Indexb. The NYSE Composite Indexc. The Wilshire 5000 Indexd.
10. Stock Indexes (LO4, CFA2) In calculating the Standard & Poor’s stock price indexes, how are adjustments for stock splits made?a. By adjusting the divisorb. Automatically, due to the manner in
9. Stock Indexes (LO4, CFA2) If the market price of each of the 30 stocks in the Dow Jones Industrial Average changes by the same percentage amount during a given day, which stock will have the
8. Stock Markets (LO1, CFA1) What is the over-the-counter market for exchange-listed securities called?a. Third marketb. Fourth marketc. After-marketd. Block market
7. Stock Markets (LO1, CFA1) What is a securities market characterized by dealers who buy and sell securities for their own inventories called?a. A primary marketb. A reordered marketc. An
6. New York Stock Exchange (LO2, CFA1) Which of the following activities is not conducted by DMMs on the NYSE?a. Acting as dealers for their own accountsb. Monitoring compliance with margin
5. Dow Jones Index (LO4, CFA2) The divisor for the Dow Jones Industrial Average (DJIA) is most likely to decrease when a stock in the DJIA:a. Has a stock split.b. Has a reverse split.c. Pays a cash
4. Value-Weighted Index (LO4, CFA2) An analyst gathered the following data about Stocks J, K, and L, which together form a value-weighted index:December 31, Year 1 December 31, Year 2 Stock Price
3. Private Equity (LO1, CFA4) The compensation constraint that requires private equity fund managers to “give back” performance fees when subsequent losses occur is a(n) _____ provision.a.

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