Q. 7 Your internet service company has been approached by investment bankers who suggest you take your company public. Where would the initial IPO price for your company be set?

Select an answer:

• at your industry's P/E ratio times your prior year's earnings

• at the price other companies in your industry used for their IPOs

• at your estimate of your company's growth potential times your prior year's earnings

• at your industry's P/E ratio divided by your prior year's earnings

Q.8 Why are high-tech industries characterized by high P/E (price/earnings) ratios?

Select an answer:

• P/E ratios are based on anticipated future risks.

• P/E ratios are based on a company's longevity.

• P/E ratios are based on expected future earnings growth.

• P/E ratios are based on the stability of a company's products.

Q.9 How did McDonalds, under new owner Ray Kroc, establish itself in the 1950s as the leader in the fast-food industry?

Select an answer:

• by relying on the recipes it purchased when it opened

• by having products with consistent quality

• by providing an expansive menu

• by continually introducing new products

Q.10 Why do most companies have a price-to-book ratio greater than one?

Select an answer:

• Intangible assets, such as reputation, are stated on a company's balance sheet as having a zero value.

• A company's past return-on-equity has been lower than average for similar companies.

• Most assets are on the "books" at their old historic costs, and not at their current values.

Q.11

You want to buy some stock, and you are going to base your investment on the price-to-sales ratio. Whose stock would you buy?

Select an answer:

• a chain supermarket that has been operating nationally for 60 years

• an online sales company whose price-to-earnings ratio is higher than its price-to-sales ratio

• a soda distributing company that is in a relatively high-profit industry

• a florist shop that recently opened in your neighborhood with a manager whom you know is good

Q.12

An investor group is considering purchasing a large national restaurant chain. What would the investment group use to best value the price it should pay for the company's shares?

Select an answer:

• the expected growth rate in the restaurant industry

• the price/earnings ratio of other restaurant chains

• the required rate of return from the investment

• the price-per-share of other restaurant chains

Q.13

If you use a formula of Price = Forecasted dividend next year/(r-g), which model are you using and which assumption is included?

Select an answer:

• the Gordon growth model, with the realistic assumption that a company will base any dividends it pays out on past profitability

• the Gordon growth model, with the realistic assumption that companies will pay out the same dividend year after year

• the Gordon growth model, with an unrealistic assumption that dividends will grow at the same rate forever

• the Gordon growth model, with an unrealistic assumption that the company will keep its profits as retained earnings

Q.14

Which assumptions are made in appraising the fair value of an asset, such as shares of stock in a publicly traded company that is being sold?

Select an answer:

• The sale was not forced, and the seller does not have any time pressure to sell the asset.

• The sale was not forced, and the market participants on both sides are informed.

• The sale was not forced, and the market participants on the buying side are novice investors.

• The sale was not forced, and the asset is liquid because of the market it is traded in.